Introduction to Finance: Financial Statements Analysis and Budgeting

This report provides an introduction to finance, covering financial statements analysis, budgeting, and strategies for Liverton Co. It includes calculations of ratios for the years 2019 and 2020, significance of financial statements analysis, opening statement of financial position, monthly cash budget for 6 months, breakeven point, margin of safety, and discussion of new strategies. The report is relevant for finance students and professionals.

Introduction to
Finance
Contents

INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Question 1........................................................................................................................................3
Significance of financial statements analysis...........................................................................5
Question 2........................................................................................................................................6
A) opening statement of financial position..............................................................................6
B ) Monthly cash budget for 6 months.....................................................................................6
Question 3........................................................................................................................................8
A) Calculation of Breakeven point (BEP)...............................................................................8
B) Margin of Safety ( MOS ) for the year ended 2019 and 2020...........................................9
C) Discussion of the new strategy that has been formed by Jessica....................................10
Question 4......................................................................................................................................10
A) Calculation of Pay Back Period, Net Present Value and Average Rate of Return......10
B) Discuss the best method of appraisal technique...............................................................13
Net Present Value-.........................................................................................................................15
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Finance is defined as matters of management of money and includes various activities
such as creation, study of money and investment, borrowing, saving, and forecasting of money.
It involves the use of banking, leverage or debt, security, creation and oversight of various
financial statements (Broadstock and Cheng, 2019). These are the written documents used in day
to day operating life of an enterprise. It can be termed as the broader term in describing the study
system of financials. It is not limited to the money but it is beyond that. Although money act as a
legal tender used in various legal settlements and many more. Usually there are three types of
finance Personal Finance, Corporate Finance and the last one Public Finance. The main aim of
this report is to critically analyse the financial statement of Liverton Co. (Dewick and Schröder,
2020). This report includes different types of ratio analysis, importance of audience, opening
statement of financial position, cash flow forecast, evaluating the expenses, payback period, rate
of return, NPV, investments approaches, profitability of each project, cash budget and many
more.
TASK
Question 1
Calculation of ratios for the year 2019 and the year 2018
1. Gross Profit Margin = (sales - COGS) * 100 / sales
= (3495 – 2182) * 100 / 3495
= (1313 / 3495) * 100
= 37.57 %
Interpretation: Gross profit margin is the measure of profitability that evaluates the percentage
of profit that exceeds the cost of goods sold. It is just a measure of comparison between gross
profit and sales revenue. In the given question gross profit for the specified year comes out to
37.57% which is almost equal to 38% that shows that the company is growing as the cost of
these is already reducing.

2. Assets usage ratio= Total sales / average total assets
= 3495 / [(3812 + 2503) / 2]
= 3495 / 3157.5
= 1.10 times
Interpretation: This ratio measures the efficiency of an organisation that is how efficient an
organisation is in using the assets at its disposable to make something from it in terms of money
and turn it in the form of profit. In this ratio the value is 1.10. When it come to the ideal ratio for
this ratio it is 2.5 times or more. In the given question, the assets usage ratio of this organisation
is 1.10 which is very low when compared with the ideal ratio measurement. So the company nee
to improve their revenue generation ability and need to look and optimise their assets in a proper
and efficient manner.
3. Current Ratio = Current Assets / Current Liabilities
= 1687 / 744
= 2.27 times
Interpretation: Current ratio is a liquidity ratio that is used to calculate the company's ability to
meet its obligations which are due for less than a year or a year. It is used with the assets
available on the balance sheet. It is also termed as the Working capital ratio. It’s ideal ratio is 2:1
in in the company given in the question company has 2.27 which is more than the ideal ratio. So
this is the good situation for the company as they have more current assets than their current
liabilities.
4. Acid Test Ratio = (Current asset – stock) / current liability
= ( 1687 – 150 ) / 744
= 1537 / 744
= 2.06 times
Interpretation: Acid test ratio also known as Quick Ratio measures capacity of a firm to meet
their short term liabilities by liquidating the assets. The ideal ratio of this is 1:1. in this question
the ratio comes out as 2.06 time which is quite impressive, significant and adequate capacity to
meet short term Obligations.

5. Inventory Holding Period = (average inventory / cost of goods sold) * 365
= [(150 + 102) / 2] / 2182 * 365
= (126 / 2182) * 365
= 21.08 days
Interpretation: Inventory holding period is a ratio that shows the number of days for which a
company holds stock or the inventories before sales. It tells the number of days a stock to rotate
in the company. In the above company inventory holding period is 21.08 days.
6. Debt to equity ratio = Total debts / Total equity
= 170 / 2898
= 0.058 times
Interpretation: Debt to Equity ratio measure the financial leverage of the company and
evaluates the extent to which it can recover its debt. When there is a high debt equity it shows
that company is having more borrowed fund from capital market in their functions. Whereas low
debt equity ratio shows that the assets of the company are utilised at its optimum level and have
less borrowed fund obligations outside the market. In this question company have 0.058 debt to
equity ratio which indicates they have less risk for the company.
Significance of financial statements analysis
Financial Statement is an annual statement which provides internal as well as external
stakeholders an overview of the company from which they can decide regarding the investing
decision (Dymski, 2018). They provide the unbiased view to the lending institutions regarding
the financial health of the business financial health which is helpful in taking the business
lending decisions.
Financial Statement has different benefits for different users.
 When we say for management it is to know the company's profitability, liquidity, and
solvency. It also measures the company's effectiveness of decision taken and to take the
corrective indeed actions ahead.
 As mentioned above investors is a very important part of a company which invests
money in a company so they too need some authentic statement to relay upon that is none
other but a financial statement (Epstein, 2018). It helps to know the business earning

capacity and its future growth indications and evaluates the safety of the money they have
invested in the company.
 Liquidation and solvency position of a business is very important for the creditors.
Creditors should be well versed with the current situation of the company.
 Government plays the important role in every business. Government need the financial
statements of a company for the taxation purpose and to take the decisions about the price
regulations.
 Customers get the longevity of the company by seeing the financial statement of the
company.
 Employees represents the company but they can't be confidant without knowing the
financials statement of the company. When they will know the progress of the company
they can be familiar by the policies and changes in the wages, bonus, job stability, etc.
Question 2
A) opening statement of financial position
Assets
Non-current assets
Tangible assets £ 150,000
Current assets
cash at bank £ 50,000
Total assets £ 200,000
liabilities
Capital £ 200,000
Total £ 200,000
B ) Monthly cash budget for 6 months
Particulars July August September October November December
Opening -55000 -170000 -215000 -200000 -135000

Balance
Receipts
Initial
Investment
200000
Sales Receipts 150000 120000 150000 210000 260000 285000
Total Receipts 350000 65000 -20000 -5000 60000 150000
Payments
Purchase of
Non-Current
Assets
150000
Material 120000 100000 60000 60000 60000 60000
Other
Expenditure
55000 55000 55000 55000 55000 55000
Wages
Expenses
80000 80000 80000 80000 80000 80000
Tax Bill 20000
Total
Payments
405000 235000 195000 195000 195000 215000
Closing Balance -55000 -170000 -215000 -200000 -135000 -65000
In the given question, Sassy clothing shows the negative cash balance in the last of each month
and after that they are expecting sales for the next 6 months will be £1,175,000. The company
need to improve their performance in terms internal and external limit to optimum level and
utilise their strengths to enhance the revenue to maintain a good or a positive cash balances at the
end of each month (Helgesson and Mörth, 2019). It is maintained through increasing the sales of
the company and lowering the other expenses like reduction in the work material by the need of
the raw material as in the production of house.

C ) Explanation of additional expenditures
This company need to surround the cost within the month side of July and December
which includes various expenses like software bills, running fees, charge to the suppliers and
rent. Overdraft Mortgage shows more price range after they no longer have any remain in the
company (Zhang and Taghizadeh-Hesary, 2022). It allows the company in dealing with the
timing mismatch in price range and helps in keeping the positive track record. The enterprise is
capable in doing the bills in their cost on the time with the help of financial Institution overdraft
(Jones, 2020).
Question 3
A) Calculation of Breakeven point (BEP)
BEP (in units) = Fixed Cost / Contribution per Unit
Total Fixed Cost = 1,650,000 + 2,850,000 + 930,000
= £ 5,430,000
Contribution per Unit = £ 300 – 125 - 15 - 20 - 15 – 10
= £ 115
BEP (in units) of Year 2019 = £ 5,430,000 / £ 115
= 47217.39 equivalent to 47218 units
BEP (Sales Revenue) For the year 2019 = Fixed Cost / Profit Volume Ratio (P/V)
= 5,430,000 / 38.33 %
= £ 14,166,449.26
There will be few changes in accordance with chief executive in Income statement for the year
2020: -
Particulars Price per unit Amount ( £ )
Sales 309 13905000
Less : variable cost
Direct material 125 5625000
Direct labour 13 585000
Manufacturing overhead 19.5 877500
Selling expenses 15 675000

Administration expenses 8 360000
CONTRIBUTION 128.5 5782500
Less : fixed cost
Manufacturing overhead 1650000
Selling and distribution overhead 2850000
Administration overhead 930000
New manufacturing facility 1450000
PROFIT -1097500
Break Even Point (BEP) for the year 2020 in units = Fixed Cost / Contribution per Unit
= 6880000 / 128.5
= 53540.86 equivalent to 53541 units
Break Even Point (BEP) for the Year 2020 in Sales Revenue = Fixed Cost / Profit Volume Ratio
(P/V)
= 6880000 / 41.59 %
= £ 16542438.09
B) Margin of Safety ( MOS ) for the year ended 2019 and 2020
MOS in terms of units for the year 2019 = Profit / Contribution per Unit
= - 255000 / 115
= - 2217 units
MOS in terms of units for the year 2020 = - 1097500 / 128.5
= - 8541 units
MOS in terms of Sales Revenue for the year 2019 = Profit / P/V Ratio
= -255000 / 38.33 %
= £ - 665275
MOS in terms of Sales Revenue for the year 2020 = Profit / P/V Ratio
= - 1097500 / 41.59 %

= £-2638855.49
C) Discussion of the new strategy that has been formed by Jessica
From the results of the calculations made from part (A) and (B), there developed two new
strategy one is BEP and the second is MOS for the year 2019 and 2020. The BEP of the strategy
in terms of output produced in old and new strategy is 47218 and 53541 units approx. The
Margin of safety in respect of output for both the years 2019 and 2020 are -2217 and -8541 units
respectively. The break even point in terms of sales would be £ 14,166,449.26 and £
16542438.09 respectively. The company need to improve their sales and need to boost up their
sales through various promotional activities targeting sales. The company had already spent a
very high cost in achieving the additional growth that is 1450000 which is the one of the reason
of occurring loss .
Question 4
A) Calculation of Pay Back Period, Net Present Value and Average Rate of Return
Year Appraisal A Appraisal B Appraisal C
Cash Inflow Cumulative CF Cash Inflow Cumulative CF Cash Inflow Cumulative CF
1 75000 75000 95000 95000 50000 50000
2 65000 140000 65000 160000 60000 110000
3 60000 200000 45000 205000 65000 175000
4 55000 255000 45000 250000 66000 241000
5 50000 305000 45000 295000 57000 298000
Pay Back Period of:-
Appraisal A
PBP = 2+ (175000-140000) / 60000
=2+(35000/ 60000)
=2.58 years
Appraisal B
PBP = 2 + (195000 – 160000) / 45000
=2+(35000 / 450000

=2.77 years
Appraisal C
PBP = 3 + ( 190000-1750000 / 66000
=3+(15000 / 66000)
=3.22 years
Net present value
Appraisal A Appraisal B Appraisal C
Year
COC
@18% CI PV of CI CI PV of CI CI PV of CI
1 0.847 75000 63525 95000 80465 50000 42350
2 0.718 65000 46670 65000 46670 60000 43080
3 0.609 60000 36540 45000 27405 65000 39585
4 0.516 55000 28380 45000 23220 66000 34056
5 0.437 50000 21850 45000 19665 57000 24909
5 0.437 5000 2185 8000 3496 4000 1748
Total
PV of
cash
inflow 199150 200921 185728
Net present value = PV of Cash Inflow – Initial Investment
Appraisal A
NPV= 199150 – 175000
=24150
Appraisal B
NPV = 200921 – 195000
=5921
Appraisal C
NPV = 185728 – 190000
=4272
Accounting Rate of Return

ARR = Average Annual Profit / Average Initial Investment
Appraisal A
Year Cash Inflow Deprecation Profit
1 75000 35000 40000
2 65000 35000 30000
3 60000 35000 25000
4 55000 35000 20000
5 50000 35000 15000
Average Annual Profit 130000
Average annual profit = (40000+30000+25000+20000+15000) / 5
= 130000/ 5
= 26000
Average Investment = ( Initial Investment+ Scrap Value) / 2
= (175000+5000) / 2
= 90000
ARR = (26000 *100) / 90000
=28.89%
Appraisal B
Year cash Inflow Deprecation Profit
1 95000 39000 56000
2 65000 39000 26000
3 45000 39000 6000
4 45000 39000 6000
5 45000 39000 6000
Average Annual Profit 20000
Average Investment = ( Initial Investment+ Scrap Value) / 2

= (195000+8000) / 2
= 101500
ARR = (20000*100) / 101500
=19.70%
Appraisal C
Year cash Inflow Deprecation Profit
1 50000 38000 12000
2 60000 38000 22000
3 65000 38000 27000
4 66000 38000 28000
5 57000 38000 19000
Average annual profit 21600
Average Investment = ( Initial Investment + Scrap Value) / 2
= (190000+4000) / 2
= 97000
ARR = (21600*100) / 97000
=22.27%
B) Discuss the best method of appraisal technique
After deep comparison of investment appraisal technique, company should take the
project A as compared to project B and project C (Whited and Zhao, 2021). Project A gives high
rate of return as compared to another projects. When compared them in respect to cost recover
project A recovers the cost in 2.58 years whereas other project B and project C will recover the
same in 2.77 and 3.22 years. The Net Present Value of Appraisal is 24150 whereas the Net
Present Value for other Appraisals is 5921 and 4272. The average rate of return that come after
calculation for Project A is 28.89% and for other project that is for Project B and Project C is
19.70% and 22.27%.
C) Capital Investment Appraisal Techniques

Following are the types of Capital investment decision- There are various ways to
classify the capital budgeting decision (Kong and Wong, 2021). The most profitable projects are
always selected by the company that give them high rate of return to their owners that is their
shareholders. The techniques used in investment appraisal are as follows:-
Net Present Value-
Pay Back Period- It tells the time required to recover the initial cash outflow. The total initial
cash outlay is equal to the time required for total cumulative net cash flows from the investment
(Liu, 2019). This method also helps in recalling of the investment made by the investors in the
project. Following are the steps followed to calculate pay back period:-
1. Calculate the total cash outflow of the project.
2. Calculate the estimate annual cash flows after the tax over the life of the appraisal.
Advantages-
1. It is easy to use
2. It is easy to understand as it gives a fast estimate of the time required by the company to
recover the money invested in the project.
3. This helps in estimating the risk in the project. The longer period shows the riskier the
project is.
Limitations-
1. The time value of money project is not considered in this project . It is considered them
when it is equal as investment if pay back period for the both projects are same.
2. It is only appropriate when cash flow is given for a short duration .
3. It does not consider the total profitability of the project. It consider the cash inflow up to
the duration until the original investment cost is not recovered.
Average rate of return-
This evaluates the average of annual income of the appraisal as certain percentage of
investment (Michaelowa and Hailu, 2021).
ARR = Average Annual Net Profit / Initial Investment
The average annual net profit is the numerator which means the net income earned by the project
becomes over by its useful life. The total cash outflow added with the scrape value is
denominator of initial investment.

Advantages-
1. Readily available data technique is used in this which does not require to generate the
specific method to generate the data.
2. True performance of company is evaluated by this method . Not only this it also helps the
company in making the decision.
3. All the net profits over the time is included in this method of the project.
Limitations-
1. It is based on the company choices and various accounting procedures that is accounting
numbers.
2. Book value of the project is used in the method rather than the book value of the assets.
3. It ignores the cash inflow in the project whether it consist of the net profit of the project.
Net Present Value-
The time value of the project is used in this concept. Where the total cash inflow is
multiple with the cost of capital and then subtracted from the initial cash outflow (Renault,
2020). This method uses the specific discount rate of the return.
Advantages-
1. It takes the whole cash flow of the project.
2. It helps to grow the shareholders wealth.
Limitations-
1. The accurate estimate of cash inflow tells the dependency of the accuracy of NPV.
2. It ignores the difference in initial outflows and size of the various proposals.
CONCLUSION
From the above report, it has been concluded that the ratio calculation assists Liverton co. to
know about their financial situation (Shen and Chen, 2018). Through the help of the ratio, they
can evaluate the requirement of amount to be raised from market and also help to utilise them in
a proper manner. The cash budget of sassy clothing also help them to analyse the cost and
revenue. Ratio also helped them to know their month end position. Further, this report furnishes
the analysis of the income and expenses at the point and assisting in choosing the new strategy

which they require and minimise the financial threats. In the end this tells that the investment
decisions are too crucial for opting the best forecast for the particular investment.

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