Introduction to Finance (Distinction Criteria)

Introduction to
Finance

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1........................................................................................................................................3
1.Calculation of ratios for year 2019 and year 2018....................................................................3
2.Significance of taking the users of the financial statements into consideration when
analysing the financials................................................................................................................5
Question 2........................................................................................................................................6
1.The Opening financial position at the start of July 20X5.........................................................6
2.Monthly cash flow forecast.......................................................................................................6
3.Explain the various additional expenses which owners of the enterprise should consider for 8
Question 3 .......................................................................................................................................9
1. Figure out the Break even point (BEP) for years 2019 and 2020 both in units and in sales.. .9
2.Calculate Margin of safety (MOS) for years, 2019 and 2020.................................................11
3. Critically measure and evaluate the strategy developed by Jessica.......................................11
Question 4......................................................................................................................................13
1. Calculate the Pay back period, Net present value and Average rate of return for each
prospective investment project for the business and evaluate the one which is most efficient. 13
2. Determine the most efficient investment as per the computations presented above.............15
3. Discuss the various approaches to investment appraisal.......................................................16
CONCLUSION .............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Finance is defined to be the management of monetary resources and other related
activities which include investing borrowing, lending, budgeting, saving and forecasting. The
fiance related processes involve effective channelling of the financial funds of the business in
several forms such as credit, loans or the capital which is required for investing (Berrou,
Ciampoli and Marini, 2019). In this report, the financial statements along with the accounting
ratios of gross profit margin, assets usage, acid test ratio, inventories holding period, current ratio
and debt to equity ratio are computed in the report. The report also introduces the monthly cash
flow and cash budget of the enterprises which will assist in evaluating the financial strength and
positions of the business and computes and evaluates three different prospective investments that
are available and asses which one to opt for by using the different investment appraisal
techniques.
MAIN BODY
Question 1
1.Calculation of ratios for year 2019 and year 2018.
 Gross profit margin = ( Sales - Cost of goods sold ) * 100 / Sales
=(3495 – 2182 ) *100 / 3495
=(1313 / 3495 ) *100
= 37.5%
Interpretation- The gross profit margin ratio is computed by dividing the difference between the
revenue and cost of goods sold by the net revenue earned by the enterprise. It aids to analyse the
gross profit efficiency of the business organisation. The ideal ratio of gross profit margin is
between 50% to 70% whereas here the ratio is 37.5% which shows that the business lacks in
generating the ideal gross profit against the total revenue earned by business (Bhardwaj, 2018). It
is required that the company works upon increasing its revenues and decrease the cost of the
good sold in the business.
 Asset Usage Ratio= Total Sales / Average Total Assets
= 3495 / [( 3812 + 2503 ) / 2]
= 3495 / 3157.5

= 1.10 times
Interpretation- This ratio evaluate the efficiency of an enterprise to utilise its total assets to
generate the business revenue. The higher the ratio, better is the efficiency of the business in
generating sales against company's total assets and ideal ratio is 2.5 or higher (Dixon, Halperin
and Bilokon, 2020). Lower ratio suggests that the business is not utilising the assets of the
enterprise in an efficient manner and lacks effectiveness of its use. The asset usage ratio here is
1.10 times which is lower as compared to the ideal ratio and shows that the company fails to use
its assets efficiently and needs to utilise it more effectively.
 Current ratio = Current Assets / Current Liabilities
= 1687 / 744
= 2.27 times
Interpretation- The current ratio analyses he liquidity of a business enterprise. It assess the
capability of a business organisation to meet the short term obligations of the business and how
effectively the business utilise its current assets to meet all the short term current liabilities of
business. The ideal current ratio is 2:1 and in this case the current ratio of the business is 2.27:1
which is higher than the ideal ratio. This shows that the company is efficiently using all its
current assets to fulfill the current short term obligations of the company which are due within
one year.
 Acid Test Ratio = ( Current Assets – Stock ) / Current Liabilities
= (1687 – 150 ) / 744
= 1537 / 744
= 2.06 times
Interpretation- The acid test ratio is also termed as quick ratio and it analyses the ability of the
enterprise to fulfill all its short term obligations by utilising the quick assets of the business. The
quick assets are the ones which can be promptly converted into cash. It includes all current assets
excluding inventory (Erel and Liebersohn, 2022). The ideal acid test ratio is 1:1 and here the
ratio is 2.06:1 which is higher than the ideal ratio. This explains that the business has enough
quick assets to meet and fulfill all its short term liability obligations.
 Inventory Holding Period = ( Average Inventory / Cost of goods sold )*365
= [( 150 + 102 ) / 2 ] / 2182 * 365
= ( 126 / 2182 ) * 365