Impact of Financial Accounting on Business Activities

The assignment provides a detailed analysis of the impact of financial accounting on business activities. It discusses how budgets are formulated to provide sufficient funds for all departments, ensuring the proper execution of business activities. The document also references various books and journals that support this topic, including 'Financial Accounting' by Horngren and others, and 'The Sustainability Curriculum' by Cullingford and Blewitt. Additionally, it mentions online resources such as Wall Street Mojo's explanation of the payback period method.

Accounting and
Financial Management

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Introduction.................................................................................................................................3
1. Computation of financial ratios in order to analyse performance of the company.................3
2. Computation of working capital cycle....................................................................................6
Conclusion...................................................................................................................................8
PART B............................................................................................................................................8
1. Different types of investment appraisal techniques................................................................8
2. Benefits and limitations of investment appraisal techniques................................................14
3. Effective sources of funds for the investment of Bitmap Plc................................................16
PART C..........................................................................................................................................16
1. Budget and its relationship with strategic plans and objective.............................................16
2. Budgeting process and interlinking of budgets that are used in an organisation..................17
CONCLUSION..............................................................................................................................18
REFENRENCES............................................................................................................................19

INTRODUCTION
Accounting and financial management is the process of formulating financial statements
and managing the performance of the organisation so that business can be executed successfully.
For all the managers it is very important to keep financial and accounting information in the form
of accounting reports so that stakeholders can analyse actual position of the company (Alves,
2012). Main aim of this assignment is to enhance knowledge about financial and accounting
management of an organisation. In this project report two different companies are going to be
analysed first one is Bitmap Plc which is a manufacturing company of furniture and established
in London, UK. Second company is Toyland Ltd which is a toy manufacturing company and
operating business in London. For the purpose of analysis, various topics are discussed under this
report that are financial ratios, working capital cycle, different types of investment appraisal
techniques their benefits and limitations and sources of funds. Budgets, budgeting process and
their relation with strategic plans and objectives are also covered in this report.
PART A
Introduction
Bitmap Plc is manufacturing company which is dealing in furniture and operating
business in London, UK. The Board of directors of the company have identified changes in
financial statements. They have asked the management accountants of Bitmap Plc to form a
report on the results of last two years of income statement and balance sheet. In this report
different financial ratios and working capital cycle have been calculated (Armstrong, 2014).
1. Computation of financial ratios in order to analyse performance of the company
Ratio analysis: It is a technique which is used by various organisations to evaluate their
profitability, efficiency, liquidity and other factors that may affect overall performance of
business operations. Management accountant of Bitmap Plc have been asked by the directors to
calculate financial ratios so that cause of changes in income statement and balance sheet can be
identified (Arroyo, 2012). Different types of profitability, gearing, liquidity, asset utilisation and
investors potential ratios are calculated in order to analyse actual performance of the company.
The calculations are as follows:
 Profitability ratios: When the managers are willing to analyse actual profitability of the
company than such type of ratios can help to determine that company is generating
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profits or facing losses. It also guide stakeholders to evaluate organisation's ability to
acquire profits and this will help them to formulate appropriate decision regarding
investment, providing credit and other. The management accountant of Bitmap Plc
calculated gross profit and net profit ratio to determine overall profitability of the
company (Beatty and Liao, 2014).
 Liquidity ratios: All ratios that are used to analyse organisations liquid strength are
called liquidity ratios. Current and quick ratios are calculated by management accountant
of Bitmap Plc to analyse overall liquidity of the organisation.
 Gearing ratios: Such ratios that are related to capital structure of a company and
calculated to establish proper balance in to assets and liabilities are called gearing ratios.
It is focused with the assessment of long term financial stability of business entities. It
guides managers to analyse the proportion of funds which is related to internal and
external sources. Management accountant of Bitmap Plc have calculated debt equity and
total assets to debt ratio under gearing ratios.
 Asset utilisation ratios: All the ratios that are mainly used to analyse that organisation is
appropriately using its assets to generate revenues or not. Management accountant of
Bitmap Plc calculated fixed assets and total assets turnover ratio to assess utility of assets
of the company.
 Investors potential ratios: The ratios that are calculated to provide appropriation
information to investors are known as investor potential ratios. They use such ratios to
analyse the rate which is going to be offered by the company on the invested amount. In
Bitmap return on equity and dividend coverage ratios are calculated by management
accountant of the company (Cheng and et.al., 2014).
Name of the ratio Formula Calculation
R
a
t
i
o
2016 2017 2016 2017
Profitability ratios:
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Gross profit ratio
Gross profit/total
revenues * 100
9100/18000*
100
12200*2300
0*100 50.56% 53.04%
Net profit ratio
Net profit after
tax/total revenues *
100
3220/18000*
100
4060/23000*
100 17.89% 17.65%
Liquidity ratios:
Current ratio
Current
assets/Current
liabilities 4150/1500 5160/1100 2.77 4.69
Quick ratio
Quick assets/current
liabilities 2350/1500 2800/1100 1.57 2.55
Gearing ratios:
Debt equity ratio
Total debts/total
equities 3500/12000 54600/15760 0.29 0.29
Total asset to debt
ratio
Total assets/total
debts 15500/3500 16760/4600 4.43 3.64
Asset utilisation
ratios:
Fixed asset turnover
ratio
Total revenues/Fixed
assets 18000/11350 23000/15200 1.59 1.51
Total asset turnover
ratio
Total revenues/total
assets 18000/15500 23000/16760 1.16 1.37
Investors potential
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ratios:
Return on equity
ratio
Net profit after
tax/total equity*100
3220/12000*
100
4060/15760*
100 26.83% 25.76%
Dividend coverage
ratio
Profit after
tax/Dividend 3220/200 4060/300 16.1 13.53
From the above ratios it has been analysed that organisation is having good profits as
gross profits of year 2016 has been increased in current year. Organisation's liquidity is increased
in year 2017 which means Bitmap Plc. is performing good and having higher liquidity that helps
to operate business successfully. Company's debt equity ratio is very low as compare to ideal
ratio which 2:1. It depicts that the organisation is not able to use outsider's fund appropriately to
operate business successfully. Organisation is properly utilising assets in order to enhance its
revenues. It has been observed form the asset utilisation ratios. Changes in revenues, equities
and dividends has been resulted in decreased investor potential ratios because they are not able to
get higher returns in current year as compare to previous year. From all the above calculated
ratios it has been observed that changes in income statement and balance sheet have taken place
due to fluctuations in figure of the elements that are recorded in balance sheet and income
statement.
2. Computation of working capital cycle
Working capital cycle: It can be defined as the period in which a company can convert
all its current assets in cash. It guides the managers to make strategic decision so that efficiency
of the company can be enhanced (Cullingford and Blewitt, 2013). For Bitmap Plc calculation of
working capital cycle is as follows:
For year 2016
Inventory collection period
Formula =Inventory/Sales per annum*365
= 1800/18000*365
= 36.50 Days
Trade Receivables period
Formula =Trade receivables/Sales per annum*365
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= 1600/18000*365
= 32.44 Days
Cash and marketable securities period
Formula =Cash/Annual sales*365
= 750/18000*365
= 15.21 Days
Trade payables period
Formula =Trade payable/Annual sales*365
=1500/18000*365
= 30.42 Days
Working Capital Cycle in Days:
Particular Days
Inventory collection period 36.50
Add: Cash and marketable securities period 32.44
Add: Trade receivables period 15.21
Less: Trade payables period 30.42
Working Capital Cycle in days 53.73
For year 2017:
Inventory collection period
Formula =Inventory/sales per annum*365
= 2,360/23000*365
= 37.45 Days
Trade Receivables period
Formula =Trade receivables/ Sales per annum*365
= (2300/23000*365)
= 36.50 Days
Cash and marketable securities period
Formula =Cash/Annual sales*365
= (500/23000*365)
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= 79.35 Days
Trade payables period
Formula =Trade payable/Annual sales*365
= 1100/23000*365
= 17.46 Days
Working Capital Cycle in Days
Particular 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
From the above calculations it has been analysed that working capital cycle for year 2016
was 53.73 days and for year 2017 it is 135.84 days which means the organisation's ability in year
2017 of converting its currents in cash is being decreased in year 2017.
Conclusion
From the above report, reasons for changes in income statement of company have
analysed. It is prepared by management accountant of Bitmap Plc to present in front of directors
of the company. Changes have occur due to fluctuation in revenues, incomes, expenses, profits,
assets and liabilities.
PART B
1. Different types of investment appraisal techniques
Toyland Ltd is a well established toy manufacturing company in London. Directors of the
organisation want to increase the demand of their products in future but currently it is not
possible for the business entity to meet increased demand (Ewert and Wagenhofer, 2012).
Directors have decided to buy a new machine, two different options are available for the
company and they have asked the finance manager to produce a report. This report will help
them to make investment related decision. Different type of investment appraisal techniques are
described below that will guide the manager to form decision:
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Following information is same for Machine A and B:
Initial investment £ 500000
Salvage value at the end £ 50000
Value of depreciation per year £ 75000
Depreciation method Straight Line Method
Life of machines 6 Years
A. The payback period:
Payback Period= (A-1)+(Cost-cumulative cash flow)(A-1)/Cash flowA
Machine A: Initial investment=500000
Years Cash Inflows
Cumulative cash
Inflows
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: Initial investment =500000
Years Cash Inflows
Cumulative cash
Inflows
1 20000 20000
2 50000 70000
3 150000 220000
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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 = (A-1)+(initial invest- discounted cumulative cash flow)(A-
1)/Discounted Cash flowA
Machine A: Initial investment =500000
Years Cash Inflows
P.V. Factor
@10% Present Value
Cumulative
Present Value of
cash Inflows
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: Initial investment =500000
Years Cash Inflows P.V. Factor Present Cumulative
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@10% Value
Present Value of
cash Inflows
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
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: Initial investment =500000
Salvage Value of machine A at the end = 50000
Years Cash Inflows 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
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=(500000+50000)/2
=275000
ARR =95000/275000*100
=34.55%
Machine B: Initial investment=500000
Salvage Value of machine B at the end =50000
Years Inflows Depreciation Net Profit
1 20000 75000 -55000
2 50000 75000 -25000
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
ARR =95000/275000*100
=34.55%
D. The net present value:
Net Present Value
=Present value of cash inflows – initial investment
Machine A: Initial investment =500000
Years Cash Inflows
P.V. Factor
@10%
Present
Value
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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
=802380-500000
=302380
Machine B: Initial investment=500000
Years Cash Inflows
P.V. 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
=661380-500000
=161380
E. The internal rate of return: trial and error method is used to determine the rate for
IRR method for both the machines.
IRR= LDR (P.V. of LDR- Initial investment/ P.V. of LDR- P.V. of HDR) (HDR- LDR)
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Rate of Return= (Cash Inflow-Initial investment)/ Initial investment*100*1 / No. of
Years
Machine A: Initial investment=500000
Cash inflow= 1020000
Life = 6 Years
Rate of return
=(1020000-500000)/500000*100*1/6
=17.33
The rates that are assumed for Machine A are 36% and 37%
Years Cash Inflows
P.V. Factor
@36% Present Value
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
P.V. 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
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Total 1020000 493570
IRR
=36+(500960-500000)/(500960-493570)*(37-36)
=36.13%
Machine B: Initial investment=500000
Cash inflow= 1020000
Life= 6 Years
Rate of return
=(1020000-500000)/500000*100*1/6
=17.33
Rates that are assumed for both the machines are 17% and 18%.
Years Cash Inflows
P.V. 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
P.V. Factor
@18%
Present
Value
1 20000 0.847 16940
2 50000 0.718 35900
3 150000 0.609 91350
4 200000 0.516 103200
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5 250000 0.437 109250
6 350000 0.370 129500
Total 1020000 486140
IRR
= 17+(504550-500000)/(504550-486140)*(18-17)
= 17.25%
Recommendation: The financial managers of the company has recommended the
directors of Toyland Ltd. To choose machine A because its pay back period and net present
value is good as compare to Machine B.
2. Benefits and limitations of investment appraisal techniques
Investment appraisal techniques: These are the techniques that are used by
organisations to compare two or more investment options and then choose the best option from
them. Purpose of using all the techniques is to measure the overall performance and result of
business portfolio (Horngren and et.al., 2012). Following techniques are considered as the part of
investment appraisal techniques:
Payback period: This method is a part of capital budgeting that helps to analyse the
period in which all the investments that are made by an organisation are going to be recovered. It
helps to analyse risk associated with a particular business project. Tesco use this method to
determine the period in which all its investments will be recovered (Payback period method,
2018).
 Benefits: It is a very simple method and easy to calculate. It provides a quick estimate to
the company of that period in which expenses and investments are going to be recovered.
 Limitations: Time value of money is ignored in this method. Overall profitability of an
investment cannot be determined with the help of this method.
Discounted pay back period: It is a capital budgeting technique which is used to
determine profitability of a business project. All the calculations under this method are done after
considering discounted future cash flow and time value of money. Waitrose Limited is using this
method to assess the specific period in which all the amount of investment will be reimbursed
after discount (Maskell, Baggaley and Grasso, 2016).
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 Benefits: Time value of money is considered in this method. It helps to analyse actual
risk which is involved in a business project.
 Limitations: It cannot determine that an investment will increase value of a company or
not. If there are multiple cash outflows than calculation of this method get complex.
Net present value: It is the difference between total cash inflows and initial investment
of a company. This method is used to evaluate a project that it will be profitable or not. This
method is used by C & K holding company to analyse the profitability of their construction
projects.
 Benefits: It results in good measures of overall profitability. It guides to make
assumption for re investment in future.
 Limitations: Sunk cost is ignored in this method and managers may face difficulties
while determining required rate of return.
Accounting rate of return: It is also known as Average rate of return in which cash
generated upon a particular investment is calculated. This technique is used by Airdri to analyse
the rate of return for the investment which is made in projects (P. Tucker and D. Lowe, 2014).
 Benefits: It is a simple method which is easy to use and understand. It can result in better
comparison of different business projects.
 Limitations: Life of a project is not considered in this method and size of an investment
is ignored while calculation ARR.
Internal rate of return: It is used to analyse the lucrativeness of a potential investment
that organisation is willing to make in future period. This method is used by CDC group of UK
in order to determine profitability of the investments before investing money in a business.
 Benefits: It helps to show the return on the actual monetary resources that are invested in
business. Working capital and scrap values are considered to get accurate results.
 Limitations: It is very lengthy technique as it is based on trial and error method. It is
very tough and complex method (Schaltegger and Csutora, 2012).
3. Effective sources of funds for the investment of Bitmap Plc
When an organisation is willing to buy a new equipment or machine than sufficient funds
are required to purchase the same. As Toyland Ltd is willing to make investment in a machine
than different sources are required to buy that machine. Following sources can be used by
directors of Toyland for the purpose of investment:
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Selling old assets: The new machine can be bought by Toyland by selling old assets that
are not used by the company. It is a good source of investment and directors do not have to
contact external parties to ask for investment.
Bank loan: For the purpose of investment the company can contact the bank by
providing a collateral to the bank. When the borrower fails to pay the borrowed amount than
bank can recover the amount by selling the asset.
Both the above described options can be used by Toyland to make investment in machine
for the purpose of increasing profits and sales (Sharma and Kuang, 2014).
PART C
1. Budget and its relationship with strategic plans and objective
Budget: Most of the organisations are using budgets so that all the future activities can
be performed successfully. Strategic planning is required to formulate budget appropriately and
when budgets are implemented than it results in achievement of goals.
For example as Toyland Ltd is willing to buy a new machine so that demand of its
products can be increased for this purpose proper planning and budgets are required. Proper
formulation of budget require strategic planning so that business objectives can be achieved. If
the plans and budged are formed appropriately than objectives will be attained.
From the above described example it has been identified that budgets, strategic plan and
objectives are interrelated with each other.
2. Budgeting process and interlinking of budgets that are used in an organisation
Budgeting process: It is the procedure in which budgets are formulated by the
organisations in order to operate business successfully. It guides managers to allot monetary
resources to functional departments according to their requirements. Following steps are required
to be followed in budgeting process:
Step 1: First of all the managers of the companies are required to set financial goals for
future period so that profitability can be increased.
Step 2: After setting goals managers and directors are required to determine various
sources of income that can be used to evaluate overall monetary funds of the company (Warren
Jr, Moffitt and Byrnes, 2015).
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Step 3: In this stage managers estimate possible future expenses that may take place. The
estimation is used to form a budget.
Step 4: When a budget is formulated than managers present it in front of board of
directors and top executives so that they can analyse the budget and mark their approval for
implementation.
Step 5: When the approval from the side of top executives is received than budget is
implemented by the mangers to execute business successfully.
Step 6: In last step the implemented budget is evaluated, controlled and monitored in
order to get positive results.
There are different types of budgets that are formulated by organisations and that are
interrelated to each other. Some of the budgets are as follows:
Expenditure budgets: All type of direct, indirect, operating and non operating expense
are recorded in expenditure budget. It provides detailed information of all the expenses that have
taken place in a specific period of time (Weil, Schipper and Francis, 2013).
Operating budget: All operating expenses and incomes are recorded in operating
budget. It provides information of revenues, costs, operating expenditures, profits and losses that
are recorded by an organisation in an accounting year.
Expenditures and operating budgets are related with each other because if operating
budget fails to provide detailed information of a particular expenditures than managers may get
its information from expenditure budget as it is very vast and detailed.
CONCLUSION
From the above project report it has been concluded that accounting and financial
management is the process of keeping appropriate information of operation in financial
statements and managing performance of business activities. Different types of capital budgeting
techniques, financial ratios and budgets are used to manage performance. Effective budgetary
planning can result in proper execution of business activities because budgets are formulated to
provide sufficient funds to all departments of the organisation.
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