Cash Flow, Financial Ratio and Cap Analysis

This document provides information about cash flow statement preparation, ratio analysis, and cap analysis. It explains the importance of financial ratios and their interpretation. It also discusses project budgeting and break-even analysis. The document includes examples and formulas for better understanding.

Cash flow, financial
ratio and cap analysis

Section A.........................................................................................................................................3
a. preparation of cash flow statement..........................................................................................3
b. Ratio analysis...........................................................................................................................4
SECTION B.....................................................................................................................................7
a....................................................................................................................................................7
b...................................................................................................................................................8
REFERENCES..............................................................................................................................11

Section A
a. preparation of cash flow statement
cash flow statement
Particulars Amount Total
Cash flow from operating activities
Net income 9416
Decrease in accounts receivable 1130
decrease in inventories 1000
increase in prepayments -500
increase in bank -7866
Increase in accounts payable 1960
Decrease in bank overdraft -1500
Decrease in accruals -600
Net cash generated by operating activities 3040
Cash flow from investing activities
Sale of fixture 280
Sale of machinery 2230
Net cash generated by that of investing
activities 2510
Cash flow from the financing activities
Issue of share capital 5250
Net cash provided by that of financing
activities 5250

Net increase in the cash
1080
0
Opening cash 236
Closing cash
1103
6
b. Ratio analysis
Particulars Formula Amount
2018 2019
Gross profit 27668 34449
Net sales 36520 40500
Gross profit ratio Gross profit/Net sales*100
0.757612
3
0.85059
3
Net profit 1566 7850
Net sales 36520 40500
Net profit ratio Net profit/Net sales*100
0.042880
6
0.19382
7
Net income 1566 7850
Total assets 23477.00
28487.0
0
Current liabilities 4660 4520
Capital employed Total assets-Current liabilities 18817.00
23967.0
0
Return on capital
employed Net income/Capital employed
0.083222
6
0.32753
4
Current assets 8347 14347.0

0
Current liabilities 4660 4520
Current ratio Current assets/ Current liabilities
1.791201
7
3.17411
5
Current assets 8347
14347.0
0
Inventory 3000 2000
Quick assets Current assets-Inventory 5347 12347
Current liabilities 4660 4520
Quick ratio Quick assets/Current liabilities 1.15 2.73
Inventory 3000 2000
Cost of goods sold 8852 6051
Inventory holding
period Inventory/Cost of goods sold*365
123.7008
6
120.641
2
Trade debtors 4760 3630
Revenue 36520 40500
Trade receivable days Trade debtors/Revenue*365
47.57393
2
32.7148
1
Trade payables 2560 4520
Cost of goods sold 8852 6051
Trade payable days
Trade payables/Cost of goods
sold*365
105.5580
7
272.649
1
Gross profit margin- It is the ratio that measures the profits generated by the company
after bearing its cost of sales. This ratio depicts the operational performance of an enterprise by

showing the relationship in between the net sales and the gross profit (Wen and Zhu, 2019).
Higher the ratio better is the operational performance of the company. As per the evaluation it
has been analyzed that the gross profit ratio of Button Ltd is increasing which clearly reflects that
the company is performing in a better manner. It shows that the sale of the firm is increasing
with an effective control on its cost incurred on the goods sold.
Net profit ratio- It means the ratio that reveals the amount of profits left after reduction of
the types of the production cost, financing, administration from that of the sales and the amount
of income taxes that are recognized. Greater the net profit margin reflects better performance of
an entity. From the results generated it has been stated that the net profit margin of Button Ltd is
increasing with a greater percentage value which clearly means that the company is generating
higher or increased profits after making payment of its cost, expenses and the tax obligation.
Thus overall the profitability performance of Button Ltd is getting better over the two years with
a greater percentage.
Return on capital employed- It referred as the financial ratio which determines
profitability of the company and the way in which the capital is been employed efficiently
(Gabric, 2018). Higher ROCE indicates optimum and economic use of the capital by the business
which reflects that the ROCE must be higher or greater than cost of capital. From an evaluation,
it has been depicted that he ratio of Button Ltd is increasing that is from 8% to 33% which shows
that the firm is making an effective and efficient use of its capital for generating higher profits.
Current ratio- It means the ratio that shows ability of the firm in paying its short term
debts that gets due within a period of one year. It tells the analyst and investors the way in which
it could maximize current assets on its balance sheet for satisfying the current debts and the other
payables. Higher the current ratio reflects better liquidity position of an enterprise and is
computed by dividing the current assets with that of the current liabilities. By reviewing the
results it has been assessed that the current ratio of Button Ltd is increasing which means that it
is making an effective use of the current assets in order to make payment of the current
liabilities.
Quick ratio- This ratio referred as an indicator of the short term liquidity position of an
entity and measures ability of an entity in meeting its immediate obligation or liabilities. The
quick ratio higher than 1 indicates that the firm is having sufficient or adequate cash for paying
its current liabilities, however if it resulted as less than 1 then it means the company does not
have enough funds to meet its immediate liabilities (Linares-Mustarós, Coenders and Vives-
Mestres, 2018). The quick ratio of Button Ltd is resulted as higher which clearly indicates that
the immediate liquidity position of the company is good and the firm can meet its immediate
obligations in a better way.
Inventory days- It means the number of the days that the company takes in converting its
inventory into the sales. It refers to an efficiency ratio that mainly measures average number of

the days that the company holds its stock before selling it into the market. Higher the inventory
days reflects that the company could not be able to turn its inventory into the sales. As the
inventory days of Button Ltd is decreasing over the year which means that the firm is
continuously taking measures for improving its inventory ratio so that it could convert its tock
into the sales.
Trade receivable days- It refers to the number of the days for which the customer invoice
remains as outstanding. Higher the ratio reflects problem in the process of debt collection or
financial position of majority of the customers (Lessambo, 2018). Moreover it also means that
the company is providing the goods on credit for a longer period in order to increase its sales.
The ratio of Button Ltd is seen as increasing which means that the firm is taking more time in
collecting its debts.
Trade payable days- It is the financial ratio that reflects the average time taken by an
entity in paying its invoices and the bills to its respective creditors that involves suppliers, other
companies and the vendors (Quesada-Pineda, 2019). As per the results, the ratio of Button Ltd is
increasing which indicates that it takes more time to pay it creditors.
Limitation of financial ratios
 The firm could make changes in their final reports for improving the ratio, thereafter
ratios resulted to window dressing.
 Financial ratios ignore the changes in the price level because of inflation. Most of the
ratios are been computed by making use of the historical costs and in overlooking
changes in price level in between the periods.
 Ratios entirely ignores qualitative aspects of an enterprise as they looks and considers
only the monetary aspects.
SECTION B
a.
1.
Particular
s Formula
Amoun
t
Direct material 4
Direct labor 4
manufacturing overhead 500
Product Direct material +Direct Labor +Manufacturing 508

cost overhead
Particular
s Formula
Amoun
t
Marketing and selling 0
Administrative expenses 21500
Interest expenses 0
Period
cost
Marketing and selling +Administrative expense +interest
expense 21500
Interpretation- Product and period cost are important to calculate because it helps in
measuring the cost incurred in manufacturing the product and in turn helps in ascertaining
accurate amount of the profit and the budget for the future period.
2.
This analysis of the cost helps in preparing budget regarding the expenses of the company
so that large amount of profits can be generated by the company. It helps in ensuring appropriate
control over the cost and in formulating the budget for running the activities in an effective way
within an organization in order to attain success.
3.
Project budget need to be prepared by the company as it is referred as the sum total of the
cost required for completing the project over definite time period. Such type of budget involves
labor cost, procurement cost and the operating cost. This helps the firm in analyzing or
ascertaining the accurate amount of the cost that the company would bear and in computing
correct amount of the profit. With the use of this budget, company can take appropriate measures
for the purpose of controlling the cost and the ways to achieve economies of scale in the process
of production.
b.
Particular
s Formula
Amoun
t
Fixed cost 38000

Contribution per unit 20
Break
even
Fixed cost/Contribution
per unit 1900
Particulars Formula
Amoun
t
Actual sales 30000
Breakeven point 1900
SP per unit 20
Margin of
safety
Actual sales-Breakeven point/SP per
unit 1405
working note
Particular
s Formula
Amoun
t
Sales units 30000
selling price per unit 20
Sales 600000
Particular
s Formula
Amoun
t
Event cost 6000
Travel cost 500
Variable
cost
Event cost + Travel
cost 6500

Particular
s Formula
Amoun
t
Rental cost 20000
Insurance cost 5000
Emma salary 10000
Jack 3000
Fixed cost 38000
Particulars
Formul
a
Amoun
t
Sales 600000
less: Variable
cost
6500*2
0 130000
Contribution 470000
Less: Fixed cost 38000
Net profit 432000

REFERENCES
Books and journal
Gabric, D., 2018. Determination of Accounting Manipulations in the Financial Statements Using
Accrual Based Investment Ratios. Economic Review: Journal of Economics and Business. 16(1).
pp.71-81.
Lessambo, F.I., 2018. Financial Ratios Analysis. In Financial Statements (pp. 207-247).
Palgrave Macmillan, Cham.
Linares-Mustarós, S., Coenders, G. and Vives-Mestres, M., 2018. Financial performance and
distress profiles. From classification according to financial ratios to compositional
classification. Advances in Accounting. 40. pp.1-10.
Quesada-Pineda, H.J., 2019. Analysis of Financial Statements Using Ratios.
Wen, H. and Zhu, T., 2019. Interpretation of Financial Statements.