Introduction to Finance: Financial Statements Analysis and Budgeting

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.