Accounting and Finance: Break-even Analysis and Investment Appraisal Techniques

Introduction to Accounting and Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1 –TOM & JERRY LIMITED....................................................................................3
Preparing statement of profitability and Financial Position by following the given transactions
.....................................................................................................................................................3
QUESTION 2 – FIDEL & ANA LIMITED....................................................................................3
a. Assessing contribution that each electric kettle will make referring the given scenario.........3
b. Computing break-even point and margin of safety.................................................................3
c. Calculating profit which firm will make if it produces and sells 48,000 electric kettles........3
d. Analyzing whether proposed strategy for Stockstone Ltd is good or not................................3
e. Explain the underpinning assumptions associated with the break-even model.......................3
QUESTION 3 – BIMBAGU PLC...................................................................................................3
a. Assessing the viability of new machine for Bimbagu Plc using investment appraisal tool....3
b. Analyzing the key merits and limitations of the differing investment appraisal techniques...5
c. Explaining the key benefits and limitations budgets as a strategic planning tool...................6
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Accounting may be defined as a process which is undertaken by manager for recording
transactions associated with business. With regards to business organization, accounting and
finance is highly significant as it furnishes information about company’s position as well as
performance. In order to meet information need of stakeholders every publicly listed firm
prepares and publish accounting statements at the end of year. For the purpose of effective
decision making and performance enhancement accounting team lays high level of emphasis on
evaluating each & every alternative available for investment purpose. The present report is based
on different case scenarios which will provide deeper insight about the concept of break-even
analysis and investment appraisal techniques. It highlights profitability and liabilities as well as
Tom & Jerry by preparing financial statements. Further, it entails the contribution of break-even
analysis in decision making pertaining to sales and production. Report also depicts the use of
capital budgeting technique in the selection of project which suitable for investment purpose.
Along with this, it also exhibits the strength and weakness related to each technique of
investment appraisal.
QUESTION 1 –TOM & JERRY LIMITED
Preparing statement of profitability and Financial Position by following the given transactions
Particulars Figures (in
£)
Figures (in
£)
Sales 633000
Less: cost of sales 297000
Wages paid 117,000
Add: Outstanding wages at the end of the year 2175 119175
GP 216825
Indirect expenses:
Depreciation on van 9600

Electricity Expenses 7725
Van running expenses 33600
Bad debts 1500
Rent paid (Less: prepaid rent at the end of the year)
(112500 – 22500) 90000
Total Operating Expenditure 142425
Net profit before tax 74400
Tax 5775
Net income after tax 68625
Statement of Financial Position for Tom & Jerry limited at 31 December 2020 is as follows:
Particulars Figures (in
£)
Figures (in
£)
Assets
Fixed assets: Delivery van 50400
Total fixed assets 50400
Current assets
Trade receivables 64500
Prepaid Rent 22500
Closing stock 228000
Cash 90000
Prepaid tax 1125
Total current assets 406125
Total assets 456525
Liabilities & shareholder’s equity
Current Liabilities
Trade Payables 93000

Bank O/D 110700
Outstanding Wages 2175
Outstanding Electricity Expenses 2025
Total current liabilities 207900
Shareholder's Equity
Share capital 180000
Add: Net profit 68625
Total shareholder's Equity 248625
Total liabilities and shareholder's Equity 456525
Working notes:
W.N. 1
Particulars Figures (in £)
credit sales 504,000
cash sales 129,000
Total Sales 633000
W.N. 2
Particulars Figures (in £)
Van’s purchase price 60000
scarp value 12000
Life of asset 5
Depreciation
(cost – scrap) / life 9600

W.N. 3
Particulars Figures (in £)
Expenses paid 5,700
Add: Outstanding expenses at the end of the year 2025
Sum of electricity expenses 7725
W.N. 4
Particulars Figures (in £)
Credit Purchases 486,000
Less: Trade Payables 393,000
Net Trade Payables 93000
W.N. 5
Particulars Figures (in £)
Annual Rent 90000
Rent Per month 7500
Prepaid rent of 3 months 22500
W.N. 6
Particulars Figures (in £)
Net profit after tax 68625
Reserves 68625
W.N. 7
Particulars Figures (in £)
COGS (Credit) 243000