Accounting Principles: Financial Statements, Ratios, Cost of Capital, Project Evaluation, Budgeting Techniques

This article covers financial statements, ratio analysis, weighted average cost of capital, project evaluation, and budgeting techniques for accounting principles. It includes a balance sheet, profit and loss account, and cash flow statement for Max Spray Ltd. The article also analyzes significant ratios such as return on equity, gross profit margin, efficiency ratio, current ratio, leverage ratio, dividend payout ratio, and EPS. The article concludes with budgeting techniques and a reference list.

Running head: ACCOUNTING PRINCIPLES
Accounting Principles
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Author’s Note

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Table of Contents
Financial Statements of Max Spray Ltd..........................................................................................2
Financial Ratio Calculation and Analysis........................................................................................5
Weighted Average Cost of Capital..................................................................................................8
Project Evaluation............................................................................................................................9
Budgeting Techniques.....................................................................................................................9
Reference.......................................................................................................................................12

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Financial Statements of Max Spray Ltd
Balance Sheet for the year 2017
Profit and Loss Account for the year 2018

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Balance Sheet for the year 2018

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Cash flow Statement for the year 2018

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Financial Ratio Calculation and Analysis

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As per the table which is shown above, the significant ratios which are very useful for the
purpose of determining the performance of the business. The return on equity shows that the it
has increased from previous year and the same is shown to be 24% in 2021 which is a positive
sign, however it is still lower than the industry average which signifies that the return on equity
of the competitors of the company is still more. The gross profit margin of the company has
decreased significantly from previous year. The gross profit margin is shown to be 51.6% for the
year 2019 and the same has reduced to 40.5% in the year 2021. This may be due to the increase
in the overall cost of good sold of the business and also due to the fall in the sales of the business
(Petruzzo et al., 2015). In addition to this, the profitability is lower than the industry average
which shows that the business is underperforming in comparison to its competitors.
The efficiency ratio of the company shows significant ratios such as inventory turnover
period, receivable settlement period and payables settlement period. The inventory turnover
period has increased from 2019 which was 77.6 days and the same is shown to be 80.4 days in
2021. This has increased which is not a favorable sign and the management is taking more time
to sell off the inventory of the business (Damjibhai, 2016). In the case of debtor settlement
period, the number of days has increased which means that the debtors of the business will be
taking more time to settle the debts of the business. The payable settlement days has reduced and
the same is showing as 28.7 days as per the above figure which is a favorable sign for the
business and the same is also lower than the industry average which is shown to be 36.4 days
which is a good sign.
The current ratio of the business has increased from previous year and the same is shown
to be 2.81 which means that the liquidity position has improved from previous years even though
the estimate is lower than the industry average which signifies that there are companies which

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has a better liquidity than Max Spray ltd (Babalola & Abiola, 2013). The acid test ratio also
shows liquidity position of the business.
The leverage ratio shows the amount of debt which a business applies in the capital mix
of the company and the level of debt applied by the company has reduced which is evident from
the decrease in the gearing ratio of the business which is shown as 63.4 % in 2021 (Kiema &
Jokivuolle, 2014).
The dividend payout ratio of the company has fallen which may be attributed to the fall in
the profits of the business as shown. The EPS of the business is shown to be 0.22 which has
increased and is comparatively higher than industry average.

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Weighted Average Cost of Capital

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Project Evaluation
As per the table which is shown above, the calculation of NPV is undertaken for the
purpose of taking decision whether the business needs to undertake the investment or not. As per
the calculations, the NPV of the project is shown to be 1.5. This means that the net cash inflows
is greater than cash outflows of the business and thus the project should be accepted.
Budgeting Techniques
Part A

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Reference
Babalola, Y. A., & Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), 132-137.
Damjibhai, S. D. (2016). Performance Measurement Through Ratio Analysis: The Case of Indian
Hotel Company Ltd. IUP Journal of Management Research, 15(1), 30.
Kiema, I., & Jokivuolle, E. (2014). Does a leverage ratio requirement increase bank
stability?. Journal of Banking & Finance, 39, 240-254.
Petruzzo, P., Gazarian, A., Kanitakis, J., Parmentier, H., Guigal, V., Guillot, M., ... & Badet, L.
(2015). Outcomes after bilateral hand allotransplantation: a risk/benefit ratio analysis. Annals
of surgery, 261(1), 213-220.