Effectively Managing Financial Information

The given project report highlights the significance of managing and maintaining accurate financial information for businesses. It discusses different investment appraisal methods like payback period, internal rate of return, accounting rate of return, and net present value. Additionally, it emphasizes the importance of ratio analysis in evaluating a company's performance.

Accounting and
Financial Management

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
Introduction............................................................................................................................1
1. Calculation of relevant ratios to analyse organisation's performance................................1
2. Calculation of working capital cycle for Bitmap Plc.........................................................5
Conclusion..............................................................................................................................7
PART B............................................................................................................................................7
1. Various investment appraisal techniques...........................................................................7
2. Key benefit and limitations in investment appraisal method...........................................14
3. Suitable sources of finance for investment.......................................................................15
PART C..........................................................................................................................................16
1. Budget and its relation with strategic objective and plans...............................................16
2. Budgeting process and and interlinking of budgets used in an organisation...................16
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................19

INTRODUCTION
Accounting and financial management is the process of preparing financial reports for an
organisation and managing organisation's financial performance. It is the main responsibility of
accountants and managers of the company to appropriately maintain and keep financial and
accounting information in the form of financial reports so that internal and external stakeholders
can analyse accurate data of the business (Ward, 2012). Actual performance can be determined
with the help of various accounting techniques including ratio analysis, capital budgeting and
cost of capital. Main aim of this project report is to develop an understanding about the
accounting and financial management in the context of an business organisation. Two different
companies have been discussed in this report. First organisation which is provided is Bitmap
PLC which is a furniture manufacturing company and executing its business operations in
London, UK. Another business entity which is provided for analysing accounting and financial
management is Toyland Ltd. This company is based in London and currently manufacturing toys
for children. In this project report calculation of accounting ratios, working capital cycle and
capital budgeting of two different companies are performed according to the different case
scenarios.
PART A
Introduction
Bitmap Plc is a furniture manufacturing company which is currently operating its
business activities in London successfully. Board of directors of organisation have analysed
significant changes in the financial statements of Bitmap Plc. Directors of this business entity
have asked the management accountant to prepare a report on the financial performance of the
organisation (Banerjee, 2012). Various financial ratios have been calculated in this report.
1. Calculation of relevant ratios to analyse organisation's performance
Ratio analysis: It can be defined as a qualitative analysis of organisation's performance
with the help of various information which is recorded in financial statements of the company.
All the internal and external stakeholders use ratios to determine that organisation is performing
well or not in the market. In the case of Bitmap Plc, ratio analysis have been conducted for the
directors so that they can analyse the cause of changes in financial statements (Blankespoor and
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et.al., 2013). Various types of ratios are calculated as a management accountant from the
financial statements of two years of this organisation below:
Profitability ratios: Such type of ratios are calculated by the accountants of the
companies in order to analyse the actual profit making ability of the organisation. Following are
the ratios that are calculated by management accountant of Bitmap Plc:
 Net profit ratio:
Formula: Net profit after tax / total revenues * 100
Particular 2016 2017
Net profit after tax 3220 4060
Revenues 18000 23000
Net profit ratio 17.89% 17.65%
From the above calculation it has been observed that Bitmap Plc's net profit ratio has
been decreased to 17.65% in year 2017 from 17.89% which is for year 2016 (Khan, 2015).
 Gross profit ratio:
Formula: Gross profit / total revenues * 100
Particular 2016 2017
Gross profit 9100 12200
Revenues 18000 23000
Gross profit ratio 50.56% 53.04%
While calculating the ratio the management accountant of Bitmap Plc have identified that
gross profits of the company have increased in year 2017 which has resulted in increased ratio.
50.56% and 53.04% are the gross profit for year 2016 and 2017 respectively.
Liquidity ratios: The ratios are calculated to ascertain actual liquid strength of a company
(Krakhmal, 2012). Main purpose behind the calculating this ratio is to make future planning for
investment and purchasing of business assets. If is it weak than management accountant suggests
directors to take appropriate actions. In Bitmap Plc following liquidity ratios are calculated:
 Current ratio:
Formula: Current assets / Current liabilities
Particular 2016 2017
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Current assets 4150 5160
Current liabilities 1500 1100
Current ratio 2.77 4.69
From the above calculation it has been analysed that organisation's liquid strength is very
good as in year 2016 current ratio was 2.77 and in year 2017 it has increased up to 4.69.
 Quick ratio:
Formula: Quick assets / current liabilities
Particular 2016 2017
Quick assets 2350 2800
Current liabilities 1500 1100
Quick ratio 1.57 2.55
From the above calculation it has been analysed that organisation have good liquidity
because the ratio of Bitmap Plc in year 2016 and 2017 are more than ideal ratio which is 1:1.
Gearing ratios: These ratios are related to organisation's capital structure in which
relationship of internal and external liabilities are analysed with each element of organisation.
Main purpose of gearing ratios is to determine company's financial stability (Taipaleenmäki and
Ikäheimo, 2013). Management accountant of Bitmap Plc have calculated following ratios for the
purpose of analysing company's stability in monetary terms:
 Debt equity ratio:
Formula: Total debts / total equities
Particular 2016 2017
Total debts 3500 4600
Total equities 12000 15760
Debt equity ratio 0.29 0.29
From the above computation it is assessed that debt equity ratio in year 2017 and 2016 is
same which shows that debts and equities has no contribution against the changes observed by
board of directors. In both years that is in 2016 and 2017 debt equity ratio is 0.29.
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 Total asset to debt ratio:
Formula: Total assets / total debts
Particular 2016 2017
Total assets 15500 16760
Total debts 3500 4600
Total asset to debt ratio 4.43 3.64
From the above calculation it has been observed that organisation's total asset to debt
ratio is decreased in year 2017 when compared to 2016. For both the years this ratio is computed
as 4.43 and 3.64 respectively.
Asset utilisation ratios: Such type of ratios are calculated to analyse the value of
organisation's assets compared to revenues (Brigham and Houston, 2012). Following ratios are
calculated by management accountant of Bitmap Plc in order to analyse overall utility of assets
of the company:
 Fixed asset turnover ratio:
Formula: Total revenues / Fixed assets
Particular 2016 2017
Revenues 18000 23000
Fixed assets 11350 15200
Fixed asset turnover ratio 1.59 1.51
From the above calculation it has been analysed that fixed assets turnover ratio of Bitmap
Plc has been decreased up to 1.51 in year 2017 from 1.59 which is for 2016.
 Total asset turnover ratio:
Formula: Total revenues / total assets
Particular 2016 2017
Revenues 18000 23000
Total asset 15500 16760
Total asset turnover ratio 1.16 1.37
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While calculating total asset turnover ratio, management accountant of Bitmap Plc have
analysed that the ratio of the company has been increased in year 2017 as compare to previous
year. For the years 2016 and 2017 this ratio is calculated as 1.16 and 1.37 respectively which
shows enhancement of business operations of this company.
Investors potential ratios: All such type of ratios are mainly used to analyse performance
of organisation's shares. Management accountant of Bitmap Plc has used following ratios to
provide appropriate information to all its investors:
 Return on equity ratio:
Formula: Net profit after tax/total equity * 100
Particular 2016 2017
Net profit after tax 3220 4060
Total equity 12000 15760
Return on equity ratio 26.83% 25.76%
From the above table it has been observed that in year 2016 return on equity was 26.83%
which has decreased in year 2017 up to 25.76% which shows that investors are receiving low
returns against their contributed capital.
 Dividend coverage ratio:
Formula: Profit after tax/Dividend
Particular 2016 2017
Profit after tax 3220 4060
Dividend 200 300
Dividend coverage ratio 16.10 13.53
From the above calculation it has been analysed that dividend coverage ratio of the
organisation has been decreased to 13.53 in year 2017 from 16.10 in 2016 which shows that
investors are reverencing comparatively low dividend against their contributed capital
2. Calculation of working capital cycle for Bitmap Plc
In this Part, calculation of working capital cycle is required, for this, firstly calculate the
various ratios which is mandatory for calculation of working capital cycle which are-
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For Year 2016
Inventory collection period = Inventory/Annual sales*365
= 1800/18000*365
= 36.50 Days
Trade Receivables period = Trade receivables/Annual sales*365
= 1600/18000*365
= 32.44 Days
Cash and marketable securities period = Cash/Annual sales*365
= 750/18000*365
= 15.21 Days
Trade payables period = Trade payable/Annual sales*365
= 1500/18000*365
= 30.42 Days
Working Capital Cycle in Days:-
Inventory collection period 36.50
Add: Trade receivables period 32.44
Add: Cash and marketable securities period 15.21
Less: Trade payables period 30.42
Working Capital Cycle in days:- 53.73
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For Year 2017
Inventory collection period = Inventory/Annual sales*365
= 2,360/23000*365
= 37.45 Days
Trade Receivables period = Trade receivables/Annual sales*365
= (2300/23000*365)
= 36.50 Days
Cash and marketable securities period = Cash/Annual
sales*365
= (500/23000*365)
= 79.35 Days
Trade payables period = Trade payable/Annual sales*365
= 1100/23000*365
= 17.46 Days
Working Capital Cycle in Days:-
Inventory collection period 37.45
Add: Trade receivables period 36.50
Add: Cash and marketable securities period 79.35
Less: Trade payables period 17.46
Working Capital Cycle in Days 135.84
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From the above calculation it has been observed that working capital cycle in days is
135.84 days for the organisation.
Conclusion
From the above report it has been concluded that organisation is performing well in the
market. Profitability and liquidity of the company is also very good. Ratios analysis is conducted
for the purpose of analysing the actual performance and status in market. The difference in
financial statements have been occurred due to the changes in revenues, assets, liabilities and
profits.
PART B
1. Various investment appraisal techniques
Toyland Ltd. is a toy manufacturing company which is currently established in London.
Directors of the organisation are willing to purchase a new machine so that profits can be
maximised. There are two options available in the market of this machinery which has same cost.
They have asked the finance manager of the organisation to produce a report so that it can help to
make appropriate decision (Ramanna, 2013). The report is based on investment appraisal
techniques that are as follows:
The information which is common for both the machines:
Cost of acquisition £ 500000
Useful Life 6 Years
Salvage Value at end of 6th Year £ 50000
Method of Depreciation Straight Line Method
Depreciation per annum £ 75000
A. The payback period:
Payback Period= Years before full recovery of cost+Unrecoverable cost at the start of
the years/Cash inflows of the year of full recovery of cost
Machine A: Outflow =500000
Years
Cash Inflows (in
£)
Cumulative cash
Inflows (in £)
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1 300000 300000
2 250000 550000
3 200000 750000
4 150000 900000
5 50000 950000
6 70000 1020000
Total 1020000
Payback Period of Machine A
=1+(500000-300000) / 250000
=1.8
Machine B: Outflow =500000
Years Cash Inflows (in £)
Cumulative cash
Inflows (in £)
1 20000 20000
2 50000 70000
3 150000 220000
4 200000 420000
5 250000 670000
6 350000 1020000
Total 1020000
Payback Period of Machine B
=4+(500000-420000)/250000
=4.32
B. The discounted payback period:
Discounted Payback Period = Years before full recovery of cost as per discounted cash
inflows+unrecoverable cost at the start of the years/Discounted Cash inflows of the year of full
recovery of cost
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Machine A: Outflow= 500000
Years Cash Inflows (in £)
Present Value
Factor @10% Present Value
Cumulative
Present Value of
cash Inflows (in
£)
1 300000 0.909 272700 272700
2 250000 0.826 206500 479200
3 200000 0.751 150200 629400
4 150000 0.683 102450 731850
5 50000 0.621 31050 762900
6 70000 0.564 39480 802380
Total 1020000 802380
Discounted Payback Period of Machine A
=2+(500000-479200) / 150200
=2.14
Machine B: Outflow= 500000
Years Cash Inflows (in £)
Present Value
Factor @10% Present Value
Cumulative
Present Value of
cash Inflows (in
£)
1 20000 0.909 18180 18180
2 50000 0.826 41300 59480
3 150000 0.751 112650 172130
4 200000 0.683 136600 308730
5 250000 0.621 155250 463980
6 350000 0.564 197400 661380
Total 1020000 661380
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Discounted Payback Period of Machine B
=5+(500000-463980)/197400
=5.18
C. The accounting rate of return:
Accounting Rate of Return= Average Net Profit / Average Investment
Machine A: Outflow= 500000
Salvage Value at end of 6th Year (in £)= 50000
Years Cash Inflows (in £) Depreciation Net Profit
1 300000 75000 225000
2 250000 75000 175000
3 200000 75000 125000
4 150000 75000 75000
5 50000 75000 -25000
6 70000 75000 -5000
Total 1020000 570000
Average Net Profit= 570000/6 =95000
Average Investment
= (Initial investment + Salvage Value)/2
=(500000+50000)/2
=275000
Accounting Rate of Return(%)
=95000/275000*100
=34.55%
Machine B: Outflow= 500000
Salvage Value at end of 6th Year (in £) =50000
Years Inflows (in £) Depreciation Net Profit
1 20000 75000 -55000
2 50000 75000 -25000
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3 150000 75000 75000
4 200000 75000 125000
5 250000 75000 175000
6 350000 75000 275000
Total 1020000 570000
Average Net Profit
=570000/6
=95000
Average Investment
=(Initial investment + Salvage Value)/2
=(500000+50000)/2
=275000
Accounting Rate of Return(%)
=95000/275000*100
=34.55%
D. The net present value:
Net Present Value= Present value of cash inflows – cash outflow
Machine A: Outflow= 500000
Years Cash Inflows (in £)
Present Value
Factor @10% Present Value
1 300000 0.909 272700
2 250000 0.826 206500
3 200000 0.751 150200
4 150000 0.683 102450
5 50000 0.621 31050
6 70000 0.564 39480
Total 1020000 802380
Net Present Value (in £)
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=802380-500000
=302380
Machine B: Outflow=500000
Years Cash Inflows (in £)
Present Value
Factor @10% Present Value
1 20000 0.909 18180
2 50000 0.826 41300
3 150000 0.751 112650
4 200000 0.683 136600
5 250000 0.621 155250
6 350000 0.564 197400
Total 1020000 661380
Net Present Value (in £)
=661380-500000
=161380
E. The internal rate of return: Percentages for calculation of IRR are chosen with the
help of trial and error method.
IRR= LDR (Residue of LDR- Initial investment/ Residue of LDR- Residue of HDR)
(HDR- LDR)
Rate of Return= (Total cash Inflow-Cash Outflow) / Cash Outflow*100*1 / No. of Years
Machine A: Outflow= 500000
Total Cash inflow= 1020000
No. of Years = 6 Years
Rate of return(%)
=(1020000-500000)/500000*100*1/6
=17.33
Firstly the rate which is assumed is 36% and 37%
Years Cash Inflows (in £)
Present Value
Factor @36% Present Value
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1 300000 0.735 220500
2 250000 0.541 135250
3 200000 0.398 79600
4 150000 0.292 43800
5 50000 0.215 10750
6 70000 0.158 11060
Total 1020000 500960
Years Cash Inflows (in £)
Present Value
Factor @37% Present Value
1 300000 0.730 219000
2 250000 0.533 133250
3 200000 0.389 77800
4 150000 0.284 42600
5 50000 0.207 10350
6 70000 0.151 10570
Total 1020000 493570
Internal rate of return
=36+(500960-500000)/(500960-493570)*(37-36)
=36.13%
Machine B: Outflow= 500000
Total Cash inflow= 1020000
No. of Years = 6 Years
Rate of return(%)
=(1020000-500000)/500000*100*1/6
=17.33
Firstly the assumed rates are 17% and 18%
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Years Cash Inflows (in £)
Present Value
Factor @17% Present Value
1 20000 0.855 17100
2 50000 0.731 36550
3 150000 0.624 93600
4 200000 0.534 106800
5 250000 0.456 114000
6 350000 0.390 136500
Total 1020000 504550
Years Cash Inflows (in £)
Present Value
Factor @18% Present Value
1 20000 0.847 16940
2 50000 0.718 35900
3 150000 0.609 91350
4 200000 0.516 103200
5 250000 0.437 109250
6 350000 0.370 129500
Total 1020000 486140
Internal rate of return
= 17+(504550-500000)/(504550-486140)*(18-17)
= 17.25%
Recommendation: Machine A should be selected by Toyland Ltd. because it is capable to
payback its amount earlier than machine B. Another reason behind this recommendation is high
net present value of machine A.
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2. Key benefit and limitations in investment appraisal method
Investment appraisal means the collection of various techniques which are used to
identify the importance of various investment proposal. The main motive of these methods is to
measure the validity of a portfolio management (Renz, 2016). There are various factors which
makes an investment appraisal important. These factors are financial, legal, environmental,
social, operational, risk etc. There are various techniques of investment appraisal with a number
of limitations and advantages.
Pay back period method: It is very simple method to assess the viability of a project. It
defines the period which is required to cover the cost of investment project (Payback Period
Method, 2018). This method is considered as effective for calculating the both financial and non
financial background of the project.
Advantages: It is very simple method to calculate the project viability and it is
understandable for both financial and non financial background persons.
Limitations: The simplicity of that method become a risk for the short term projects and
it ignores the aspects after payback point.
Accounting rate of return(ARR): It is a financial ratio which is used to prepare the
capital budgeting format. It is the ratio of average annual profit of the proposed project and the
capital invested. This method helps in measuring the capital needed for acquire a project and
expected accounting profit (Lambert and Sponem, 2012).
Advantage: It shows the relationship between the capital required and expected profit to
be generated by project and consider the accounting profit rather than cash inflow. It clearly
define the attractiveness of project. This method can be applied in real life. For instance, if the
Toyland Ltd. Can sue this method to ascertain their relationship between annual profit and
capital.
Limitations: It does not consider the time value of money and exclude the depreciation
as well. Accounting rate of return method is difficult to understand as it does not include any non
financial information.
NPV(net present value): It is calculated by the discounted cash flow to find the present
value of project. The discount rate usually calculated on the basis of weighted average cost of
capital. It would be negative or positive both. Positive NPV shows the decision in favour of
project and a negative signify the rejection of proposed project (Sharma and Panigrahi, 2013).
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Advantage: It consider all the cash flows of business and clearly signify the results for
acceptance and rejection (Baxter, R. and et.al., 2013). This method is considered as the best
technique and should be used in practical scenario by Toyland.
Limitations: Discounted rate is not clearly mention for this method and include all the
cash flows not profits. Negative NPV results for rejection which would not always a right
decision for the proposed project.
Internal Rate of Return(IRR): It is calculated by using the discounting cash flows and
these are discounted twice. After calculating IRR, it can be compared with the weighted average
cost of capital for assessing the viability of project. If IRR is less than the WACC then project
will be rejected and if opposed to it so it shows acceptance.
Method of calculation:
IRR= a+{(b-a)*Na/Na-Nb}
a= lower discount rate chosen
b=higher discount rate chosen
Na=NPV at lower rate
Nb= NPV at higher rate
Advantage: It clearly define the acceptance and rejection level and include all the cash
flows.
Limitations: It depend on the WACC for the decision of acceptance and rejection.
Sometime it generate the several results which mislead the decisions.
NPV is the strongest of the four techniques which are described above. In real life
business context NPV is the bester method for adoption regarding to investment appraisal.
3. Suitable sources of finance for investment
Sources of funds: Funding refers to the credit which is acquired by the organisations
from internal and external sources so that all the planned strategies can be implemented. As
Toyland is willing to buy a new machine. For this purpose funds can be raised form following
resources:
Bank loan: It can be defined as the credit which is taken by organisations from banks.
The loan is provided to such companies who provide a collateral security to the bank so that if
the borrower fails to make repayment to bank then the security or the asset can be seized or sold
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by the lender. Toyland Ltd. can contact to the bank so that a higher amount can be received to
buy the machine in order to maximise sales and profits of the organisation (Edwards, 2013).
Venture funding: It can be defined as the investment which is made by individuals in an
organisation in a specific project for the purpose of getting higher returns. Such investments are
mainly concerned with higher risk and provide high return. Toyland Ltd can invite such type of
funding for the organisation by sharing the appropriate information of the project so that their
interest can be raised (Budding, Grossi and Tagesson, 2014).
Both the above mentioned sources of funds can be used by directors of Toyland Ltd. for
the purpose of making investment.
PART C
1. Budget and its relation with strategic objective and plans
Budget: It can be defined as the financial estimation of a upcoming period. It helps the
organisations to keep sufficient funds for such activities that are going to be performed in future.
Main purpose behind the formulation of a budget is to operate business in limited monetary
resources. Managers of business entities allot appropriate funds to the each functional
departments so that they can execute all their operations effectively.
Budgets, strategic objectives and plan are related to each other because objectives and
plan are formulated according to budget. For example, as Toyland Ltd in above question is
willing to buy a new machine so that it can enhance its profits. For this purpose the organisation
have to make strategic plans and form a budget. As objective of the company is to maximise
profits which is possible when demand increases. To attain all the objectives it is required to
form strategic plans and implement them.
From above analysis it can be analysed that strategic objectives and plan are related to
budget because it is not possible to implement plan and achieve objectives without proper
budget.
2. Budgeting process and and interlinking of budgets used in an organisation
Budgeting process: It can be defined as the procedure in which budgets are formulated
by the managers of the organisation. It helps to allot appropriate amount to different departments
according to their requirements. Process of budget formulation is described below:
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Step 1: In this step managers of the company set financial goals so that profits can be
enhanced.
Step 2: When the goals are set than managers are required to analyse all the different
sources of income in order to evaluate overall income of company.
Step 3: In this step total expenses that may take place in future are assessed and than a
proper budget will be formulated according to incomes and expenses.
Step 4: After formulation budget will be presented in front of top executives for their
approval. They analyse the budget and than mark their approval, if they find any error they ask
for modifications.
Step 5: In this step approved budget is implemented within the organisation to operate
business appropriately.
Step 6: This is the last step in budgetary process in which implemented budgets are
monitored and controlled by employees and other concerned persons of the organisation. It will
help to determine that budget is beneficial or not.
Various budgets are used by an organisation that helps to execute business appropriately.
All the budgets are as follows:
Expenditures budget: All the expenses of a business are recorded in expenditures
budget. It includes all direct and indirect expenses that are recorded in income statements of the
company.
Operating budget: It includes all operating expenses that are recorded in profit and loss
account of an organisation. It guides managers while they are willing to analyse all the operating
expenses of business.
Both the above described budgets are interrelated with each other. If managers found any
mistake in operating budget than they can resolve it by checking it is expenditure budget. As
expenditure budget is vast hence it can help the accountants to formulate operating budget
accurately.
CONCLUSION
From the above project report it has been concluded that for all the business entities it is
very important to effectively manage and maintain financial information so that organisation's
performance can be measured. Various investment appraisal techniques like pay back period,
internal rate of return, accounting rate of return and net present value can be used to compare two
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