Introduction to Accounting and Finance - Desklib Study Material

This study material covers topics such as income statement, financial position, investment appraisal techniques, and more related to accounting and finance. It includes solved questions and calculations to help students understand the concepts better. The content is relevant for students studying accounting and finance courses in colleges and universities.

Introduction to Accounting
and Finance

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
QUESTION 1...................................................................................................................................3
QUESTION 2...................................................................................................................................5
a) .................................................................................................................................................5
b)..................................................................................................................................................5
c)..................................................................................................................................................7
d)..................................................................................................................................................7
e)..................................................................................................................................................8
QUESTION 3...................................................................................................................................9
c)..................................................................................................................................................9
Question 4......................................................................................................................................11
Calculating investment appraisal techniques.............................................................................11
Analyses the key merits and limitations of the differing investment appraisal techniques. .....13
REFERENCES..............................................................................................................................15

QUESTION 1
Income statement for the year ended 31st December 2020
Particulars Amount
Net sales 633000
Less: Cost of goods sold 297000
Wages 119175
Gross profit 216825
Less: Indirect expenses
Rent 90000
Electricity bills 7725
Van running expenses 33600
Bad debt 1500
Depreciation on van 9600
Tax 5775
Net profit 68625
From the evaluation of above prepared income statement it can be interpreted that Tom
and Jerry Limited is earning good amount of profitability. There are various expenses that are
paid by organization for having sufficient capabilities to have smooth functioning. Preparing the
income statement that helps in gaining proper ability to identify the crucial insights that
regarding income and expenses that are incurred by firm for having appropriate function in turn
getting appropriate amount of market position can become possible. To have reliable and
relevant information that can be shared with stakeholders of company it becomes essential for
the specified organization to formulate income statement by involving all relevant expenses
associated with particular specified period. In addition to this, it can be specified that there are
several benefits that can be obtained by particular organization through proceeding like this. Tom
and Jerry Limited can be benefited by focusing on gaining proper understanding regarding the

amount of expenses incurred by firm for achieving proper smooth functioning in turn higher
profitability and sustainability can be derived.
From the evaluation of above presented income statement it can be interpreted that tax,
rent, van using expense, etc are few indirect expenditure are paid by specified firm for having
appropriate ability to gain proper ability to have sufficient liquidity for have relevant processing.
Financial Position as at 31 December 2020
Assets Amount
Current assets
Prepaid rent 22500
Prepaid tax 1125
Inventory 39000
Trade receivables 436500
Fixed asset
Van 50400
Total 642675
Liabilities
equity 180000
net profit 67500
Out sanding wages 2175
Trade payable 393000
Total 642675
The above illustrated table formulated for the year ending 31 December 2020 indicating
that there is sufficient liquidity that helps in getting balance in overall proceeding of company.
In the assets side of prepared financial position there is availability of both current and fixed
assets for having higher level of smooth functioning. On the basis of formulated balance sheet it
can be articulated that there is as well presence of short term as well long term liabilities that
includes trade payables, etc. on the basis of this, it can be interpreted that there are several

reasons for which preparing the financial statement can be beneficial for the specified
organization as allows getting summarized details of transaction conducted for annual period. In
addition to this, it can be stated that equal balance in overall practices of firm can be achieved. It
is required that company should largely concentrate on overcoming the prevailing obligations so
that higher stability in turn can be derived. It can be identified that there is much requirement to
formulate balance sheet so that appropriate extent of trustworthiness and credibility can be
maintained.
QUESTION 2
a)
Particulars Amount £
Selling price 13
Variable Costs (per unit)
Materials 5.25
Labour 2.95
Variable overheads 1.85
Contribution per unit 2.95
contribution that each electric kettle is £2.95
b)
Break even point (In units) = fixed cost / (selling price cost per unit- variable cost unit)
Particulars Amount £
Fixed costs 106600
SP per unit 13
VC per unit 10.05

Break-even point (In units) 36135.59
From the above prepared table it can be interpreted that break even point that specified firm
should obtain for having no profit or loss situation is 3636 units.
Break even points (In revenue)= fixed cost / contribution margin per unit
Particulars Amount £
Total revenue 689000
variable cost 53265
Contribution margin 29.35%
Particulars Amount £
Fixed costs 106600
Contribution margin 29.35%
Break even points (In revenue)= fixed
cost / contribution margin per unit 363202.73
From the assessment of above table it can be articulated that the total amount of revenue that
firm required to generate for reaching the situation of break even point. The specified amount of
units that has been budgeted by firm will require to have sufficient amount of revenue such as
£363202.725 that will assist the company to have reliable position in industry by obtaining the
situation of the no profit and loss by recovering all the expenses.
Margin of safety in revenue = currents sales — break even sales
= 689000 – 363202.73
= 325797.27

Margin of safety in units= Currents sales units – break even units
= 53000-3636
= 49364 units
On the basis of above calculation it can be interpreted that margin of units that helps company
to have make sure that there is proper safety is maintain so that maximum ability to earn higher
revenue can be derived. On the basis of above derived outcome in units and revenue includes
49364 units and £325797.27. From this it can be stated that significant risk affecting firm can be
declined through maintaining this majors in internal processes.
c)
Particulars Amount
Sales 624000
Less Variable Costs
Materials 252000
Labour 141600
Variable overheads 88800
Contribution per unit 141600
Less Fixed costs:
Production 59000
Selling etc 47600
Profit 35000
d)
Particulars Amount
(after
Amount
(Before

advertising
)
advertising
)
Sales 878681.7 689000
Less Variable Costs
Materials 325552.5 278250
Labour 182929.5 156350
Variable overheads 114718.5 98050
Contribution per unit 255481.2 156350
Less Fixed costs:
Production 59000 59000
selling etc 47600 47600
Profit 148881.2 49750
From the above table it can be articulated that there the specified strategy it can be articulated
after spending the particular amount of advertising the mentioned organization will become able
to incline the profitability. In addition to this, advertising play important role in influencing the
market forces that provides assistance in inclining sales revenue. The mentioned strategy of
increasing the advertising expenses is good strategy that is helpful in inclining the sales revenue
and therefore profitability. To be successful in industry it becomes essential for the specified
company to pay attention on taking such course of action in turn higher productivity and
sustainability can be achieved. There are various benefits which can be achieved by conducting a
suitable advertising and promotional activities. It helps in achieving ability to spread awareness
regarding operational practices so that higher brand awareness can be derived. This can be stated
by referring specified table inclining trend can be seen. From the evaluation it can be articulate
that implementing the particular strategy helps firm to have positive impact which can contribute

in having stable position in sector. It provides assistance to have both monetary and non financial
rewards that allows getting success in industry.
e)
Break even model is associated with paying attention on deriving the situation that has no profit
and loss. In addition to this, it can be articulated that there are number of benefits which can be
obtained by applying the break even model for taking strategic decision. On the basis of this, it
can be articulated that firms irrespective of their scale of operation emphasize on having
significant ability to reach situation where it can cover s all the incurred expenses.
Each technique has few limitations that are required to be focused for having reliable
information in turn irrelevant actions can be removed (ASSUMPTIONS OF BREAK EVEN
Model, 2021). From the evaluation it can be articulated that there are number of limitation which
arise due to implementation of various assumptions. The one of the significant assumption that
need to be taken into consideration for having depth information about break even model
(Aslanidis and Hartigan, 2021). The particular model has assumption that cost will be divided
into fixed and variable. There is no focus is provided on semi variable that does not permit to
have reliable information.
There is presence of assumption that cost and revenue variable will remain linear that si
not possible in actual market (Messer, 2020). There is as well assumed that sales volume and
production units are equal which is not possible in current market situation. Selling price of
product is assumed to remain constant that is one of the major factor that serve adverse impact
on decision-making process. The main reason behind identifying this as one of the biggest
limitation is that prices of product keeps on changing as they are dependent on market forces in
turn better compliance with gaining higher profitability. Constant technology and no
improvement in labour efficiency that is inaccurate in current situation. It can be specified that
these keeps on altering with changing time. It becomes essential to focus on several factors that
are providing insignificant outcome that is hampering decision-making procedure of business.
Along with mentioned limitation the biggest issue that has been specified in current report
includes constant rate of increase in variable cost. From the evaluation it can be articulated that
these are the crucial assumptions which lead to impact business functioning.

Question 4
Calculating investment appraisal techniques
Net cash flow assessment
Year
Cash
inflows
(in £)
Less:
Cash
outflows
(in £)
Less:
Depreciatio
n
EAT (in
£)
Add:
Depreciatio
n
Net cash
inflows
(in £)
1
17,000,00
0
6,400,00
0 7000000
3,600,00
0 7000000
10,600,00
0
2 17000000
6,400,00
0 7000000
3,600,00
0 7000000
10,600,00
0
3 17000000
6,400,00
0 7000000
3,600,00
0 7000000
10,600,00
0
4 17000000
6,400,00
0 7000000
3,600,00
0 7000000
10,600,00
0
5 17000000
6,400,00
0 7000000
3,600,00
0 7000000
15,600,00
0
Year
Net cash inflows
(in £)
PV factor @
7%
PV of cash flows (in
£)
1 10,600,000 0.935 9906542
2 10,600,000 0.873 9258451
3 10,600,000 0.816 8652757
4 10,600,000 0.763 8086689
5 15,600,000 0.713 11122584
Total discounted cash inflows 47027024
Less: initial investment 40,000,000
NPV 7,027,024
Payback period
Year Net cash inflows (in £)
Cumulative cash
inflows (in £)
1 10,600,000 10,600,000
2 10,600,000 21,200,000
3 10,600,000 31,800,000
4 10,600,000 42,400,000
5 15,600,000 58,000,000

3 + (40000000 – 31800000) / 10600000
= 3.8 years or 3 years and 8 months
Accounting rate of return
ARR = (Average EAT / Average investment) * 100
Average investment = (£40000000 + £5000000) / 2
= £22500000
Year Net cash inflows (in £)
1 10600000
2 10600000
3 10600000
4 10600000
5 15600000
Average 11600000
= (11600000 / 22500000) * 100
= 51.56%
Recommendations
From the above calculation it is evaluated that Bimbagu Plc should buy the machine.
When comparing investments, it is analysed that the firm needs to appraise project (Dawood,
2021). According to experts, if Net present value is positive then it adds value to the company, so
the investor needs to undertake a positive Project. By investigating the above table it is evaluated
that net present value allows for comparison between options of investment.
It is recommended to offer discounts for early payment and improve its inventory
management. It is noted that the payback period should be the shortest time period and generally
to be most acceptable. As payback period is an effective method to measure investment risk, the
present company needs to focus and improve its payback period. It is suggested to experiment
with sales channels and find out the ways to make profit. The company needs to cut the cost of
acquisition and increase its pricing model ensures that they spend more to access services. By
reinforcing the advantages of services and provide incentives to stay.
With the above mentioned calculation of net present value it is suggested that the
company should buy the machinery. Bimbagu PLC should consider moving forward with the
investment. With the use of investment criteria the company guide management through

decisions and address about the potential conflicts. Moreover, The management team needs to
focus more on qualitative issues such as consistency of investment decision-making process with
goals and objective and reputation of the company. While making investment decision for future
requirements company needs to focus on assumptions about costs, price and demand in order to
deal with changing market and economic condition and external factors.
Analyses the key merits and limitations of the differing investment appraisal techniques.
The investment appraisal are methods used in the company in order to take decision of
capital investment. It is usually used by Bimbagu Plc for ranking projects and those techniques
are being compared to the projects. Once this process is completed then it will determine the
highest one among all and will be implemented.
Accounting rate of return
Merits
ARR is the technique that compare the measure of profit over the project life to the
capital amount that needs to be invested to earn profit margin. It is helpful to calculate and
compare company's target return.
It is easy to understand the payback pattern over the project life. ARR shows the
investment profit and helps to determine the financial performance of the project. The company
utilizes this method in order to eliminate outlying statistics.
It helps investors to determine about their options before taking decision about particular
investment. ARR focus is to reduce investment risk with the help of simple comparison
(Chambers, Spaenjers and Steiner, 2021.). Investors used this method for long term capital
investment decisions for different projects.
Limitations
ARR method doesn't focus on investment in a project when it is made at different parts.
This method does not focus on taxes and cash inflows as it is based on profits of accounting.
As time value is an important factor in deciding the investment, this method doesn't
consider the time factor. Additionally, it doesn't provide the accurate results when projects are
being compared.
Payback period
Merits

This technique is used by company to calculate the period required and helps them to
evaluate the project reliability. As it provide quick solution the company adopted this method for
liquidity preferences (KARTINI and CALLISTA, 2021). Payback period is used by company if
they are looking to reinvest to earn faster, so they can keep growing their business.
limitations
Payback period only focuses on cash flow for a certain time frame, thus it is short term
budgeting method. However, if any business is looking for project investment, long term
approach, this method has some major demerits.
Net present value
Merits
This technique is used by firm to determine the proposed project profitability. It is useful
for evaluating an investment in the firm or any new business project (Abdelhady, 2021). It is a
popular method as it is helpful to find out cost of capital. With the help of this method investors
takes decision about their willingness to pay today for a cash flows in the future. NPV consider
the time value of money and helps the top-level management in the better investment decision-
making of the company.
Disadvantages
Net present value focus on quantitative factors only and sometimes omit opportunity
costs which is termed as hidden costs. If the company used this method then it can be
challenging finding out accurate discount rate that shows the true risk premium of investment.
This technique doesn't useful for comparing business projects of different sizes and also it
doesn't consider qualitative factors which sometimes affect the largest projects which generate
the highest returns.
c) Benefits and limitations of using budgets as atool for strategic planning
There are several types of budgetary tool that are taken into practices for having strategic
planning. There are various types of budgetary tool that allows organization to have appropriate
ability to pay attention on gaining information that can contribute in making suitable decision
(Budgetary Control, 2021.). There are different types of budgets which can be utilized by
business involves cash, flexible, capital expenditure, etc. these mentioned planning tools gives
few benefits and limitations that are needed to be considered to have strategic planning. Key

benefits that can be obtained for by implementing this budgets like cash, capital expenditure,
zero, activity based budgeting, variance analysis, incremental budget, etc.
Each budget has its own advantages and demerits which are required to be specified for
having significant ability to make appropriate decision. Zero based budgeting is formulated by
involving all the information from the starting so that appropriate budget can be prepared to
overall information (Maheshwari, Maheshwari and Maheshwari, 2021). Activity based budget
is s well planning tool that gives data regarding the business practices that lead to cost. Cash
budget involves all the inflow and outflow information related with budget so that proper data
respect to liquidity can be obtained.
Advantages
There are number of benefits which can be obtained by company through implementing
budgetary control system as planning tool through focusing on applying any of the budgets.
 The one of the biggest advantages that can be achieved for making proper strategy can
be formulated (Gonçalves and et.al., 2018). It includes optimum utilization of resources
through allocating resources in efficient manner.
 Paying attention on objectives becomes possible by having executing strategic planning
in tur better coordination can be implemented. This aids in having proper efficiency
among employees so that facilitating control can become possible.
 Maintaining flexibility in overall operation can be done effectively by implementing this
course of action so that concerting with changing circumstances can become possible
(Pradhan and Katel, 2021). It encourages innovativeness and creativity for having better
planning system that can encourage management to have higher profitability &
sustainability can be achieved.
Disadvantages
There are few limitations which can be adversely affected the processing of business that might
result in inaccurate decision formulation.
 The crucial demerit that is achieved by applying budgetary system as planning tool is
maximum time-consuming process (Berry, Broadbent and Otley, 2019). It leads to have
result in inappropriate planning that inclines he business decision.

 It is based on historical data that has major influence that does not allow recognizing
sudden emergencies which does not permit to have proper decision in turn adverse
influences is derived.
 There is no involvement of external factor that does not give proper emphasis on
including all sufficient informations that provides incomplete decision-making.
On the basis of this it can be interpreted that there are variety of advantages and
disadvantages that highly influence the business process. These mentioned benefits gives ability
to have higher profitability & sustainability. On the other side, these mentioned drawback
negatively effect providing irrelevant, insufficient, etc. that does not permit to have strategic
planning.

REFERENCES
Books and Journals
Abdelhady, S., 2021. Performance and cost evaluation of solar dish power plant: Sensitivity
analysis of levelized cost of electricity (LCOE) and net present value (NPV). Renewable
Energy, 168, pp.332-342.
Ali, H. H. and Fales, R. C., 2021. A review of flow control methods. International Journal of
Dynamics and Control, pp.1-8.
Aslanidis, N. and Hartigan, L., 2021. Is the assumption of constant factor loadings too strong in
practice?. Economic Modelling. 98. pp.100-108.
Baum, A. E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley &
Sons.
Berry, A. J., Broadbent, J. and Otley, D. T. 2019. Management control theory. Routledge.
Chambers, D., Spaenjers, C. and Steiner, E., 2021. The rate of return on real estate: Long-run
micro-level evidence. HEC Paris Research Paper No. FIN-2019-1342.
Dawood, S., 2021. Corporate Social Responsibility and MNCs: An Appraisal from Investment
Treaty Law Perspective. Indonesian Journal of Law and Society. 2(2).
EjekwuTobechi, B., Chioma, P. and Victor, O., AN APPRAISAL OF INTERNAL RATE OF
RETURN ON CASH FLOWS OF PRIVATE CAPITAL INVESTMENT IN NIGERIA.
Gonçalves, F. R and et.al., 2018. Risk-sharing agreements, present and
future. Ecancermedicalscience. 12.
KARTINI, K. and CALLISTA, G. C., 2021. The Influence of Startup Business Characteristics
on Investment Decisions of Business Angels: A Case Study in Indonesia. The Journal of
Asian Finance, Economics and Business. 8(6). pp.931-938.
Maheshwari, S. N., Maheshwari, S. K. and Maheshwari, M. S. K., 2021. Principles of
Management Accounting. Sultan Chand & Sons.
Messer, R., 2020. Break Even Decisions. In Financial Modeling for Decision Making: Using
MS-Excel in Accounting and Finance. Emerald Publishing Limited.
Pradhan, G.M. and Katel, P.K., 2021. Determination of Break-Even Point through Consumer
Preference Relation. The Batuk. 7(2). pp.67-76.
Online
Payback period. 2021. [Online]. Available through: <https://paddle.com/resources/guide-to-
payback-period/>
ASSUMPTIONS OF BREAK EVEN Model. 2021. [Online]. Available through:
<http://www.assignmentguys.com/assumptions-of-break-even-analysis/>
Budgetary Control. 2021. [Online]. Available through:
<https://www.wallstreetmojo.com/budgetary-control/>