Accounting And Finance - PDF

Introduction To
Accounting And Finance

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
PART B............................................................................................................................................3
PART C............................................................................................................................................5
(b) Merits and limitations............................................................................................................6
(c) Benefits and limitation of budgets.........................................................................................9
CONCLUSION..............................................................................................................................10
REFERNCES.................................................................................................................................11

INTRODUCTION
Accounting and finance both are important for an organisation to manage business
activities in effective manner (Aggarwal and Goodell, 2014) . Through principle of accounting
and finance apply in the accounts of company and prepare with rules and regulations. Both are
different from each other because in accounting consider day to day flow of money in and out of
a company or institution. On the other side finance is a broader term for the management of
assets and liabilities and the planning of future growth. Accounting is more about reliability
reporting which is already happen with law and standards. While finance is looking forward and
growing a pot of money or mitigating losses. The particular report has been divided into three
parts, in first part define about concepts and techniques of financial accounting. In second part,
models and techniques of management accounting and in part third, role of finance regarding to
decision making process.
PART A
Income Statement – An income statement is one of major part of final accounts which
can help to calculate net profit of particular accounting periods. It can prepare by an organisation
to know financial performance and business activities. In income statement consider operating
expenses which can expense to operate business activities in direct manner. There are also
considering Income which is gain by company in their accounting period. From income less
amount of expenses then remaining amount known as net profit. Income statement also known as
profit and loss statement, statement of revenues and expenses (Ahmed and Duellman, 2013) .
Income Statement for the year end 31 December 2018
Particulars Amount (£)
Sales 633000
Less – Cost of sales 297000
Gross Profit 336000
Less – Operating Expenses
Electricity Bills 5700
Van Running Expenses 33600
1

Wages 117000
Rent 90000
Rates 3855 250155
Net Profit 85845
Interpretation – As per the above table it is getting that the company the company
generate £336000 gross profit in specific accounting period as well as £85845. From the amount
of sales less amount of cost of sales after then get amount of gross profit which is £336000. From
gross profit deduct amount of operating expenses which is electricity bills, van running expenses,
wages, rent and rates. After then remaining amount known as net profit.
Working Note -
Sales = (504000 + 129000) = 633000
Cost of Sales = ( 243000 + 54000) = 297000
Rates -
In 2018 = 106*3 = 480 (January to March)
In 2018 = 375*9 = 3375 (April to December)
Balance Sheet – A balance sheet is a financial statement that defined about organisation's
assets, liabilities and shareholder's equity of particular accounting period. On the basis of these
information calculate rate of return and capital structure of a company (Atanasov and Black,
2012) The particular financial statement can provide a snapshot of what a company owns and
owes as well as the amount invested by shareholders. The balance sheet provide information to
reader about company performance and it allows someone like a creditor to see what a company
owns as well as what it owes to other parties as the date point in the heading.
Balance Sheet as per year ending 31 December 2018
Assets
Non current assets
Motor Van 60000
Less – Depreciation 9600 50400
2

Premises 22500
Current assets
Bank 135000
Trade Receivables (486000- 393000 - 1500) 486000
Less – Payment to trade payables 393000
Less – Bad debts 1500 915000
Inventory 36645
Total 336045
Liabilities
Current Liabilities
Trade Payable 504000
Less - 438000 66000
Non Current Liabilities
Outstanding Wages 2175
Outstanding Electricity 2025
Share & Equity
Capital 180000
Net Profit 85845
Total 336045
3

Interpretation – As per the above table it has been analysed that assets side and
liabilities side will be equal. The recoded amount divided into different categories like current
assets and non current assets. In liability side categorised into non current liabilities, current
liabilities and share & equity. After then calculate total of assets and liabilities which can be
equal it is £336045. Assets = Liabilities = Equity, all terms are solved through the particular
equation basis.
PART B
(a) Contribution – It is defined as difference between sales and variable cost and contribution
also consider in per unit (Ball, Kothari and Nikolaev, 2013) .. It is also called as gross margin
and contribution margin. When calculate contribution margin that time less amount of all
marginal/variable cost where consist of direct labour, material and variable overhead. But there
are not deducting amount of fixed cost.
Particulars Amount (£)
Selling price per unit 13
Less – Variable Cost
Materials 5.25
Labour 2.95
Variable Overheads 1.85 10.05
Contribution 2.95
(b) Break of point – The break even point indicates stock and potential contract when market
price of an assets equal to the original cost. The particular point defined that company needs to
cover necessary company's total amount of fixed and variable expenses in particular period of
time (Bhimani, and Willcocks, 2014) .
BEP (in units) = Fixed cost / Sales price per unit – Variable cost per unit
When produce – 70000
BEP = 106600 / 206500 = 0.52
When budgeted – 53000
BEP = 106600 / 689000 = 6.82
4

Margin of Safety – In the terms of break even analysis point out of margin of safety with
the help of break even point. If sales of the company has been decreased so it will directly
influence to profit of the company. Because it cam help to know risk preferences and buying
securities when it will allow an investments.
Margin of safety = Actual sales – break even point / selling price per unit
When produce 70000
Margin of safety = 910000 – 36400 / 13 = 67200
Budgeted – 53000
Margin of safety = 689000 – 361460 / 13 = 25195.38
(c) Profit of the company
Sales 624000
Less – Variable cost (48000*10.05) 482400
Contribution 141600
Less – Fixed cost ( 59000 + 47600) 106600
Profit 35000
(d) When produce 70000
Selling price (13 + 13*9%) (14.17*70000) 9919000
Less – Variable Cost ( 98900 * 10.05) 993945
Contribution 8925055
Less – Fixed cost
Marketing and advertising - 45000
Production – 59000
Selling - 47600
151600
Profit 8773455
(e) Assumption of break even model
5

 To calculate break even point there are all costs are divided into fixed and variable costs.
So it will beneficial easily to identify.
 In this method can not change fixed cost so as a reflect can not change results in different
levels (Bushman, and Williams, 2012) .
 Total variable cost time to time change so as a result output can frequently change and no
change in per unit variable cost.
 At every output level sales will be remain same.
 Costs and revenue can analysis in in linear fashion within a relevant range.
 These evaluation based on the producing product of business and related to constant
product mix.
 There are not recognised any inventories because in the end of accounting period or
inventory levels are expected to remain constant.
 In the break even model technology, production methods and efficiency can not change
without any effect.
 No factor can asset to other than sales volume because it can affect to costs and sales
revenues.
There has been analysed that these model can successfully will be utilised in particular range of
differencing business.
PART C
(a) Pay Back Period = Initial Investment / Net annual cash inflow
= 40,000,000 / 17000000 = 2.352
Accounting Rate of return = Average accounting Profit / Average investment
= 3400000 / 40000000 = 0.085
Net Present Value =
(b) Merits and limitations
Investment Appraisal
Techniques
Merits Limitations
Pay Back period  The particular method easy
and simple to understand
 Through this method
can not recognised
6

because through this
method easily calculate
complex things. It is a
favourable among
executives for snap
answers (Hui, Klasa and
Yeung, 2012) .
 When create uncertainty
that time the particular
method useful and provide
solution due top randomly
changes in technology.
 The particular method
handy device to analysis
the proposal of investment.
It can not evaluate
profitability because it is
not important.
 It is a short term approach
which can be added to as a
benefit to calculate capital
expenditure.
value to time money.
And it provides high
emphasis on liquidity
and ignores to
profitability.
 The method can not
consider at the time of
cash inflow as well as
timing of cash inflows.
 It is totally ignores
annually cash in flow
 In the change of
operation cost may
influence of cash inflow
in direct manner so it
can show as delicate
and rigid.
 This method over
emphasises the
importance of liquidity
as a goal of capital
expenditure decision.
Accounting Rate of
Return
 APP is based on the
accounting information
and easy to calculate and
simple to understand (Kim
and Zhang, 2016).
 Through this method
calculate profitability of
investment basis and
consider total profits of
 Many times result will
be came different if one
calculates return on
investment so it will
create problem in
decision making
process.
 A fair rate of return is
not taken base of
7

particular period of time.
 In the method analysis of
net earnings such as
depreciation and earning
after tax.
 Through calculation of this
method company has been
getting clear picture and
easily calculate accounting
records.
Average rate of return
because there are
creating discretion of
the management.
 The particular method
has been recognised as
cash inflows so it will
not important than the
accounting profits.
 Sometimes it ignores
the period in which the
profits are earned as a
10% rate of return in 8
years so it will be
indicated to be better
than 16% rate of return
in 4 years. So it will not
show proper regarding
to long time period.
Net present Value  Net present value can
provide time value of
money. As per calculation
after cash flow and before
cash flow defined about
the projects.
 It can help to maximizing
the company's value and
follow the method of
convection cash flow
patter.
 There are considering all
 NPV method difficult to
apply in specific project
because it is typical to
compare project on the
basis of 5 years.
 The biggest problem in
this method that there is
required to estimate of
future cash flow and
determine of coat of
capital of an
8

cash flow activities to
measure of profitability in
effective manner.
 There are identified those
factors which can create
risk as well as identify in
effective manner.
 The NPV method produces
a dollar amount that
present how much the
project will create for the
company.
organisation.
 It is not applicable when
comparing projects that
have assortment from
investment amounts.
 In a big project need to
higher NPV which is
not better for
investment purpose.
Internal rate of return  It is perfectly use for time
value of money theory
because IRR nothing
present interest rate which
expect as per investment
basis.
 In this method provide
importance to equally all
cash flow and can not basis
on uninformed ranking.
 To calculate through this
method there is no need to
calculate cost of capital ans
through the method check
profitability of any project.
 Pre assumption of cost of
capital is very difficult so
there is need to examine
the project in specific
 The particular method
based on assumption
that are earning to
reinvest at the internal
rate of return in
reference to spare life of
the project.
 The method has been
used for calculate
profitability not for
capital expenditure.
Because off internal rate
of return favours a
project with
comparatively as long
time period.
 In the end of calculation
of project it is getting
that net present value
9

manner. method and internal rate
of return have been
different as per the
project to determine
size, life and timing of
cash inflows.
(c) Benefits and limitation of budgets
Budgets as a tool Benefits Limitations
Master Budget  It support to make an
authentic relation among
all other budgets of
company so that short term
objective of respective
company can be attained.
 It also help to resolve the
conflicts among any
departments as it is a
consolidation of each
functional budgets of
company.
 It act as a measure of
performance evaluation as
it incorporate the target of
each departments.
 These are depended on
forecasting as they are
vulnerable to
uncertainty in the
existing business
environment.
 These are basically
based on particular
assumptions that might
are not true in various
future situations.
Zero based budget  It help to increase the
employees involvements at
every stage because it
needs much information
and thus allotted work can
 It only focus on short
term goals thus not
helpful in gaining the
long term objective for
10

be completed within
budgets.
 It responds to various
sudden changes in business
environment thus help to
distribute resources in
appropriate manner in
more profitable manner.
company.
 It is a complicated
budgeting so many time
management skills are
not appropriate.
CONCLUSION
As per the above report it has been concluded that accounting and finance both are
working in effective manner in reference to internal work of an organisation. Accounting is
mathematical calculation which is used to get exact result and make further business decision.
The main purpose of accounting is to assess the profitability and productivity by including
different types of accounts. Finance is basic needs which is used to define the management assets
and liabilities for future business growth. Accounting and finance both are most important for all
small as well as large size of organisation which help to make correct business decision after
defining income and expenses. This report has covered fundamental models, concepts and
techniques in order to investment appraisal as well as break even analysis.
11