Financial Reporting for Different Business Structures
VerifiedAdded on 2020/02/03
|22
|4288
|187
Essay
AI Summary
This assignment delves into the world of financial reporting across various business structures. It examines how Profit & Loss (P&L) accounts and Balance Sheets are structured and presented for sole proprietorships, partnerships, and limited liability companies. The assignment utilizes illustrative examples to demonstrate key differences in financial reporting based on the chosen legal structure of the business.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
MANAGING FINANCIAL
RESOURCES AND DECISION
MAKING
RESOURCES AND DECISION
MAKING
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance available to business...............................................................................3
1.2 Implications of different source of finance...........................................................................3
1.3 Appropriate source of finance for business project ..............................................................4
TASK 2............................................................................................................................................5
2.1 Cost of different source of finance........................................................................................5
2.2 Importance of financial planning .........................................................................................5
2.3 Information needs of different decision makers....................................................................5
2.4 Impact of finance on financial statements ............................................................................6
TASK 3............................................................................................................................................7
3.1 Analysis of budgets...............................................................................................................7
3.2 Calculation of unit cost and pricing decisions......................................................................7
3.3 Viability of project ...............................................................................................................8
TASK 4............................................................................................................................................9
4.1 Main financial statements.....................................................................................................9
4.2 Format of financial statements............................................................................................10
.......................................................................................................................................11
4.3 Ratio analysis......................................................................................................................18
CONCLSUION..............................................................................................................................20
REFERENCES..............................................................................................................................21
INDEX OF TABLES
Table 1: Analysis of company budget.............................................................................................8
Table 2: Payback period...................................................................................................................9
Table 3: Calculation of ARR...........................................................................................................9
Table 4: Calculation of NPV..........................................................................................................10
Table 5: Calculation of IRR...........................................................................................................10
Table 6: Ratio analysis of Sainsbury.............................................................................................18
ILLUSTRATION INDEX
Illustration 1: P&L account for partner..........................................................................................11
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance available to business...............................................................................3
1.2 Implications of different source of finance...........................................................................3
1.3 Appropriate source of finance for business project ..............................................................4
TASK 2............................................................................................................................................5
2.1 Cost of different source of finance........................................................................................5
2.2 Importance of financial planning .........................................................................................5
2.3 Information needs of different decision makers....................................................................5
2.4 Impact of finance on financial statements ............................................................................6
TASK 3............................................................................................................................................7
3.1 Analysis of budgets...............................................................................................................7
3.2 Calculation of unit cost and pricing decisions......................................................................7
3.3 Viability of project ...............................................................................................................8
TASK 4............................................................................................................................................9
4.1 Main financial statements.....................................................................................................9
4.2 Format of financial statements............................................................................................10
.......................................................................................................................................11
4.3 Ratio analysis......................................................................................................................18
CONCLSUION..............................................................................................................................20
REFERENCES..............................................................................................................................21
INDEX OF TABLES
Table 1: Analysis of company budget.............................................................................................8
Table 2: Payback period...................................................................................................................9
Table 3: Calculation of ARR...........................................................................................................9
Table 4: Calculation of NPV..........................................................................................................10
Table 5: Calculation of IRR...........................................................................................................10
Table 6: Ratio analysis of Sainsbury.............................................................................................18
ILLUSTRATION INDEX
Illustration 1: P&L account for partner..........................................................................................11
Illustration 2: P&L account for sole proprietor..............................................................................14
Illustration 3: P&L account for company......................................................................................15
Illustration 4: Balance sheet of company.......................................................................................12
Illustration 5: Balance sheet for partners.......................................................................................16
Illustration 6: Balance sheet for sole trader...................................................................................17
Illustration 3: P&L account for company......................................................................................15
Illustration 4: Balance sheet of company.......................................................................................12
Illustration 5: Balance sheet for partners.......................................................................................16
Illustration 6: Balance sheet for sole trader...................................................................................17
INTRODUCTION
Finance is a life blood for an organization and no one can survive without it. In this report
sources of finance are discussed in detail. On the basis of evaluation of business best source of
finance is selected for the firm. In the report, cost of different source of finance is also explained.
Along with this, financial planning is discussed briefly in the report. In the middle part of the
report project evaluation technique is applied and best project is selected for the firm. At the end
of the report, ratio analysis is done and comments are done on the firm performance.
TASK 1
1.1 Sources of finance available to business
Some of the sources of finance that are available to Aquapet are as follows: Bank loan- The investment is small from business point of view and due to this reason,
bank loan will be appropriate for the firm. Under this, Aquapet needs to prepare
projections for income, expenditure and cash flows. On that basis, banks measure
viability of the firm project and will avail loan facility to Aquapet. While taking bank
loan, firm must abstain from taking a loan at the flexible interest rate (Baker and
Mukherjee, 2007). This is because if loan will be taken at this rate and interest rate gets
elevated then finance cost of the firm will increase. Hence, firm must take loan at fixed
interest rate. Overdraft facility- Aquapet can make the use of overdraft facility. Under this, mentioned
firm can withdraw an amount that is more than bank deposit value. By using this, it can
finance its working capital needs. Thus, firm must wisely use this alternative source of
finance.
Consortium finance- In this, several banks will join hands in order to finance Aquapet
operations (DIAW, 2015). By doing this, Aquapet can easily raise debt amount from the
banks. Hence, Aquapet can use consortium finance in order to fund its business.
1.2 Implications of different source of finance
Implications of different sources of finance are as follows. Bank loan- In case of bank loan, there are many positive and negative points. There are
two types of interest rate in bank loan including fixed and flexible. In case of fixed rate,
finance cost remains same but, in case of flexible interest rate, finance cost keeps on
Finance is a life blood for an organization and no one can survive without it. In this report
sources of finance are discussed in detail. On the basis of evaluation of business best source of
finance is selected for the firm. In the report, cost of different source of finance is also explained.
Along with this, financial planning is discussed briefly in the report. In the middle part of the
report project evaluation technique is applied and best project is selected for the firm. At the end
of the report, ratio analysis is done and comments are done on the firm performance.
TASK 1
1.1 Sources of finance available to business
Some of the sources of finance that are available to Aquapet are as follows: Bank loan- The investment is small from business point of view and due to this reason,
bank loan will be appropriate for the firm. Under this, Aquapet needs to prepare
projections for income, expenditure and cash flows. On that basis, banks measure
viability of the firm project and will avail loan facility to Aquapet. While taking bank
loan, firm must abstain from taking a loan at the flexible interest rate (Baker and
Mukherjee, 2007). This is because if loan will be taken at this rate and interest rate gets
elevated then finance cost of the firm will increase. Hence, firm must take loan at fixed
interest rate. Overdraft facility- Aquapet can make the use of overdraft facility. Under this, mentioned
firm can withdraw an amount that is more than bank deposit value. By using this, it can
finance its working capital needs. Thus, firm must wisely use this alternative source of
finance.
Consortium finance- In this, several banks will join hands in order to finance Aquapet
operations (DIAW, 2015). By doing this, Aquapet can easily raise debt amount from the
banks. Hence, Aquapet can use consortium finance in order to fund its business.
1.2 Implications of different source of finance
Implications of different sources of finance are as follows. Bank loan- In case of bank loan, there are many positive and negative points. There are
two types of interest rate in bank loan including fixed and flexible. In case of fixed rate,
finance cost remains same but, in case of flexible interest rate, finance cost keeps on
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
changing. Hence, Aquapet must take loan at fixed interest rate. Control of existing
shareholders does not get diluted in case of bank loan (Duxbury, 2015). In order to take
bank loan, Aquapet will need to complete some paper formalities with banks. Without
such formalities, it cannot get loan from the banks. Overdraft facility- In case of overdraft, control of existing shareholding will also not get
diluted in the firm (Du and Girma, 2007). Moreover, by completing some paper
formalities, firm can easily get overdraft from banks. In return, bank will charge some
interest on overdraft amount from the firm. Apart from this, there are no serious
implications of overdraft for Aquapet.
Consortium finance- Like bank loan, there are also some legal implications in case of
consortium finance. For using this source of finance, Aquapet needs to present some of
the paper documents related to company’s performance. Those banks that are providing
finance to the firm will also share company’s information with each other before giving a
debt amount (Hall, 2009). Interest will be charged on Aquapet for the debt taken by same.
On the other hand, no dilution of control will take place in case of this source of finance.
Thus, it can be said that there are more complex legal implications in case of consortium
finance than bank loan.
1.3 Appropriate source of finance for business project
Bank loan is one of the most appropriate sources of finance for Aquapet. This is because
firm is at initial stage and it does not have high level of credibility among the banks. Due to this
reason, it becomes very difficult for Aquapet to use consortium finance for business projects.
This source of finance can be used only when company has a long term business relation with
the banks and it should be good credibility among the bank. But, here the case is different as
Aquapet is a newly opened start up and due to this reason, it does not have good image among
the banks (Haugh, 2005). However, banks do not have sufficient information and thus, they are
not in position to share company related information with each other. Hence, Aquapet cannot get
fund through consortium finance. On the other hand, in case of banks loan it is easy to raise debt.
This is because that Aquapet does not need too much big amount. There is no need of
information sharing with other banks. In other words, there is not a complex procedure like
consortium finance in case of bank loan. This is the reason due to which bank loan is the best
source of finance for the firm. Overdraft facility can be readily available from banks in order to
shareholders does not get diluted in case of bank loan (Duxbury, 2015). In order to take
bank loan, Aquapet will need to complete some paper formalities with banks. Without
such formalities, it cannot get loan from the banks. Overdraft facility- In case of overdraft, control of existing shareholding will also not get
diluted in the firm (Du and Girma, 2007). Moreover, by completing some paper
formalities, firm can easily get overdraft from banks. In return, bank will charge some
interest on overdraft amount from the firm. Apart from this, there are no serious
implications of overdraft for Aquapet.
Consortium finance- Like bank loan, there are also some legal implications in case of
consortium finance. For using this source of finance, Aquapet needs to present some of
the paper documents related to company’s performance. Those banks that are providing
finance to the firm will also share company’s information with each other before giving a
debt amount (Hall, 2009). Interest will be charged on Aquapet for the debt taken by same.
On the other hand, no dilution of control will take place in case of this source of finance.
Thus, it can be said that there are more complex legal implications in case of consortium
finance than bank loan.
1.3 Appropriate source of finance for business project
Bank loan is one of the most appropriate sources of finance for Aquapet. This is because
firm is at initial stage and it does not have high level of credibility among the banks. Due to this
reason, it becomes very difficult for Aquapet to use consortium finance for business projects.
This source of finance can be used only when company has a long term business relation with
the banks and it should be good credibility among the bank. But, here the case is different as
Aquapet is a newly opened start up and due to this reason, it does not have good image among
the banks (Haugh, 2005). However, banks do not have sufficient information and thus, they are
not in position to share company related information with each other. Hence, Aquapet cannot get
fund through consortium finance. On the other hand, in case of banks loan it is easy to raise debt.
This is because that Aquapet does not need too much big amount. There is no need of
information sharing with other banks. In other words, there is not a complex procedure like
consortium finance in case of bank loan. This is the reason due to which bank loan is the best
source of finance for the firm. Overdraft facility can be readily available from banks in order to
finance working capital needs. Hence, it can be said that bank loan and overdraft both are the
appropriate sources of finance for Aquapet.
TASK 2
2.1 Cost of different source of finance
Bank loan, overdraft and consortium finance are sources of finance which are debt in
nature. Interest is one of the costs that are charged on all these sources of finance. The main thing
that managers of Aquapet need to keep in mind is that they have to make sure that business is not
taking loan at flexible interest rate. In case of flexible interest rate, there are large chances of
reduction and increment in finance cost. If, interest rate is increased by the central bank, then the
bank from which firm has taken loan will also increase rate (Hogan and Hutson, 2005). If, this
will happen then finance cost for the firm will be elevated. Thus, it will be better to take loan at
fixed interest rate. If, this will be done then even interest rate will increase by the central bank,
but finance cost for the Aquapet will not change. Thus, it would be better to take loan at fixed
interest rate.
2.2 Importance of financial planning
Financial planning is importance because it is a tool by using which the best use of funds
can be made. Aquapet is newly opened business and it needs to finance its internal and external
operations as well as invest in financial instruments. In order to make good financial plan, firm
will look after its projections that are prepared by using financial modeling techniques. By using
these, cost sheet will be prepared and by considering this sheet, allocation for finance of
company internal and external operations will be made. Remaining amount will be invested in
the finance instruments (Soni and Vohra, 2014). In this section, fund will be further divided
among investment in shares and derivative contracts. By using these contracts, firm will hedge
itself from fluctuations in the commodity market. This in turn will save a large amount of money
and business will also in position to generate positive returns on the investment. In this way,
financial planning will help firm in making the best possible sue of funds in order to finance
business operations and investment needs.
2.3 Information needs of different decision makers
Following are the decisions makers of the firms.
appropriate sources of finance for Aquapet.
TASK 2
2.1 Cost of different source of finance
Bank loan, overdraft and consortium finance are sources of finance which are debt in
nature. Interest is one of the costs that are charged on all these sources of finance. The main thing
that managers of Aquapet need to keep in mind is that they have to make sure that business is not
taking loan at flexible interest rate. In case of flexible interest rate, there are large chances of
reduction and increment in finance cost. If, interest rate is increased by the central bank, then the
bank from which firm has taken loan will also increase rate (Hogan and Hutson, 2005). If, this
will happen then finance cost for the firm will be elevated. Thus, it will be better to take loan at
fixed interest rate. If, this will be done then even interest rate will increase by the central bank,
but finance cost for the Aquapet will not change. Thus, it would be better to take loan at fixed
interest rate.
2.2 Importance of financial planning
Financial planning is importance because it is a tool by using which the best use of funds
can be made. Aquapet is newly opened business and it needs to finance its internal and external
operations as well as invest in financial instruments. In order to make good financial plan, firm
will look after its projections that are prepared by using financial modeling techniques. By using
these, cost sheet will be prepared and by considering this sheet, allocation for finance of
company internal and external operations will be made. Remaining amount will be invested in
the finance instruments (Soni and Vohra, 2014). In this section, fund will be further divided
among investment in shares and derivative contracts. By using these contracts, firm will hedge
itself from fluctuations in the commodity market. This in turn will save a large amount of money
and business will also in position to generate positive returns on the investment. In this way,
financial planning will help firm in making the best possible sue of funds in order to finance
business operations and investment needs.
2.3 Information needs of different decision makers
Following are the decisions makers of the firms.
Managers- These are the important stakeholders of the firms because these are those who
manage company operations. They need facts related to the company performance in
order to get information about its condition. On the basis of evaluation of performance
and condition managers prepare a business strategy in order to improve company balance
sheet performance (Srinivasan, 2012). Thus, it can be said that these are important
decision makers of the firm. Creditors- These are those who give a debt to the firm and before giving a debt amount
they evaluate company performance. On the basis of ratio analysis they identify the
company liquidity position and days in which pay back debt amount to the creditors. By
using ratio analysis creditors decide whether to give loan or not the specific firm.
Shareholders- These are those who make an investment in the company. By using
company information they identify firm profitability level and its current business
position. On the basis of such kind of information they decide whether to keep
investment in the firm or to exit from same (Tauringana and Afrifa, 2013). Thus,
shareholders are also one of the decision makers of the firm.
2.4 Impact of finance on financial statements
Finance has a strong impact on the financial statements especially on the balance sheet.
Aquapet take a debt of 80,000 then its long term liability will increase. On other hand, its assets
side of the balance sheet will also increase by the same amount under head cash. When debt is
taken Aquapet will need to pay interest on same. At the end of the financial year interest will be
paid and it will show in the income statement of the firm. Hence, by the interest amount profit on
income statement will decline. In same way if Aquapet issue shares then shareholder funds will
increase in the liability side of the balance sheet (Salvino, Tasto and Randolph, 2014). On other
hand cash amount will be increase in the asset side of the balance sheet under head cash and
bank balance. Dividend amount will be shown in the income statement and it will be deducted
from the income of the business. Hence, less amount of net profit will be transferred to the
balance sheet of the firm. In this way finance affects financial statements of the firm.
manage company operations. They need facts related to the company performance in
order to get information about its condition. On the basis of evaluation of performance
and condition managers prepare a business strategy in order to improve company balance
sheet performance (Srinivasan, 2012). Thus, it can be said that these are important
decision makers of the firm. Creditors- These are those who give a debt to the firm and before giving a debt amount
they evaluate company performance. On the basis of ratio analysis they identify the
company liquidity position and days in which pay back debt amount to the creditors. By
using ratio analysis creditors decide whether to give loan or not the specific firm.
Shareholders- These are those who make an investment in the company. By using
company information they identify firm profitability level and its current business
position. On the basis of such kind of information they decide whether to keep
investment in the firm or to exit from same (Tauringana and Afrifa, 2013). Thus,
shareholders are also one of the decision makers of the firm.
2.4 Impact of finance on financial statements
Finance has a strong impact on the financial statements especially on the balance sheet.
Aquapet take a debt of 80,000 then its long term liability will increase. On other hand, its assets
side of the balance sheet will also increase by the same amount under head cash. When debt is
taken Aquapet will need to pay interest on same. At the end of the financial year interest will be
paid and it will show in the income statement of the firm. Hence, by the interest amount profit on
income statement will decline. In same way if Aquapet issue shares then shareholder funds will
increase in the liability side of the balance sheet (Salvino, Tasto and Randolph, 2014). On other
hand cash amount will be increase in the asset side of the balance sheet under head cash and
bank balance. Dividend amount will be shown in the income statement and it will be deducted
from the income of the business. Hence, less amount of net profit will be transferred to the
balance sheet of the firm. In this way finance affects financial statements of the firm.
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
TASK 3
3.1 Analysis of budgets
Table 1: Analysis of company budget
January February March April
Opening balance 11000 25600 41600 54900
Sales 20000 22000 21000 20000
Total of income 31000 47600 62600 74900
Expense
Purchase 1400 1500 1700 1500
Salary 3000 3000 4000 4000
Creditors 1000 1500 2000 1800
Total 5400 6000 7700 7300
Net balance 25600 41600 54900 67600
Interpretation
On analysis of figures it can be seen that firm cash balance is increasing continuously
even sales of the firm get declined. In the month of January and February cash flow is increasing
and sales is growing steadily. But in the month of the month of March and April scene gets
changed and sales declined to level of 21,000 and 20,000. Due to such an unprecedented change
Aquapet do not get an opportunities to take some of the steps in order maintain stability in the
company profit. In the month of March all expense items get increased. Aquapet take this change
in business environment seriously and it reduces its expenses in the month of April. Moreover, it
reduce its debt in order to make sure that in case of fall in economy there will be less burden on
the firm. On the basis of analysis of budget it can be said that firm take steps on time and it is
following a cautious approach in its business.
3.2 Calculation of unit cost and pricing decisions
Cost 50000
Units produced 200
Per unit cost 250
Margin on sales 30.00%
3.1 Analysis of budgets
Table 1: Analysis of company budget
January February March April
Opening balance 11000 25600 41600 54900
Sales 20000 22000 21000 20000
Total of income 31000 47600 62600 74900
Expense
Purchase 1400 1500 1700 1500
Salary 3000 3000 4000 4000
Creditors 1000 1500 2000 1800
Total 5400 6000 7700 7300
Net balance 25600 41600 54900 67600
Interpretation
On analysis of figures it can be seen that firm cash balance is increasing continuously
even sales of the firm get declined. In the month of January and February cash flow is increasing
and sales is growing steadily. But in the month of the month of March and April scene gets
changed and sales declined to level of 21,000 and 20,000. Due to such an unprecedented change
Aquapet do not get an opportunities to take some of the steps in order maintain stability in the
company profit. In the month of March all expense items get increased. Aquapet take this change
in business environment seriously and it reduces its expenses in the month of April. Moreover, it
reduce its debt in order to make sure that in case of fall in economy there will be less burden on
the firm. On the basis of analysis of budget it can be said that firm take steps on time and it is
following a cautious approach in its business.
3.2 Calculation of unit cost and pricing decisions
Cost 50000
Units produced 200
Per unit cost 250
Margin on sales 30.00%
Sales price 325
There are three types of costs one is fixed cost and second is variable cost followed by
semi variable cost which is third type of cost (Sedevich-Fons, 2014). Fixed cost is those cost that
never get changed and always remain static. On the other hand, there is a variable cost which
never remains stable and with increase in production per unit cost gets reduced. Third is semi
variable cost who’s some part remain fixed and some remain variable. Cost for Aquapet cover all
types of costs and it’s per unit cost is 250 which are computed by dividing total cost by number
of units produced. After that margin percentage is added to the per unit cost in order to arrive at
sales price. In this way cost and sales price is computed for Aquapet.
3.3 Viability of project
Table 2: Payback period
Project A Project B
Initial
investment -25000 -25000
1 10000 -15000 8000 -17000
2 11000 -4000 9000 -8000
3 12000 8000 11000 3000
4 13000 21000 13000 16000
5 14000 35000 14000 30000
Interpretation
Pay back period reflect the time period with in which project can recover invested
amount. Payback period of both projects are same and due to this reason none of them can be
selected as viable project for the firm.
Table 3: Calculation of ARR
Project A Project B
Initial
investment 25000 25000
1 10000 8000
2 11000 9000
3 12000 11000
There are three types of costs one is fixed cost and second is variable cost followed by
semi variable cost which is third type of cost (Sedevich-Fons, 2014). Fixed cost is those cost that
never get changed and always remain static. On the other hand, there is a variable cost which
never remains stable and with increase in production per unit cost gets reduced. Third is semi
variable cost who’s some part remain fixed and some remain variable. Cost for Aquapet cover all
types of costs and it’s per unit cost is 250 which are computed by dividing total cost by number
of units produced. After that margin percentage is added to the per unit cost in order to arrive at
sales price. In this way cost and sales price is computed for Aquapet.
3.3 Viability of project
Table 2: Payback period
Project A Project B
Initial
investment -25000 -25000
1 10000 -15000 8000 -17000
2 11000 -4000 9000 -8000
3 12000 8000 11000 3000
4 13000 21000 13000 16000
5 14000 35000 14000 30000
Interpretation
Pay back period reflect the time period with in which project can recover invested
amount. Payback period of both projects are same and due to this reason none of them can be
selected as viable project for the firm.
Table 3: Calculation of ARR
Project A Project B
Initial
investment 25000 25000
1 10000 8000
2 11000 9000
3 12000 11000
4 13000 13000
5 14000 14000
Total 60000 55000
Average 12000 11000
ARR 48.00 44.00
Interpretation
It indicates the average return that a project can earn on the invested amount. ARR of
project A is 48% and sale of project B is 44%. Hence, project A is viable for the firm.
Table 4: Calculation of NPV
Project A PV @10% Present value Project B PV @10%
Present
value
Initial
investment 25000 25000
1 10000 0.909 9090 8000 0.909 7272
2 11000 0.826 9086 9000 0.826 7434
3 12000 0.751 9012 11000 0.751 8261.0
4 13000 0.683 8879 13000 0.683 8879.0
5 14000 0 14000 0 0
Total 36067 31846
NPV 11067 6846
Interpretation
It indicates the value of the project that remains after deducting initial investment value
from the present value of the case flows (What is NPV. 2015). NPV of project A is higher than
project B and on that basis former project is considered viable for the firm.
Table 5: Calculation of IRR
Project A Project B
Initial
investment -25000 -25000
1 10000 8000
2 11000 9000
5 14000 14000
Total 60000 55000
Average 12000 11000
ARR 48.00 44.00
Interpretation
It indicates the average return that a project can earn on the invested amount. ARR of
project A is 48% and sale of project B is 44%. Hence, project A is viable for the firm.
Table 4: Calculation of NPV
Project A PV @10% Present value Project B PV @10%
Present
value
Initial
investment 25000 25000
1 10000 0.909 9090 8000 0.909 7272
2 11000 0.826 9086 9000 0.826 7434
3 12000 0.751 9012 11000 0.751 8261.0
4 13000 0.683 8879 13000 0.683 8879.0
5 14000 0 14000 0 0
Total 36067 31846
NPV 11067 6846
Interpretation
It indicates the value of the project that remains after deducting initial investment value
from the present value of the case flows (What is NPV. 2015). NPV of project A is higher than
project B and on that basis former project is considered viable for the firm.
Table 5: Calculation of IRR
Project A Project B
Initial
investment -25000 -25000
1 10000 8000
2 11000 9000
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
3 12000 11000
4 13000 13000
5 14000 14000
IRR 35.74% 29.64%
Interpretation
IRR reflects the actual return that a project can earn on the invested amount. Here also
project A IRR is greater than project B. this is the reason due to which project A is assumed
viable then project B.
TASK 4
4.1 Main financial statements
Main financial statements are as follows. Income statement – It is a statement in which there is information about expenses and
income. On the basis of these information managers comes to know about the
profitability of the company (Sedevich‐Fons, 2013). Such statements are also used for
preparing projected income statement. Hence, it can be said that this statement have a
wide business applications. Balance sheet- This statement reflects the financial position of the firm at the end of the
financial year. By applying ratio analysis technique managers comes to know about the
firm liquidity position. Hence, it can be said that balance sheet has a very high
importance for the managers.
Cash flow statement- It is a statement that reflects the cash inflow and outflow in the
operating financing and investing activities of an organization (Shaoul, Stafford and
Stapleton, 2010). On the basis of evaluation of these statement managers get information
about the cash is used in the business. Thus, cash flow statement is widely used in the
business.
4.2 Format of financial statements
P&L formats
4 13000 13000
5 14000 14000
IRR 35.74% 29.64%
Interpretation
IRR reflects the actual return that a project can earn on the invested amount. Here also
project A IRR is greater than project B. this is the reason due to which project A is assumed
viable then project B.
TASK 4
4.1 Main financial statements
Main financial statements are as follows. Income statement – It is a statement in which there is information about expenses and
income. On the basis of these information managers comes to know about the
profitability of the company (Sedevich‐Fons, 2013). Such statements are also used for
preparing projected income statement. Hence, it can be said that this statement have a
wide business applications. Balance sheet- This statement reflects the financial position of the firm at the end of the
financial year. By applying ratio analysis technique managers comes to know about the
firm liquidity position. Hence, it can be said that balance sheet has a very high
importance for the managers.
Cash flow statement- It is a statement that reflects the cash inflow and outflow in the
operating financing and investing activities of an organization (Shaoul, Stafford and
Stapleton, 2010). On the basis of evaluation of these statement managers get information
about the cash is used in the business. Thus, cash flow statement is widely used in the
business.
4.2 Format of financial statements
P&L formats
Illustration 1: P&L account for partner
Illustration 2: P&L account for sole proprietor
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Balance sheet
Illustration 3: P&L account for company
Illustration 3: P&L account for company
Illustration 4: Balance sheet of company
Illustration 5: Balance sheet for partners
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
On analysis of these statements it can be seen that there is a minor difference in the
formats of the income statements and balance sheet of partnership, sole trader and company
(Kung, Huang and Cheng, 2013). This happened because nature of business and size of its
Illustration 6: Balance sheet for sole trader
formats of the income statements and balance sheet of partnership, sole trader and company
(Kung, Huang and Cheng, 2013). This happened because nature of business and size of its
Illustration 6: Balance sheet for sole trader
operations vary in this mode of businesses. Hence, there is a little difference in the format of
financial statements of the partnership, sole trader and company.
4.3 Ratio analysis
Table 6: Ratio analysis of Sainsbury
Ratios Formula 2014 2013
Profitability ratios
Gross profit 1377 1277
Operating profit 1009 887
Net profit 716 614
Net Sales 23949 23303
Gross Profit Ratio (Gross Profit/ Net Sales) *100 5.75 % 5.48 %
Operating Profit Ratio (Operating Profit/ Net Sales) *100 4.21 % 3.81%
Net Profit Ratio (Net Profit/ Net Sales) *100 2.99 % 2.63 %
Liquidity ratios
Current Assets 4362 1901
Current Liabilities 12171 3115
Closing Stock 1005 987
Current Ratio Current Assets / current 0.36 0.61
financial statements of the partnership, sole trader and company.
4.3 Ratio analysis
Table 6: Ratio analysis of Sainsbury
Ratios Formula 2014 2013
Profitability ratios
Gross profit 1377 1277
Operating profit 1009 887
Net profit 716 614
Net Sales 23949 23303
Gross Profit Ratio (Gross Profit/ Net Sales) *100 5.75 % 5.48 %
Operating Profit Ratio (Operating Profit/ Net Sales) *100 4.21 % 3.81%
Net Profit Ratio (Net Profit/ Net Sales) *100 2.99 % 2.63 %
Liquidity ratios
Current Assets 4362 1901
Current Liabilities 12171 3115
Closing Stock 1005 987
Current Ratio Current Assets / current 0.36 0.61
Liabilities
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.28 0.29
Efficiency Ratios
Net Sales 23949 23303
Total Assets 16540 12695
Total Assets Turnover Ratio Net Sales/ Total Assets
1.45
times 1.84 times
Cost of goods sold 22562 22026
Inventory 1005 987
Inventory Turnover ratio COGS/Inventory
22.45
times
22.32
times
Gearing ratios
Debt 2250 2617
Equity 6005 5733
Debt Equity Ratio Debt/ Equity 0.37 0.46
Net income 716 614
Annual Interest Expense 159 142
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.28 0.29
Efficiency Ratios
Net Sales 23949 23303
Total Assets 16540 12695
Total Assets Turnover Ratio Net Sales/ Total Assets
1.45
times 1.84 times
Cost of goods sold 22562 22026
Inventory 1005 987
Inventory Turnover ratio COGS/Inventory
22.45
times
22.32
times
Gearing ratios
Debt 2250 2617
Equity 6005 5733
Debt Equity Ratio Debt/ Equity 0.37 0.46
Net income 716 614
Annual Interest Expense 159 142
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Times Interest Ratio Net Income/ Interest expense 4.5 times 4.32 times
Net credit sales 23949 23303
Net receivables 433 306
Accounts receivable turnover Net credit sales/Net receivable
55.31
times
76.15
times
Interpretation
On analysis of profit ratio it can be seen that firm give a good performance and its
profitability get increased on year on year basis. But liquidity position of the firm is not good and
does not have sufficient amount of current assets to pay current liabilities on time. Here,
Sainsbury needs to do lots of work. Use of current assets for business expansion may be another
reason for low current and quick ratio (Financial Ratio Analysis. 2012). Debt equity ratio of the
firm is declining and it means that proportion of debt in the firm capital structure is reduced and
sale of equity get increased in capital structure. This indicates that firm condition is good and
finance cost is low in FY 2014 relative to FY 2013. Accounts receivable ratio decline and this
indicate that firm is recovering debt from the debtors quickly. Hence, Sainsbury give a mixed
performance and on some fronts it needs to work.
CONCLSUION
On the basis of above discussion it is concluded that firms must select an appropriate
source of finance by considering capital structure and economic conditions. It is also concluded
that project must not be selected randomly and by applying project evaluation techniques best
project can be selected for the firm. Firms must do ratio analysis time to time in order to evaluate
their business performance. By doing this they can take action on time.
Net credit sales 23949 23303
Net receivables 433 306
Accounts receivable turnover Net credit sales/Net receivable
55.31
times
76.15
times
Interpretation
On analysis of profit ratio it can be seen that firm give a good performance and its
profitability get increased on year on year basis. But liquidity position of the firm is not good and
does not have sufficient amount of current assets to pay current liabilities on time. Here,
Sainsbury needs to do lots of work. Use of current assets for business expansion may be another
reason for low current and quick ratio (Financial Ratio Analysis. 2012). Debt equity ratio of the
firm is declining and it means that proportion of debt in the firm capital structure is reduced and
sale of equity get increased in capital structure. This indicates that firm condition is good and
finance cost is low in FY 2014 relative to FY 2013. Accounts receivable ratio decline and this
indicate that firm is recovering debt from the debtors quickly. Hence, Sainsbury give a mixed
performance and on some fronts it needs to work.
CONCLSUION
On the basis of above discussion it is concluded that firms must select an appropriate
source of finance by considering capital structure and economic conditions. It is also concluded
that project must not be selected randomly and by applying project evaluation techniques best
project can be selected for the firm. Firms must do ratio analysis time to time in order to evaluate
their business performance. By doing this they can take action on time.
REFERENCES
Books & journals
Baker, K. H and Mukherjee, K. T., 2007. Survey research in finance: views from journal editors.
International Journal of Managerial Finance. 3(1). pp. 11 – 25.
Diaw, A., 2015. The global financial crisis and Islamic finance: a review of selected literature.
Journal of Islamic Accounting and Business Research. 6(1). pp. 94 – 106.
Du, J. and Girma, S., 2007. Finance and firm export in China. Kyklos. 60(1). pp. 37-54.
Duxbury, D., 2015. Behavioral finance: insights from experiments I: theory and financial
markets. Review of Behavioral Finance. 7(1). pp. 78 – 96.
Hall, E., 2009. Being in Control: Personal Budgets and the New Landscape of Care for People
with Learning Disabilities. Mental Review Heralth Journal. 14(2). pp. 44 – 53.
Haugh, H., 2005. A research agenda for social entrepreneurship. Social enterprise journal. 1(1).
pp. 1-12.
Hogan, T. and Hutson, E., 2005. Capital structure in new technology-based firms: Evidence from
the Irish software sector. Global Finance Journal. 15(3). pp. 369-387.
Kung, F, Huang, C. and Cheng, C., 2013. An examination of the relationships among budget
emphasis, budget planning models and performance. Management Decision. 51(1).
pp.120 – 140.
Salvino, R., Tasto, M. And Randolph, G., 2014. Entrepreneurship and the consequences of
healthcare policy. Journal of Entreprenuers and Public Policy. 3(5). pp.141 – 159.
Sedevich-Fons, L., 2014. Financial indicators in healthcare quality management systems. The
TQM Journal. 26(4). pp.312 – 328.
Sedevich‐Fons, L.,B., 2013. Healthcare quality costs based on an ISO 9000 model. Leadership
in Health Services. 26(3). pp.184 – 195.
Shaoul, J, Stafford, A. and Stapleton, P., 2010. Financial black holes: The disclosure and
transparency of privately financed roads in the UK. Accounting, Auditing &
Accountability Journal. 23(2). pp.229 – 255.
Soni, P. and Vohra, J., 2014. Advertising Foods to Indian Children: What is the Appeal?. Young
Consumers: Insight and Ideas for Responsible Marketers. 15 (2).
Srinivasan, P., 2012. The value relevance of consolidated financial statements in an emerging
market: The case of India. Asian Review of Accounting. 20(1) pp.58 – 73.
Books & journals
Baker, K. H and Mukherjee, K. T., 2007. Survey research in finance: views from journal editors.
International Journal of Managerial Finance. 3(1). pp. 11 – 25.
Diaw, A., 2015. The global financial crisis and Islamic finance: a review of selected literature.
Journal of Islamic Accounting and Business Research. 6(1). pp. 94 – 106.
Du, J. and Girma, S., 2007. Finance and firm export in China. Kyklos. 60(1). pp. 37-54.
Duxbury, D., 2015. Behavioral finance: insights from experiments I: theory and financial
markets. Review of Behavioral Finance. 7(1). pp. 78 – 96.
Hall, E., 2009. Being in Control: Personal Budgets and the New Landscape of Care for People
with Learning Disabilities. Mental Review Heralth Journal. 14(2). pp. 44 – 53.
Haugh, H., 2005. A research agenda for social entrepreneurship. Social enterprise journal. 1(1).
pp. 1-12.
Hogan, T. and Hutson, E., 2005. Capital structure in new technology-based firms: Evidence from
the Irish software sector. Global Finance Journal. 15(3). pp. 369-387.
Kung, F, Huang, C. and Cheng, C., 2013. An examination of the relationships among budget
emphasis, budget planning models and performance. Management Decision. 51(1).
pp.120 – 140.
Salvino, R., Tasto, M. And Randolph, G., 2014. Entrepreneurship and the consequences of
healthcare policy. Journal of Entreprenuers and Public Policy. 3(5). pp.141 – 159.
Sedevich-Fons, L., 2014. Financial indicators in healthcare quality management systems. The
TQM Journal. 26(4). pp.312 – 328.
Sedevich‐Fons, L.,B., 2013. Healthcare quality costs based on an ISO 9000 model. Leadership
in Health Services. 26(3). pp.184 – 195.
Shaoul, J, Stafford, A. and Stapleton, P., 2010. Financial black holes: The disclosure and
transparency of privately financed roads in the UK. Accounting, Auditing &
Accountability Journal. 23(2). pp.229 – 255.
Soni, P. and Vohra, J., 2014. Advertising Foods to Indian Children: What is the Appeal?. Young
Consumers: Insight and Ideas for Responsible Marketers. 15 (2).
Srinivasan, P., 2012. The value relevance of consolidated financial statements in an emerging
market: The case of India. Asian Review of Accounting. 20(1) pp.58 – 73.
Tauringana, V., and Afrifa, A. G., 2013. The relative importance of working capital management
and its components to SMEs' profitability. Journal of Small Business and Enterprise
Development. 20 (3). pp.453 – 469.
Online
Financial Ratio Analysis. 2012. [Online]. Available through:
<http://www.bized.co.uk/compfact/ratios/index.htm> [Accessed on 16th February 2016].
What is NPV. 2015. [Online]. Available through: < http://www.accountingcoach.com/blog/npv-
net-present-value>. [Accessed on 16th February 2016].
and its components to SMEs' profitability. Journal of Small Business and Enterprise
Development. 20 (3). pp.453 – 469.
Online
Financial Ratio Analysis. 2012. [Online]. Available through:
<http://www.bized.co.uk/compfact/ratios/index.htm> [Accessed on 16th February 2016].
What is NPV. 2015. [Online]. Available through: < http://www.accountingcoach.com/blog/npv-
net-present-value>. [Accessed on 16th February 2016].
1 out of 22
Related Documents
Your All-in-One AI-Powered Toolkit for Academic Success.
+13062052269
info@desklib.com
Available 24*7 on WhatsApp / Email
Unlock your academic potential
© 2024 | Zucol Services PVT LTD | All rights reserved.