Accountancy: Income Statement, Financial Ratios, Investment Appraisal

This article covers income statement, financial ratios, and investment appraisal in accountancy. It includes a calculation of payback and net present value for investment, financial ratios of NS Plc, and a comparison of NS Plc's performance with MS Plc.

Accountancy

Table of Contents
SECTION A.....................................................................................................................................3
Question1.....................................................................................................................................3
Section B..........................................................................................................................................5
Question 2....................................................................................................................................5
(a) Calculation of Pay Back and Net Present Value for the investment......................................5
(b).................................................................................................................................................6
(c).................................................................................................................................................7
(d).................................................................................................................................................7
Question 4....................................................................................................................................8
(a) Calculation of financial ratios of NS Plc................................................................................8
(b) Comment on the performance of NS plc as compared to MS plc..........................................9
REFERENCES................................................................................................................................1

SECTION A
Question1
a. Income Statement for the year ended 31/12/2021
Particulars Amount in ‘000 Amount in ‘000
Sales 25000
Cost of Sales
Opening Inventory 4000
Purchases 19000
Closing Inventory [6000] [17000]
Gross profit 8000
Expenses
Administration expenses 1000
Selling and distribution expenses [980 + 20
(Outstanding)]
1000
Advertising [500 – 200 (Prepaid)] 300
Audit fee 100
Bad debt 40
Director’s remuneration 200
Salaries & wages [480 + 70 (Accrued)] 550
Miscellaneous expenses 20
Debenture interest [120 + 140 (Outstanding)] 260
Depreciation on fittings 200
Depreciation on machinery 680 [4350]
Profit before tax 3650
Provision for taxation [650]
Profit after tax 3000
Dividends – Interim paid
Final Proposed [11000 * 0.1]
990
1100
[2090]
Retained profit for the year 910
Brought forward retained profit 2360

Retained profit carried forward 3270
Working notes:
1. Debenture interest to be paid for the year = 2600 * 10% = 260
Outstanding debenture = Debenture to be paid – Debenture paid = 260 – 120 = 140
2. Depreciation on fittings = 2000 * 10% = 200
3. Depreciation on machinery
Reduced balance = Cost – accumulated depreciation = 4000 – 600 = 3400
Depreciation = 3400 * 20% = 680
b. Statement of financial position as at 31/03/2021
ST plc
Particulars Amount in ‘000
Non – current assets Cost Accumulated
depreciation
Net Book Value
Land and building 8000 - 8000
Fittings 2000 400 + 200 = 600 1400
Machinery 4000 600 + 680 = 1280 2720
14000 1880 12120
Current assets
Inventory 6000
Receivables 1210
Prepayments 200
Bank 30
Cash 10 7450
Total assets 19570
Share capital
£1 Ordinary share 11000
Reserves
Retained Profit 3270

Shareholder’s Fund
[or Equity]
14270
Non – Current
liability
10% Debenture 2600
Current liabilities
Accruals [20 + 70 +
140]
230
Provision for taxation 650
Proposed dividends 1100
Payables 720 2700
Shareholder funds
and liabilities
19570
Section B
Question 2
(a) Calculation of Pay Back and Net Present Value for the investment
Calculation of Pay Back Period
Years Cash Flows (£000s) Cumulative Cash Flows (£000s)
0 -2000 -2000
1 600 -1400
2 700 -700
3 800 100
4 600 700
5 400 1100
5 100 1200
Pay Back Period = A + B / C
A = Year before full recovery
B = Unrecovered cost at the start of the year

C = Cash flow during the year
= 2 + 700 / 800
= 2 Years + 0.875
= 2 .875 years
Calculation of Net Present Value
Years Cash flows (£000s) Discounting factor
(£000s) @ 10%
Present value of cash
flows (£000s)
0 -2000 1 -2000
1 600 0.909 545.4
2 700 0.826 578.2
3 800 0.751 600.8
4 600 0.683 409.8
5 400 0.621 248.4
5 100 0.621 62.1
Net Present Value = Present value of Cash inflow – Present value of
cash outflow or initial investment
444.7
(b)
On the basis of above calculations, it is identified that the payback period of project is lower
than the expected of 3 years. Also, on the other hand, it is also analysed that the net present value
of the project is positive £444700. So, on this basis it is advisable to K plc that they should invest
in this project by visualising and taking into consideration of NPV as well as payback. It is
because net present value considers the time value of money concept and discount the future
cash flows into present. The both method is best for selecting the most profitable and suitable
project for the purpose of investment (Baum, Crosby and Devaney, 2021). Thus, on the basis of
result, it is advisable to K plc that they should invest in this project as they able to generate its
initial investment amount from projects in less than 3 years and the overall net present value or
return from project is positive.

(c)
The five non-financial may affect investment decision are as follows:
Uncertainty: The uncertainty is a non-financial factor which influence the decision-making
process regarding investment. The uncertainty regarding future changes such as increase or
decrease in tax rate, damage of assets etc. affect the decision of the management of business.
Recession: This is a non-financial factor which is basically a result of increase in inflation rate
and decrease in unemployment rate of country. This affects the investment decision in large
extent because due to inflation rate the cash return from machinery will get affected.
Relationship with supplier and customer: The relation of the company to its supplier and
customer is also one of the non-financial factors that affect the decision of the business. It is
because if the relation of the company is not good with its customer than their sales will not
enhance and if not good with supplier than its production level will affect. The result of which
the investment in new machinery do not result in higher returns (Okolelova, Shibaeva and
Trukhina, 2018).
Size and number of investment opportunities: At the time when the company have too many
investment opportunities and each investment opportunities is different in size than identifying
the best and highly profitable alternative is became difficult. But this affect the decision as net
present value do not work well in case if the investment project is of different size.
Government policy: This is also one of the factors of non-financial that state the change in
government policy and meeting the requirement of current and future legislation affects the
decision regarding the investment of the project.
(d)
Meaning of internal rate of return: This is basically a method of computing the investment
rate of return. This is an annual rate of return that an investment is expected to generate.
Comment on IRR: On the basis of above calculation of NPV, it is assumed or expected that the
IRR of above investment might be 14% i.e., above cost of capital of 10%. It is because the NPV
of project is positive. As per IRR rule, the internal rate of return of project is the rate where the
present value of cash inflow minus present value of cash outflow is equal to zero. Thus, it is
assumed that the IRR of above project might be 14% (Byaruhanga and Evdorides, 2021).
Three advantages of IRR:

 It considers the time value of money which leads to identification of best and profitable
investment project.
 In IRR there is no requirement to finding out the IRR hurdle or required rate of return.
 The managers of the company can make rough estimates of required rate of return
(Moutinho and Mouta, 2018).
Question 4
(a) Calculation of financial ratios of NS Plc
Particulars Formula 2021
Gross Profit 184.2
Sales revenue 830.4
GP ratio Gross profit / sales * 100 0.221821
Particulars Formula 2021
Net profit 120.8
Sales revenue 830.4
NP ratio Net profit / sales * 100 0.145472
Particulars Formula 2021
Current assets 419.5
Current
liabilities 346.2
Current ratio Current assets / current liabilities 1.211727
Particulars Formula 2021
Current assets 419.5

Current
liabilities 346.2
Inventory 102.7
Prepaid expenses
Quick ratio
Current assets - (stock + prepaid
expenses) 0.915078
Particulars Formula 2021
Inventory 102.7
Cost of sales 646.2
Inventory
days COGS/inventory8365 58.00913
Particulars Formula 2021
Receivables 43.2
sales 830.4
Receivable
days receivable/ sales*365 18.98844
Particulars Formula 2021
creditors 80
COGS 646.2
Creditors
days creditors/ COGS*365 45.18725

(b) Comment on the performance of NS plc as compared to MS plc
Profitability: On the basis of above calculation of GP and NP ratio of NS plc and its comparison
with MS plc, it is identified that the both GP and NP ratio of NS plc is lower as compared to its
competitors (Dance and Imade, 2019). This means that the profitability performance of NP plc is
poor. In order to improve the same, they need to increase its sales and reduce its cost of
production.
Liquidity: On the basis of above calculation and its comparison with competitors, it is analysed
that the both current as well as quick ratio of NS plc is lower than MS plc. This indicate the poor
liquidity position of company and the ability to pay of its current obligation with the cash
generated from current assets and quick assets is poor (Easton and et.al., 2018). In order to
improve the same, the organization need to sale its outdated assets and also build a strong
relation with the supplier.
Efficiency: This indicates the ability of the company to manage inventory, debtors’ collection
and payable payment within the organization. After analysing the above calculation and
comparing the same with competitors such as MS plc it is identified that the inventory days of
NS plc is higher than the MS plc. It is the company unable to manage its inventory and sale the
same to the customer on time. In order to improve the same, the company should adopt just in
time inventory management system. Further, the debtor collection days of NS plc is lower than
the MS plc. This indicate that NS plc have the ability to collect the dues from its receivable
earlier than its competitors (Nufus and et.al., 2020). Lastly, the payable payment days of NS plc
is higher than the competitors. This means the ability to pay its supplier on time is poor of NS plc
and they have to improve the same. In order to improve it, it is advisable to NS plc that they
should adopt take small loans to pay its creditors on time and increase their credit worthiness.

REFERENCES
Books and journals
Dance, M. and Imade, S., 2019. Financial ratio analysis in predicting financial conditions distress
in indonesia stock exchange. Russian Journal of Agricultural and Socio-Economic
Sciences. 86(2).
Easton, P. D. and et.al., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge
Business Publishers.
Nufus, K. and et.al., 2020. Analysis of Financial Performance: Case Study of PT. X Employee
Cooperative. Utopía y praxis latinoamericana: revista internacional de filosofía
iberoamericana y teoría social. (10). pp.429-444.
Baum, A.E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley &
Sons.
Okolelova, E., Shibaeva, M. and Trukhina, N., 2018. Model of investment appraisal of high-rise
construction with account of cost of land resources. In E3S Web of Conferences (Vol. 33,
p. 03014). EDP Sciences.
Byaruhanga, C. B. and Evdorides, H., 2021. A systematic review of road safety investment
appraisal models. Cogent Engineering. 8(1). p.1993521.
Moutinho, N. and Mouta, H., 2018. The importance of strategic analysis in investment
appraisal. China-USA Business Review.17. pp.494-498.
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