Financial Reports and Decision Making

The provided document is a report on financial analysis for a company considering opening a new store. The report includes a break-even analysis of two products, CBT software and other goods, to determine if selling 383 or 420 units within three months will result in profit or no loss. Additionally, it calculates the cash budget for three months, showing that the company can sell 1260 products in total, indicating higher profits. The report also references various studies on financial reporting practices and their impact on decision-making processes.

Financial Report

Table of Contents
INTRODUCTION..............................................................................................................1
LITRATURE REVIEW......................................................................................................1
SOURCES OF FUNDING................................................................................................2
ANALYSIS OF INVESTMENT APRAISAL BY USING NPV.............................................3
Investment appraisal....................................................................................................3
COMPUTATION OF BREAK EVEN ANALYSIS AND CASH BUDGET...........................5
Break even analysis.....................................................................................................5
Cash Budget................................................................................................................ 6
EVALUATION...................................................................................................................8
CONCLUSION................................................................................................................. 8
REFERENCES.................................................................................................................9

INTRODUCTION
Financial report is a part of financial statements which helps managers to see
actual position of its organisation (Perera and Chand, 2015). It means the full disclosure
of company,s financial statements, to all different users of it. It helps mangers to make
an analysis of its company's statements and find out any problems and develop
strategies to tackle those problems. The following report contains a detailed analysis of
SPORTS LTD working in UK, headquartered in South Africa providing financial services
to property developers, SME's and investment property funds in both Africa and UK.
This report also consists of sources of funding for SPORTS LTD and implication of new
accounting software.
LITRATURE REVIEW
As per Trujillo-Ponce, Samaniego-Medina and Cardone-Riportella (2014)
accounting models are models which are used by an organisation to manage its
resources and prepare its final statements. These models helps an organisation to work
effectively and efficiently and to follow general accounting concepts. Following are some
models of accounting:
As per Gotze, Northcott and Schuster (2016) investment appraisal is a method to
find out investment attractiveness so that it can get maximum return out of that
investment. It is used by mangers to identify viability of any project, this help
organisation to get an estimate amount of return from their investment to check whether
that particular invest will be profitable or not.
As per Comans, and et.all (2013) Break even analysis is a calculation of margin
of safety. It is a point where company's cost of production including both variable and
fixed cost is equal to revenue generated by sale of these goods. This is an analysis of
different level of prices, it is used by businesses to identify the level of sales which are
necessary in order top cover company's fixed cost.
As per Warren (2015) cash budgeting also known as cash budget is used by
mangers to identify budget to see the requirement of cash in an accounting year. It
helps mangers to identify that company has a sufficient to mange its operations or not.
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While preparing cash budget for a company previous sales and production data are
analysed to see an estimate use of cash in a company.
SOURCES OF FUNDING
Funding is one of the most important part of an organisation without funds it is
impossible for any organisation to survive (Dunne and et.all, 2013). It is one of a basic
necessities of an organisation which helps it to keep on going. These funds can be
raised from various sources as mentioned above in case study, SPORTS limited uses
only two methods for raising its capital. Earlier company was funded by its parent
organisation situated in South Africa, company has to always relies on its parent
company to support it financially. In this process it consumes time and approval for
every single transaction, but now company has decided to implement new software to
improve its efficiency which will help the company to raise its capital from other sources.
To raise it fund company decided to take a bank loan at 3% interest and loan
amount to be paid back in one year dividing it into 12 equal instalments, loan amount
take by company is of 18000 to open a new store in London to sell two software as
Small business tool (SBT) and Corporate business tool (CBT). Initially company will only
sell two products to test market and check that its break even analysis is achieved
during same period. SPORTS limited is also considering to implement new software for
its accounting purpose for this company has selected two software one is capital suit
and the other one is capital platform by which it can manges its resources and reduce
borrowing money from its parent organisation. At present company raised it funds
through loan to set up a new shop in London. There are other ways also to raise its fund
through issuing equity share, long term debts which include debentures and long term
bank borrowing.
Equity Shares: Equity shares are shares which are issued by company to raise
its capital, this type of shares gives the shareholders a controlling as per decided by
company (Valentinetti and Rea, 2012). Equity share holders are considered as owner of
business. Following are the advantage and disadvantages of equity share:
Advantages: It is considered as a permanent source of capital, company can issue
equity share whenever they require funds and company does not have to pay it back
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unless a company is going into liquidation. These shares does not have any fixed rate
to pay dividends every year.
Disadvantages: Equity shares are not redeemable which may lead to over capitalization
for a company. Equity shareholders some time create obstacles for a company by
organising and manipulation. Some times a dividend is paid at a higher returns during a
prosperous periods.
Long term loans: Long term loans are a type of loan which are given to a
company whose repayment time is after a long term, long term in case of accounting is
considered if a period is of more than one year (Chandar, Chang and Zheng, 2012).
Following are some advantages and disadvantages of it:
Advantages: These long term loans provide flexibility to an organisation as they don't
have to worry about there loans they only have to make their instalments on time and
can fully focus on their operations. It also helps to manage their working capital as it
provides funds for its daily operations.
Disadvantages: Most important disadvantage of these long term are their strict
documentation process. In bank loan documents which are required by these
institutions are strictly required and should be in proper form. It also create an additional
burden on its cost or production of the goods. To take a long term loan company has to
maintain its credit score and security needs should be provided.
ANALYSIS OF INVESTMENT APRAISAL BY USING NPV
Investment appraisal
Investment appraisal is finding out the rate of return which a company can earn
after taking that investment (Barth, 2013). It is calculated by using various different
methods such as internal rate of return (IRR), average rate of return, payback period
and net present value (NPV).
Capital suite
Draft figure
Year 0 1 2 3 4 5
New software cost 8800 9700 11940 16900 22170 28270
Working capital 900 600 800 300 700
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Sales Revenues 3300 6400 7700 8700 9700
Less:
Module 1 -420 -600 -800 -900 -1100
Module 2 -1010 -1400 -1600 -2100 -1900
Overheads -230 -240 -330 -300 -300
Total inflows 9700 11940 16900 22170 28270 34670
NPV
Year
PV factor
@11% Amount (£)
Initial investment -9700 1 -9700
1 11940
0.9009009
009
10756.75675
67568
2 16900
0.8116224
332
13716.41912
18245
3 22170
0.7311913
813
16210.51292
34421
4 28270
0.6587309
741
18622.32463
90792
5 34670
0.5934513
281
20574.95754
37902
NPV 1002.01
Capital Platform
Year 0 1 2 3 4 5
New software cost 8600 9700 11940 16900 22170 28270
Working capital 500 653 806 959 1112
Sales Revenues 5650 6780 9040 10735 11300
Less:
Module 1 -341 -529 -810 -1053 -1441
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Module 2 -1320 -1875 -2250 -2723 -2945
Overheads -186 -227 -270 -316 -360
Total inflows 9100 14156 16895 23569 29925 34824
Year
PV factor
@11% Amount (£)
Initial
investment -9100 1 -9100
1 14156
0.9009009
009
12753.15315
31532
2 16895
0.8116224
332
13712.36100
96583
3 23569
0.7311913
813
17233.44966
58821
4 29925
0.6587309
741
19712.52440
12891
5 34824
0.5934513
281
20666.34904
83112
NPV 1161
COMPUTATION OF BREAK EVEN ANALYSIS AND CASH BUDGET
Break even analysis
It is an analysis used by companies to check that can they be able to meet its
fixed expenses. It a measurement system used by companies to calculate margin of
safety by analysing the amount or number of units to be sold to cover its fixed and
variable expenses.
Uses: It help managers to determine selling price for their products which helps
to achieve profits desired by an organisation. It also helps to forecast its profit and cost
of production if there is a change in volume. Break even analysis help management to
make inter-firm comparison of profits earned by each firm.
CBT SBT Total
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Combined fixed cost
Rent
Telephone
Loan interest
Insurance
Electricity and gas
Business rates
5333
600
360
2000
1167
1333
10667
1200
720
4000
2333
2667
16000
1800
1080
6000
3500
4000
Fixed Cost
Marketing
Administration
Staff Salary
26000
12000
24000
24000
8000
18000
50000
20000
42000
Total fixed cost 72793 71587 144380
Variable Price per
unit
220 190 410
Selling Price per unit 410 300 710
Break even point 383 approx 650 approx 481 approx
Working note:
break even point of CBT= total fixed cost / (selling price per unit – variable price per
unit)
= 72793/(410-220)
= 383 approx
break even point of SBT= total fixed cost / (selling price per unit – variable price per
unit)
= 71587/(300-190)
= 650 approx
break even point of total =total fixed cost / (selling price per unit – variable price per unit)
= 144380/(710-410)
= 481 approx
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Cash Budget
It is an estimation done by the top level of management to check how much cash
is being used in a specific period of time (Yusuf and et.all, 2013). It help managers to
keep a track of the usage of cash in an organisation. It is used to see a company
sufficiency of cash to manage its daily operations, to prepare these budget company
needs the data of its sales and expenditures.
Uses: It is used by companies to project its cash position, cash surplus or deficit
for a particular month. This budget is used by organisation to plan for cash in advance if
it is required in future. It helps management to start preparing for raising funds by short
term credits or bank loans.
Cash budget for CBT
Particulars April(In £) May(In £) June(In £)
Receipts:
Cash sales
Credit sales
Capital invested
Loan received
Total Receipts(A)
Payments:
Fixed expenses-
rent
telephone
loan interest
insurance
electricity and gas
business rates
marketing
administration
17220
-
1667
-
18887
1778
200
120
667
389
444
8667
4000
17220
40180
-
6000
63400
1778
200
120
667
389
444
8667
4000
17220
40180
-
-
57400
1778
200
120
667
389
444
8667
4000
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staff salary
Total Payments(B)
Net Receipts( A-B)
8000
24265
(5378)
8000
24265
39135
8000
24265
33135
Cash budget for SBT
Particulars April(In £) May(In £) June(In £)
Receipts:
Cash sales
Credit sales
Capital invested
Loan received
Total Receipts(A)
Payments:
Fixed expenses-
rent
telephone
loan interest
insurance
electricity and gas
business rates
marketing
administration
staff salary
Total Payments(B)
24930
-
3333
-
28263
3556
400
240
1333
778
889
8000
2667
6000
23863
24930
58170
-
12000
95100
3556
400
240
1333
778
889
8000
2667
6000
23863
24930
58170
-
-
83100
3556
400
240
1333
778
889
8000
2667
6000
23863
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Net Receipts(A-B) 4400 71237 59237
Working Notes:
Calculation of capital invested and loan interest- Total capital is of
5000£ which is divided by 1/3 in CBT and remaining 2/3 in SBT. As well as loan interest
is of 1080£ that is divided in 1/3 to CBT and 2/3 to the SBT.
EVALUATION
From the above calculation of break even analysis it is evaluated that if company
is selling 420 units including both software CBT and SBT every month company will be
able to sell more than the break even point of sale. As per the above calculation it is
evaluated that break even point of three months for CBT software is at 383 which
means if company will sell 383 units in three months than there will be no profit or loss,
but form the calculation of cash budgets it is found out that the company will sell 420
goods in three months resulting in profit for organisation. If total sales is taken into
context than the company need to sell 481 product in three months but from the above
budget it is seen that company will be able to sell 1260 products in total which states
that the company can earn higher profits.
CONCLUSION
From the above report it is concluded that financial reports plays an important
part for decision making process. The above report states different sources of raising
funds and investment appraisal methods. This report also shows calculation of break
even analysis of two different products and cash budget for three months to check that
company's decision of opening new store is profitable or not.
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REFERENCES
Trujillo-Ponce, A., Samaniego-Medina, R. and Cardone-Riportella, C., 2014. Examining
what best explains corporate credit risk: accounting-based versus market-based
models. Journal of Business Economics and Management. 15(2). pp.253-276.
Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL.
SPRINGER-VERLAG BERLIN AN.
Comans, T. A., and et.all, 2013. A break-even analysis of delivering a memory clinic by
videoconferencing. Journal of telemedicine and telecare. 19(7). pp.393-396.
Warren, K., 2015. Time to look again at accrual budgeting. OECD Journal on
Budgeting. 14(3). pp.1-17.
Dunne, T. and et.all., 2013. Stakeholder engagement in internet financial reporting: The
diffusion of XBRL in the UK. The British Accounting Review. 45(3). pp.167-182.
Valentinetti, D. and Rea, M. A., 2012. IFRS Taxonomy and financial reporting practices:
The case of Italian listed companies. International Journal of Accounting
Information Systems. 13(2). pp.163-180.
Chandar, N., Chang, H. and Zheng, X., 2012. Does overlapping membership on audit
and compensation committees improve a firm's financial reporting
quality?. Review of Accounting and Finance. 11(2). pp.141-165.
Barth, M. E., 2013. Global comparability in financial reporting: What, why, how, and
when?. China Journal of Accounting Studies. 1(1). pp.2-12.
Yusuf, J. E., and et.all., 2013. For the people: Popular financial reporting practices of
local governments. Public Budgeting & Finance. 33(1). pp.95-113.
Perera, D. and Chand, P., 2015. Issues in the adoption of international financial
reporting standards (IFRS) for small and medium-sized enterprises
(SMES). Advances in accounting. 31(1). pp.165-178.
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