Financial Planning and Decision Making

This assignment explores the crucial role of financial planning and management in business success. It delves into topics such as capital budgeting, cost accounting, sources of finance, and the impact of monetary policy on firm-specific characteristics. Students analyze different methods for making financial decisions and evaluate the relative costs of various financing options. The assignment emphasizes the importance of a well-structured financial plan and its contribution to informed decision-making processes.

MANAGING FINANCIAL
RESOURCES
AND
DECISIONS

TABLE OF CONTENTS
.........................................................................................................................................................3
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
1.1 Identifying sources of finance that are available to business.................................................4
1.2 Assessing the implications of different sources.....................................................................5
1.3 Evaluating appropriate sources of finance for a business project..........................................6
2.1 Analyzing the cost of various source of finance....................................................................6
TASK 2............................................................................................................................................7
2.2 Explaining the significance of financial planning.................................................................7
To see that firm does not raise resources unnecessarily:...................................................7
Provide assistance in fixing appropriate capital structure: ...............................................8
3. Helps in Investing Finance in Right Projects:...............................................................8
2.3 Assessing the information needs of different decision makers..............................................8
2.4 Explain the impact of finance on the financial statements...................................................9
TASK 3 .........................................................................................................................................11
3.3 Assessing the viability of a project with the help of investment appraisal techniques. ......14
TASK 4 .........................................................................................................................................18
4.1 Discussing the key financial statements..............................................................................18
4.2 Comparing the appropriate formats of financial statements for varied kinds of business...18
4.3 Interpreting financial statements using appropriate ratios and comparison of same ..........19
REFERENCES..............................................................................................................................22
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INTRODUCTION
Its very important for every kind of organization to make choice of source of finance. As
the choice affects the cash flows of the organization and place impact over the profitability.
Every source comprises different implications as well as cost of the organization (Managing
Financial Resources and Decisions, 2016). Looking at the present competitive and dynamic
business world, it is primary goals of the organizations to have an adequate availability of funds
any time so that it can protect itself from the potential threats. Having required quantity of
finance sources and its proper administration is necessary so that business can achieve their
financial goals in most effectual manner (Adams and et.al., 2010). Present project assignment
will demonstrate different types of sources that an organization can use to fulfill their financial
need. Effective analysis and examination of the sources helps to identify most appropriate
sources so that firms can fulfill their financial requirement at less cost.
TASK 1
1.1 Identifying sources of finance that are available to business
There are various sources of finance from which a business can raise funds: Those are:
Equity Shares/ Share Capital
Share capital is a amount that company raises from the proceeds of shares of stock from
the public investors. Share capital includes equity financing and can be generated through the
sale of common or preferred shares (Beck, Levine and Loayza, 2010). Though share capital
refers to a dollar amount, it is dictated by the number and selling price of a organisation shares.
For example, If a company issues 1,000 shares for £25 per share, it generates £25,000 in share
capital. Share capital falls into one of several categories, depending on where the company is in
the equity-raising process.
Debentures
Debenture us a long term instrument with the help of which copies borrow money from
general public at fixed rate of interest. In originally it can be refer to as the document that either
created acknowledges while some countries are using bonds loan stock etc these days (Bennouna
and et.al., 2010).
Financial Institutes
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Financial institute is a establishment that conducts the financial transactions such as
loans, deposits, investments etc (Bhimani, Datar and Foster, 2002). Everything from depositing
money to taking out of loans and exchanging currencies must be done through financial
institutions. Here is an overview of some of the major categories of financial institutions and
their roles in the financial system.
Commercial Banks
A commercial bank is a financial institution that provides different financial service, such
as issuing loans as well as accepting deposits. Commercial bank customers can take advantage of
a range of investment products that commercial banks offer like savings accounts and certificates
of deposit (Blocher, Chen and Lin, 2008). The loans a commercial bank issues can vary from
business loans and auto loans to mortgages.
1.2 Assessing the implications of different sources
Implications of share capital are it helps in increasing the flexibility in issuing additional
stock that is considered as a security that is not require to be paid back. Under this the
organizations are not required to make regular interest or principal payments that gives
management more operational flexibility. It also leads to the dilution of ownership of existing
shareholders (Bougheas, Mizen and Yalcin, 2006).
Debentures does not result into the dilution of interest of equity shareholders as they do
not have any right to vote or either to take a part into the management of organisation. Also the
interest is tax deductible expenditure and so saves income tax. Another implication of debenture
is that cost of debenture is low in comparison to equity as well as preference shares. However,
payment of interest on debenture is obligatory and hence it becomes burden if the company
incurs loss (Broadbent and et.al., 2012).
Implication of financial institute carries both loan capital as well as risk and also provides
facility of underwriting. For the organizations which have been set up at a low scale it is easier
for them to take loan from financial institution than that of taking loans from public. However,
concern requiring finance from public financial institutions has to submit itself to a thorough
investigation that involves a number of formalities and documents (Brunzell and et.al., 2013).
Implications of Commercial Banks are that it is quick and cost effective way of raising
regular working capital. It is best way in which the organisation can make advantage of short
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term interest fluctuations in the markets and also provides exit opportunities to investors to quit
their investments (Georgiou, 2010). However, It is available only to a few selected blue chip and
profitable companies. By issuing commercial paper, the credit available from the banks may get
reduced. Issue of commercial paper is very closely regulated by the RBI guidelines.
1.3 Evaluating appropriate sources of finance for a business project
In order to prepare a business project the company can take loan from two sources that
are commercial banks and financial institutions. As in case if financial institute it is easier for the
companies to recover the theft amount if any. This can be better understand with an example that
is in any case money will be paid back if any hacker has wiped out all financial resource form
the account (Gray and et.al., 2011). Secondly financial institution provides more freedom as if
the company wants to transfer money from other account there is no need to pay extra fees
charges, drop interest rate as well as change policy etc. Hence it will be easier for the company to
move its business somewhere else etc.
Another helpful source for the organization will be of commercial banking can help a
small business by making it easier to manage day-to-day financial tasks. An established
commercial account with a bank will make it easier to borrow money when you grow your
business. Often a business is assigned a representative who works directly with the company to
find the best services and solutions for the issues the business is facing. For example, the
company may save money by outsourcing payroll processing (Adams and et.al., 2010). Banks
also offer invoicing services, with personalized invoices, and can set up transfers to other banks
which will simplify accounting procedures. Some banks offer retirement account management
for your employees as well as other employee benefits. This can save you money, and make it
easier to manage all of the services you offer employees. Some banks allow you to make
deposits online by scanning checks. Your bank may offer you discounts on your merchant
services fees. Commercial banking allows you to set up direct deposits for your employees as
well as for any invoices you need to pay to others, which will save you time.
Since its inception that company wants to expand in market and thus it require large
amount of funds for different business activities. In this respect, company needs to invest in new
building. Therefore, it can obtain bank loan as it provide large amount of funds at flexible
interest rate. The construction loan can be obtained and can be easily repaid in few installments.
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Further, for meeting the working capital requirement it is significant for company to use retained
earning or accumulated depreciation. It is effective source as funds are accessible to the business
without any explicit cost. Similarly, for need of business like new and expensive machinery
company can use leasing. Therefore, in exchange of some payment, company can use the
machine of other party. Thus, firm will be saved for blocking too much funds in purchasing the
asset and thus will be only responsible for its service and maintenance.
2.1 Analyzing the cost of various source of finance
However, financial institute as a source of finances leads towards various cost. In other
words, one of the major cost of financial obligation is of low return on the investment that is the
companies. Also it includes fees and commissions as well as opposing goals. It is important to
consider the cost of fees commission interest rates as well as potential alternatives before mailing
any sort of financial transactions. Customers are required to vary on the basis of opportunities
that can be seem too good to be true or that to make promise high guaranteed returns (Beck,
Levine and Loayza, 2010).
Commercial banking or business accounts are often more expensive than traditional bank
accounts. Banks may charge fees for night deposits, for processing a certain number of checks
and for the payroll services. Depending on the size of your business, some of the services offered
may not be needed, and you may still be charged for the services even if you're not fully using
them (Bennouna and et.al., 2010). Different banks may offer different services and charge
different fees, and it can be difficult to compare the services. Signing up for a commercial
account before your business is ready for one will cost you and may slow the growth of the
business. If you choose the wrong bank, you may have a difficult time opening a new account
and transferring all of the services to another bank. This can cost you both time and money.
Overall, it can be stated that different sources of finance comes up with different cost. The
detailed explanation of which is as follows:
 Bank loan: It is easy to obtain funds from commercial bank but they involve significant
cost and expenses. The entity is required to pay interest charges on the amount obtained
through loan.
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 Retained profits: There is no explicit cost involved in the funds obtained from the
retained profits or accumulated depreciation. It involve cost in terms of financial risk as
they are likely to reduce revenue of business.
 Debentures: They are long term loans that can be obtained by company in return of fixed
interest rate charges. Therefore,cost involved in debentures is in terms of dividends that
are to be paid every year.
 Leasing: It is an agreement whereby one party grants the permission to use a specific
products for duration to the other party. It involve cost in terms of lease rentals which
will be paid by entity at regular intervals.
 Grants: It is financial reward that is provided by federal, state or local administration to
an worthy candidate. In order to avail them, one has to pay cost in terms of legal
compliance.
 Equity shares: The funds obtained from equity shares is subject to various cost like
interest charges that must be paid after paying off to debenture holders.
 Overdrafts: The high rate of interest charges are to paid by company for the amount
overdrawn.
 Factoring: It can be defined as short term non banking of accounts receivable. It is help
in obtaining quick cash. However, for this individual has to pay for the commission
charges that are deducted by factor.
TASK 2
2.2 Explaining the significance of financial planning
It is important for every kind or type of organisation conduct a strong financial planing in
order to attain long term success. Some of the significance are as follows:
Ensure availability of funds:
The purpose behind financial planning is to make availability of sufficient fund to meet
day to day expenses and to purchase assets for long term purpose. It check timely accessibility of
finance. Along with availability financial planning also tries to specify the sources of finance
(Importance of a Financial Plan, 2016).
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To see that firm does not raise resources unnecessarily:
Surplus or extra funding is as bad as deficient or shortfall of monetary fund. If there is
extra money, financial planning must put it in the best possible manner in order to keep the
financial resources idle is a great loss for an organisation (Bhimani, Datar and Foster, 2002).
Financial Planning includes short term and long term planning. Long term planning focuses on
capital expenditure plan whereas short term financial plans are called budgets. Budgets include
detailed plan of action for a period of one year or less (Blocher, Chen and Lin, 2008).
It facilitates optimum collection of funds:
It helps in avoiding situations of surplus capitalization as well as wastage.
Provide assistance in fixing appropriate capital structure:
Funds should be arranged from different sources and are used for long term, medium
term and short term. Financial planning is essential for sound proper sources at appropriate time
as long term funds are generally contributed by shareholders and debenture holders, medium
term by financial institutions and short term by commercial banks (Bougheas, Mizen and Yalcin,
2006).
3. Helps in Investing Finance in Right Projects:
Financial plan suggests how the funds are to be allocated for various purposes by
comparing various investment proposals.
4. Provides assistance in conducting Operational Activities:
The success or failure of production and distribution function of business depends upon
the financial decisions as right decision ensures smooth flow of finance and smooth operation of
production and distribution (Broadbent and et.al., 2012).
5. Base for Financial Control:
Financial preparation acts as base for evaluating the financial activities by making
comparison between the the actual as well as the estimated revenue and actual cost with
estimation cost (Brunzell and et.al., 2013).
6. Proper Utilization of Finance:
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Finance is essential source of the business enterprise. This is because the financial
planning is an integral part of organizational planning. Also the business plans depends upon the
status of the financial planning (Georgiou, 2010).
2.3 Assessing the information needs of different decision makers
It is very important for the organisation to collect financial information of organisation
before taking decision. Financial statement or information may include details regarding the
profit or loss account that will help in evaluating the actual performance scale of the company.
Also the balance plays a important role in providing details regarding business assets and
liabilities and also liquidity of business (Gray and et.al., 2011). Also the information regarding
purchases and sales helps the company in making future trading as well as account with suppliers
and clients. Also the company is required to collect information related to the purchase of asset
and liability, wage paid as well as about cost as it will help them in making decision. This will
further help in making appropriate decision about how to reduce cost or how to increase the sales
as well as profitability of the organisation (Adams and et.al., 2010). Following information also
helps organisation that when to make purchase of new capital asserts and the financial sources.
Financial statement is again a source that helps the company in making future budget and
plans. So that mangers will be able to evaluate budget to find any variances or adjustments are to
be made to make ye decision. Profit and loss as well as balance sheet are the financial statement
that helps in collecting past records and data (Beck, Levine and Loayza, 2010).
Following financial statements can be compared with the results attain by related establishment
in previous time periods in order to determine areas of improvement. For instance, if a firm spots
that its cost of sales is higher than those of a rival it may seek to switch to an alternative supplier,
or take other actions such as reducing direct costs (Bennouna and et.al., 2010). Financial
statement provides information in the form of invaluable statistics and evidences on the basis of
which managers takes decisions.
Therefore,different types of information is needed by different parties having interest in
the operations of company. The creditor require information about the financial stability of
company so as to assure that company will be able to pay of its obligations. With this
information the creditor can decide whether they should lend money or goods on credit to
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particular firm or not. Similarly, shareholders require financial information so as to decide
whether they should purchase the shares of particular company or not.
2.4 Explain the impact of finance on the financial statements
Impact of finance on the financial statement of R Riggs.
From the monetary record we can see that the aggregate resources are the whole of settled
resources and current resources.
Total assets: £5,020+£35,974=£40,994.
Total liabilities: £5,657
Total capital: £35,337
a) Using the accounting equation of Asset = Liability +Capital. It can be depicted that how it can
place a impact over the Riggs balance sheet.
Assets = Liabilities + Capital
£40,994 £5,657 £35,337
+ + +
£10,000 £10,000 0
£50,994 = £15,657 + £35,337
But when Riggs needs to pay the interest of 10% that is £1,000, there is other changes.
Assets = Liabilities + Capital
£50,994 £15,657 £35,337
- - -
£1,000 0 £1,000
£49,994 = £15,657 + £34,337
Hence, it can be said that although loan of £10,000 will definitely increase both asset as well as
liability side of the balance sheet (Brunzell and et.al., 2013). But looking towards the interest rate
that is 10% which the company will have to pay on the taken loan will surely impact the capital
and asset of the firm and will get decreased by the amount of £1000.
b) Under this Riggs is going to obtain a line of credit on a purchase of £15,00.
Assets = Liabilities + Capital
£40,994 £5,657 £35,337
+ + +
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£1,500 £1,500 0
£42,494 = £7,157 + £35,337
it will lead to increase in the both liability and asset side of balance sheet with the amount of
£1,500. Hence there will be no impact on the capital of R Riggs Ltd.
c) Under this situation R Riggs Ltd will issue additional 1000 shares at the rate of £3.50 per
share.
Assets = Liabilities + Capital
£40,994 £5,657 £35,337
+ + +
£3,500 0 £3,500
£44,494 = £5,657 + £38,837
This will lead to increase the capital by amount of £3,500 which can further be used by the
company.
 Under this situation the company is Selling office furniture of £2,000 at net realizable
value, with no profit made on disposal (Gray and et.al., 2011) .
Assets = Liabilities + Capital
£40,994 £5,657 £35,337
- - -
£2,000 0 0
+ + +
£2,000 0 £2,000
£40,994 = £5,657 + £35,337
There will be no impact on the asset as the cash received will be credited to the capital. Hence,
there will be no impact will appear over the assets.
TASK 3
3.1 Analysing budget and making appropriate decisions
From the provided case study,it has been identified that Yuri is a cutlery producer that
mainly focuses on the production of spoons. However, the market in which firm is operating is
suffering from many issues like, poor quality of steel, intense rivalry. Also, accessibility of
labour of good but still market lacks in availability of individuals expert in cutlery production. In
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the present section, learning will be shown about the implication of budget and stages involved
in it.
Budget can be defined as statement that predicts cost, profit and resources over a
particular frame of time. It further showcase the future financial position of firm and objectives
(Adams and et.al., 2010).. Overall, it can be stated that budget is effective way for predicting
income and expenses for specific time period and ascertaining these approximation. It involve
following stages.
 Developing new budget: The entrepreneur in the cited case study, planned to offer
100,000 spoons . For this aspect, Yuri planned to expend not more than £15,000 on raw
material and upto £22,500 on direct labour.
 Determining measures for performance: This aspect will help in ascertaining the
criteria for judging performance. Since, the quality of steel was not appropriate and lack
of experience workforce,it became tough for Yuvi to offer the arranged amount.
 Calculating actual performance: In the contrast of developed budget, Yuvi could offer
75000 spoons. The expenditure was also increased ton upto £22500 on raw material and
on labour upto £24735.
 Comparing actual performance with budget: It was budgeted that entrepreneur will
sell 100,000 spoons but it was able to offer 75000 only. Further, it was determined that
£15000 will be incurred but actually the outlay was more up to £22500. Similarly, the
expenditure on labour was planned upto £22500 but actually £24375 was spent.
Therefore, it is clear that actual expenditure was more than the budgeted. The prime
reason for this can be lack of experience among workers resulting into wastage of
resources etc.
 Determining the variance: The variance can be stated as difference between real and
budgeted amount. From the calculation,it has been identified that variance is 25000.
Here, aggregate variation of raw material is £7500 whereas, real and expenditure plan for
material of change in worth £4500. further, deviation in usage was £3000. It is
unfavourable new for business of Yuri as actual expenditure is more than planned one
(Beck, Levine and Loayza, 2010). The major cause behind this is deficiency of poor
quality steel and use difference. Furthermore, difference between plan and budget for
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deviation of labour is £1875. thereafter,total rate of variance is £3750 whereas, £5625
accounts for efficiency variance. Here, positive rate variance can be noticed as a result of
fall in pay rate due to lack of experience in workers. While, more time is consumed by
workers leading eti efficiency variance.
 Taking a action: From the critical analysis of aforementioned discussion,it can be stated
that Yuri should plan to offer more remuneration to workers to draw the attention of
trained and skilled workers. This will help in resolving the issue of wastage of raw
material, prompt preparation of product with satisfying quality.
Conclusion
The entrepreneur sold less spoons as per the plan. Further, the expenditure on material
was more than planned amount as result of availability of poor quality of steel in market. Further,
outlay on direct work is high as it was required to pay poor practiced labors.
3.2 Explaining the calculation of unit costs and taking pricing decisions using relevant
information
In the present section,calculation of unit cost for printing entity for completing the order
of 100,000 leaflets for A5 size written in black ink will be provided.1. Calculation of total manufacturing cost
Total cost: Fixed cost+Variable cost = (Direct cost+Indirect cost)+ Fixed Cost
 Direct cost: It is cost that is directly related with particular products. It refers to cost of
workforce, material (paper, ink) and outgo on the manufacturing of goods.
Direct Cost= ( £3*204)+( £9*2)+( £15*2) = £612+ £18+ £30= £660
 Indirect cost: It refers to that expenditure of business that is not immediately associated
with product manufacturing. Such as expenditure on distribution, administrative and
production overheads, usage time of machine.
Indirect cost: ( £55*2)+ ( £20*2)= £110+ £40= £150
Variable cost: Direct cost+ Indirect Cost= £150+ £660= £810
Fixed cost: £0
Total cost = £810+ £0 = £810
2. Calculation of price that entity must cite for the job
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The revenue can be determined as financial advantage that is availed by firm after paying
various cost, expenses, tax and duties related with work of business.
Profit: (% Mark up* Total expenditure)/ 100
= (10* £810)/100 =81
Offering price: It is derived after total of direct cost, revenue and portion of overheads.
Selling price: £150+ £660+ £81 = £891
3. Re-Computation of the price that firm must quote in case:
1. The budgeted no of hours that work needs is readjusted to 2.5 hours
Direct cost= ( £3*204)+( £9*2)+( £15*2.5) = £612+ £18+ £37.5= £667.5
Indirect cost: ( £55*2.5)+ ( £20*2.5)= £137.5+ £50= £187.5
Total cost: Variable cost+ fixed cost= ( sum of Indirect and direct cost)+Fixed cost = (£187.5 +
£667.5)+ £0 = £855
Revenue = ( (% Mark up* Total expenditure)/ 100
(10* £765)/100 = £76.5
Offering price = TC (Direct and Indirect cost)+Revenue = £652.5+£112.5+£76.5 =£841.5
Selling price: £841.5
3.3 Assessing the viability of a project with the help of investment appraisal techniques.
In the following part, the viability of investment project A will be assessed. The project
had initial investment of £50000 where chah flow in year 1. 2, 3 and 4 are 35000, 30000,
25000,20,000. In this respect, the calculation for NPV and the proficiency index is provided as
follows:
Project A.
Particulars A project Present factor Future value
Investment in the
beginning
50000 1 50000
Inflow of cash in
1 st year
35000 0.909 31818
Inflow of cash in
2nd year
30000 0.826 24793
Inflow of cash in 25000 0.751 18775
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3rd year
Inflow of cash in
4th year
20000 + 10000 0.683 20490
NPV 45860
Calculation of NPV: Future value of cash inflow – Present value of cash outflow (initial
outflow)
(£31815 + £24780 + £18775 + £20490) - £50000 =
£95860 - £50000 = £45860
Project B.
Particulars B project Present factor Future value
Investment in the
beginning
50000 1 50000
Inflow of cash in
1 st year
20000 0.909 18180
Inflow of cash in
2nd year
20000 0.826 16520
Inflow of cash in
3rd year
24000 0.751 18024
Inflow of cash in
4th year
36000 + 10000 0.683 31418
NPV 34142
Calculation of NPV: Future value of cash inflow – Present value of cash outflow (initial
outflow)
(£18180 + £16520 + £18024 + £31418) - £50000 =
£84142 - £50000 = £34142
Profitability Index (PI) of project A and B is as follows:
Formula of PI= Present value of cash inflow\ initial investment
A: £95860/50000 = 1.91
B: £84142/ £50000= 1.68
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ii) The ARR on the average capital invested
ARR= Average annual investment/Initial investment
Project A
 Depreciation = Depreciation = (Initial investment - Resale Value) / Total no of Years
* Here, initial investment is £50000 and resale value is £10000, no of years are 4.
Depreciation= (£50000 - £10000) / 4 = £40000 / 4 = £10000
 Annual revenue= Yearly revenue 1st year+ Yearly revenue 2nd year+ Yearly revenue 3rd
year+ Yearly revenue 4th year
Yearly revenue 1st year= Inflow of cash in 1st year – Depreciation
Inflow Y1 = £35000 Depreciation= £10000
Yearly revenue 1st year= £35000 - £10000 = £25000
Yearly revenue 2nd year= Inflow of cash in 2nd year – Depreciation
Inflow Y2 = £30000 Depreciation= £10000
Yearly revenue 2nd year= £30000 - £10000 = £20000
Yearly revenue 3rd year= Inflow of cash in 3rd year – Depreciation
Inflow Y3 = £30000 Depreciation= £10000
Yearly revenue 3rd year= £25000 - £10000 = £10000
Therefore, Sum of annual profits of 4 year= £25000 +£20000 + £15000 + £10000 = £70000
 Average revenue = Total of annual years/ total years
£70000 / 4 = £17500
 Average Investment = ( Total Initial Investment +Resale Value) / 2
= (£50000 + £10000) / 2 = £30000
 Average rate of return= (Average Revenue x 100) / Average Investment
= (£17500 X100) / £30000 = 58.3%
As per the above calculations ARR of project A is as follows
Project A Cash flow
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Initial Investment 50000
Cash Inflow in 1 st year 35000 - 10000 25000
Cash Inflow in 2nd year 30000 - 10000 20000
Cash Inflow in 3rd year 25000 - 10000 15000
Cash Inflow in 4th year 20000 - 10000 10000
Revenue less depreciation= Sum of cash inflow= 25000 + 20000 + 15000 + 10000 = 70000
*Depreciation= 50,000-10,000/4= 10000
* Average revenue= 70000/4 = 17500
* Average investment = (50000+10000)/ 2 = 30000
Average rate of return = (17500 x 100) / 30000 = 58.33 %
Project B
Accounting rate of return
Project B Cash flow
Initial Investment 50000
Cash Inflow in 1 st year 20000 - 10000 10000
Cash Inflow in 2nd year 20000 - 10000 10000
Cash Inflow in 3rd year 24000 - 10000 14000
Cash Inflow in 4th year 36000 - 10000 26000
Revenue less depreciation= Sum of cash inflow= 10000 + 10000 + 14000 + 26000 = 60000
*Depreciation= 50,000-10,000/4= 10000
* Average revenue= 60000/4 = 15000
* Average investment = (50000+10000)/ 2 = 30000
Average rate of return = (15000 x 100) / 30000 = 50%
Pay-Back period for project A: It refers to time needed to recover the invested amount.
Initial investment+ Cash inflow Y1+Y2+Y3+Y4
Year Cash inflow Cumulative Inflow
0 50000 50000
1 25000 25000
2 20000 45000
3 15000 60000
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4 10000 70000
Payback-period
Pay-Back period for project B:
2. Recommendation about the project that must be accepted
From the study of the aforementioned calculations it has been identified that, average rate of
return or project A is higher than of B. The pay back period is also less for project A as
compared to that of B. Further, net present value for project A is also more than B. therefore, it is
feasible for company to select project A as it is likely to render more fruitful outcomes
TASK 4
4.1 Discussing the key financial statements
As per the International accounting standards, it has been stated that financial statements
are prepared with the objective of rendering information about financial position, cash flow of
business that is beneficial for large number of individual for making fruitful business decisions
(Georgiou, 2010). The key financial statements that will be prepared by entity are as follows:
 Balance sheet: It is financial statement that contains the summary of equity of
shareholders, assets, liabilities at particular point of time. It is the blue print of financial
position of firm.
 Profit and loss: The financial state of income for a particular time frame which involves
financial expenses, income, tax and duty expenses are part of profit and loss account.
With the help of this statement, the entrepreneur can have knowledge that business is
running under loss or revenue (Broadbent and et.al., 2012).
 Cash flow statements: In accordance with the definition provided by International
accounting standards, cash flow can be refereed as input and output of cash equivalent
and cash.
4.2 Comparing the appropriate formats of financial statements for varied kinds of business
 Sole trader: It is kind of business that is owned and operated by single individual who is
in charge of all the risk, profits and loss related with business. Example, small retailers,
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market merchant, small restaurant owners etc. The statement prepared by sole traders is
in accordance with International financial reporting standards.
 Partnership: It is kind of business entered by more than two individuals who agree to
share liability of business. The main concern of partners is maximize profit and minimize
loss by risk sharing. They are required to prepare partners capital account, balance sheet,
income and loss statements (Gray and et.al., 2011)..
 Limited liability company: In this company the share of members is limited to the
amount invested by them. Such companies are required to strictly adhere the International
financial reporting standards (IFRS) and regulations of International accounting standards
board (IASB) while preparing, balancesheet, P&L and cash flow statements
Furthermore, by looking up the provided balance sheet of Riggs and JB corporation,
information about their type of business can be obtained. The income and expenses of the
corporation are shown in single head which shows that it is sole proprietorship. On the contrast,
in balance sheet of J and B associate the salary ,drawing and capital of both the individual are
shown separately. This reflects it is partnership firm.
4.3 Interpreting financial statements using appropriate ratios and comparison of same
Ratios Formula 2012
Profitability ratios
Gross profit 208000
Net profit 163000
Net Sales 804000
Gross Profit Ratio
(Gross Profit/
Net Sales) *100 25.87
Net Profit Ratio
(Net Profit/ Net
Sales) *100 20.27
Liquidity ratios
Current Assets 219000
Current Liabilities 140000
Cl stock 98000
Current Ratio
Current Assets /
current
Liabilities 1.56
Quick ratio (Cu. Assets - Cl.
Stock)/Cu.
£0.86
20

Liabilities
Efficiency ratio
Trade receivable days
Trade
receivable/
Sales*365 51 days
Trade payable days
Trade payable /
Cost of
Sales*365 43 days
Inventory days
365/ Inventory
turnover
Inventory turnover
Cost of goods
sold/Average
ending
inventory 60 days
A) Calculation of ratio:
1. Gross profit margin: GP/ NS *100= 20800/804000*100 = 25.87
2. Net profit margin: NP/ NS* 100= 163000/804000*100 = 20.27
3. Current ratio: CA/CL = 219/140= £1.56
4. Quick ratio: CA- Inventory/Cl= 219-98/140 = 121/140= £0.86
5. Trade receivable day: TR*365/ cost of sales = 112*365/ 804 = 51 days
6. Trade payable days: TP*365/ cost of sales= 71*365/596= 43 days
7. Inventory days= 98/ 596*365= 60 days
2012 2013
Current ratio 1.6:1 1.56:1
Acid test ratio 1.2:1 0.86:1
Trade receivable days 42 days 51 days
Trade payable days 43 days 43 days
21

Inventory days 50 days 60 days
1. Gearing ratio: Long term debt* 100/ capital employed
= £7,880,000 x100) / £13,688,680 = 57.56 %
2. Earnings per share: Net revenue after Tax / Number of Shares
= £750,000 / £5,000,000 = 15 per share
3. Dividend per share: Dividend/ No of ordinary share
= £200,000/£5000,000 = 4 per share
4. Dividend yield: Dividend per share/ price per share *100
= 4p/80p*100 =5%
5. Dividend cover: EPS/DPS
= 15p/4p = 3.75 times
6. P.E ratio: MPS/ EPS= 80p/15p = 5.33
Staton Plc.
2007 2008
Gearing 68.65 % 57.56 %
Earnings per share 12p (£0.12) 15p (£0.15)
Dividend per share 3.75p (£0.0375) 4p (£0.04)
Dividend yield 6.25 % 5 %
Dividend cover 3.2 times 3.75 times
Price / earnings ratio 5 5.33
Memorandum report
From: ABC
To: XYZ investor of Staton Plc
Date: 6/8/2016
Subject: Regarding shares of Staton Plc
22

It is requested you to trust our company as per the positive performance of past. As per
2008, the revenue per offer is increasing gradually. Along with it, the income proportion is
growing which clearly shows the future fruitful outcomes of business. The performance of
business is improved as compare to last year. Also, outfitting proportion of 2008 is less as
compared to 2007 with 7.4%. Further, investment policy is favorable as it is giving high rate of
return to investor. By continuing this policy, company will be able to maintain the interest of its
investors.
23

REFERENCES
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Georgiou, G., 2010. The IASB standard-setting process: Participation and perceptions of
financial statement users. The British Accounting Review. 42(2). pp.103-118.
Gray, G.L. and et.al., 2011. Perceptions and misperceptions regarding the unqualified auditor's
report by financial statement preparers, users, and auditors. Accounting Horizons. 25(4).
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Online
Importance of a Financial Plan. 2016. [Online]. Available
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4713.html>. [Accessed on 6th August 2016].
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[Accessed on 6th August 2016].
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MFRD. 2010. [Online]. Available Through:<http://www.lcbuk.org/pdf/HNC02.pdf>. [Accessed
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