Introduction to Finance and Financial Analysis of Liverton Co.

Introduction to
Finance

Table of Contents
INTRODUCTION ..........................................................................................................................3
Question 1........................................................................................................................................3
A) Calculation of the ratios of Liverton Co.'s with their interpretation for the year 2019 and
2018:............................................................................................................................................3
B) Analysis of financial statements.............................................................................................5
Question 2........................................................................................................................................5
A) Opening statements of the financial position at the starting of July.......................................5
B) Prepare a monthly cash flow forecast.....................................................................................7
C) Additional Expenditure...........................................................................................................7
Question 3 .......................................................................................................................................7
A) Break-even point and sales revenue calculation for the year ended 2019 and 2020..............7
B) Margin of safety......................................................................................................................9
C) New strategies that company can formed...............................................................................9
Question 4......................................................................................................................................10
(a) calculation of pay back period, Net present value and average rate of return......................10
B) Methods of Appraisal Technique..........................................................................................13
C) Capital Investment Appraisal Techniques............................................................................13
CONCLUSION .............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Finance refers to an effective management system which involves various activities like
lending, borrowing, investing, forecasting and saving. In the system of finance credit, money is
effectively utilized as the mean for many exchanges. Along with this in modern financial system
financial services, markets and instruments are also involved. Efficient finance system allows
smooth and appropriate process of funds investment, allocation (Belousova and et.al, 2019). The
main aim of this report is to analyse how finance help Liverton Co.'s business in their smooth
functioning of all the business operations and activities which help them in their financial
positions. Report includes the analyses of Liverton Co.'s business income statements.
Furthermore, report includes calculation of ratio and their analysis. Along with this report
includes analysis of Free Air Ltd revenue and Net present value which implies to be high
profitable for the projects of Scrap pit plc.
Question 1
A) Calculation of the ratios of Liverton Co.'s with their interpretation for the year 2019 and
2018:
Gross profit margin: It show the picture about how effectively business management is
generating revenue. If company generate higher revenue means company is more efficient and
manage their profit effectively.
(Sales – Cost of goods sold) *100 / sales
(3495 – 2182) *100 / 3495
37.57%
Interpretation of gross profit margin: In above case gross profit ratio of the company is
37.57% which is identical with the 38% that indicates better as a growing and develop sector and
company will get this only after reducing the cost of goods (Choudhury, 2018).
Assets Usage Ratio: This ratio analyse how effectively management of business use its assets at
its provision to make money and generate profit. It is also classifying into the efficient ratio
which is help business to earn sales incomes from their held assets which has monetary value
with the help of using net revenue with average of total assets.
Total sales / Average total assets
3495 (3812 + 2503) / 2

3495 / 3157.5 = 1.10 times
Interpretation of Assets Usage Ratio: The ideal assets usage ratio is 2.5 times or more but as
per above case ideal ratio is 1.10 times which is less as compared to the ideal ratio. This state
that company have to improve their ability of revenue generation and have to effectively use
their assets (Elheddad and et.al, 2021).
Current Ratio: This is also referring as liquidity ratio. This ratio analyses the ability of business
to pay off its all short-term debt obligations with its short term assets. It mainly measures how
business meet their short term obligations in less period of time.
Current assets / Current liability
1687 / 744 = 2.87 times
Interpretation of Current ratio: Ideal current ratio is 2:1 but in above case current ratio is 2.27
which is higher than the ideal ratio. This is the most appropriate and suitable in which business
has more current assets.
Acid Test Ratio: This ratio is also known as quick ratio. This ratio measures the short-term
assets of company to its short-term liability to analyse company has sufficient amount of cash to
pay its short term liabilities.
Acid test ratio = (Current assets – stock) / Current liability
= (1687 – 150) / 744
= 2.06 times
Interpretation of Acid test ratio: The ideal acid test ratio is 1:1 but as per above case acid test
ratio is 2.06 times is which more than ideal ratio and indicates more safe and accurate to meet all
short-term liabilities (Hasan, 2020).
Inventories holding period Ratio: This ratio is shows the number of days’ period for which a
company holds its inventory before sales. It measures how many days it takes for inventory to
shift in company.
Inventory holding period = (Average inventory / cost of goods sold) *365
= (150+102) / 2] / 2182*365
= (126+2183) * 365
= 21.08 days
Interpretation of Inventory holding period: Ideal inventory holding period is between 5 to 10
days in above case inventory holding period is 21.08 days which indicates that money is tied up