Introduction to Finance: Comply or Explain Model, Financial Statements, Investment Techniques, CVP Analysis

This report covers the Comply or Explain model of corporate governance, characteristics of approach used for filing financial statements, payback period and ARR calculation for investment proposals, evaluation of payback technique, and characteristics and advantages/disadvantages of investment decision techniques with CVP analysis.

Introduction to Finance

TABLE OF CONTENTS
TABLE OF CONTENTS..............................................................................................................2
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
a) Discussing “Comply or Explain” model of corporate governance.........................................3
b) Explaining characteristics of approach that is used for filing financial statements................4
QUESTION 2...................................................................................................................................5
a) Calculating Payback period....................................................................................................5
b) Calculating Accounting rate of return for both proposals......................................................7
c) Critically evaluating Payback technique.................................................................................8
d) Explaining characteristics of investment decision techniques with advantages &
disadvantages of IRR..................................................................................................................9
QUESTION 3.................................................................................................................................10
a) explaining the concept of contribution and its importance to CVP technique....................10
b) Explaining CVP usage in dropping a product or service special contract decision..........11
c) Describing CVP & its related limitation in context of both economies model and other
interpretation.............................................................................................................................11
QUESTION 4.................................................................................................................................12
a)................................................................................................................................................12
b)...............................................................................................................................................13
c) Explaining additional expenses business should take into account as result of needing
financial assistance...................................................................................................................15
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Finance is a system which requires transfer of funds between borrowers and lenders or
investors. It depicts managing money and identifying sources from where it can be acquired at
least cost. The present report will discuss the “Comply or Explain” model of corporate
governance and will explain the characteristics of approach used to file final accounts to major
authorities. Further, report will calculate the payback period and ARR of two investment
proposals of Edinburgh & Newcastle.
It will also highlight advantages and disadvantages of IRR. In addition to this, study will
outline concept of contribution and its importance and will describe nature of 'dropping a product
or service’ and ‘special contract’ decisions. Study will also shed light on limitations of CVP
technique. Lastly, report will prepare opening statement, monthly cash flow forecast.
QUESTION 1
a) Discussing “Comply or Explain” model of corporate governance
Comply or Explain is a mechanism which is generally used in UK as a prominent part of
corporate governance. It means that all the corporate bodies should comply with rules and
regulations laid down by Corporate governance or should explain the reasons why they are not
complying with it (Ho, 2017). Main reason behind this approach is to let the market or industry
decide that whether a set standard of rules and regulations are fit & appropriate for companies or
not. This principle provides full flexibility to companies to make a decision of either complying
with Code or not and state reason for not complying. It is beneficial because it asks for
transparency in company transactions and business, and in case of breach of any principles,
sufficient explanations can be given (Comply or Explain (UK) – Definition, 2021). Company
can benefit from Code at the times of introducing new initiatives and changes by preventing box-
ticking.
The principle also shows recognition and justification, that is, there are several other
alternatives for achieving good governance outside code. There are many companies in UK
having good governance without any intervention of government body. However, on critical
note, sometimes investors state that explanations given by company at the times of non-
compliance with code are not adequate and businesses fail to explain the good governance

alternatives (Roberts and et.al., 2020). In addition to this, organizations not complying with the
Code have bad reputation and impression in market.
Mutual trust with investors and shareholders must be build by company which is possible
when companies maintain good governance. A solid foundation is build by having trust and
commitment with investor which is done by complying with laws laid by government.
b) Explaining characteristics of approach that is used for filing financial statements
There are various characteristics that need to be applied by organization in order to filing
financial statement by Plc’s operating in UK. Companies listed in UK require to pay attention
two financial reporting framework so that preparation of financial statement according to
legislation, regulations, etc can be exerted. There are qualitative characteristic which are require
to be used by formulating financial statement that includes understand ability, relevance,
reliability,comparability, timeliness, etc that allow to accomplish objective of filing can become
possible (Xiuli, 201). International accounting standard requires the firm to largely concentrate
on highlighting crucial characteristics that can make particular statement reliable and materialist
in turn greater accuracy & fairness in functional practices of business can be maintained.
To accomplish the objective of providing all relevant, reliable, etc to give full
disclosure by considering all past, present and future events so that assistance to stakeholders in
taking strategic decision can become possible. There are various approaches which need to be
specified for having ability to file the financial statement within house and London Stock
Exchange. It involves the qualitative features that are required to be maintained in respect to
avoid any legal obligation on company. It is essential for the firm to largely concentrating on
giving different aspects like full disclosing, reliability, simplicity, relevancy,comparability,
understand ability,completeness, accuracy, promptness, reliability, analytical, qualities,
qualities, etc so that significant information while creating financial reports can be provided.
There are various requirements that are need to attained by companies for being eligible for
trading on stock exchange (Subair and et.al., 2020). Investors usually make their decision of
trading by paying attention on gathering information from financial statements of the company.
For this purpose, firms are obligated to utilize qualitative characteristics in turn eligibility to
trade on stock exchange can be derived. As per the UK GAAP,IFRS standard, etc prevailing in
UK require its company to highlight these characteristics in its financial statement so that
greater sustainability and efficiency of processing can be derived. The main approach for

utilization of these characteristics is to safe guard interest of financial statement users so that
higher trustworthiness can be provided. For this purpose, companies in UK adopts IFRS
standards in order to consolidated financial statement in turn ability to function smoothly
and effectively can be obtained. To coordinate with corporate governance, all scale of
organization pay attention on developing such mentioned approaches in turn highers
sustainability and growth can be derived. On the basis of this, it can be interpreted that
approaches using qualitative characteristics, IFRS, accounting , etc concept can help in meeting
criteria for smooth functioning.
QUESTION 2
a) Calculating Payback period
Edinburgh
Franchisee fee 8700
New buses 4120
Initial Investment 12820
Payback period
Years Cash flows Cumulative cash flow
1 3780 3780
2 4150 7930
3 4550 12480
4 5120 17600
5 5010 22610
Payback period
3 + (12820 – 12480) / 5120
= 3.06 years
Newcastle
Franchisee fee 7950

New buses 3890
Initial Investment 11840
Years Cash flow Cumulative
cash flow
1 3500 3500
2 3850 7350
3 4200 11550
4 5150 16700
5 5045 21745
3 + (11840
– 11550) /
5150
Payback
period
3.05 years
Flyer's Plc can bid for Newcastle bus services because it will
be profitable for business (Crespo Chacón and et,al., 2019
The reason being after calculating payback period of both
proposals (Edinburgh & Newcastle), it was identified that
Newcastle will cover the initial investment in 3.05 years
which is less than Edinburgh that is taking 3.06 years for
covering initial outlay. Therefore, Newcastle will be
beneficial to Flyer Plc.

b) Calculating Accounting rate of return for both proposals
Edinburgh
Years Cash flows
1 3780
2 4150
3 4550
4 5120
5 5010
Estimated life 4
Initial Investment 12820
Scrap value 110
Average annual net earnings 4522
Average investment 6465.00
ARR 69.9%
Newcastle
Years Cash flows
1 3500
2 3850
3 4200
4 5150
5 5045
Estimated life 5

Initial Investment 11840
Scrap value 95
Average annual net earnings 4349
Average investment 5967.50
Accounting rate of return 72.88%
Interpretation:
Flyer Plc should select Newcastle for operating bus services because it is providing an
accounting rate of return of 72.88% which is greater than the rate given by Edinburgh which is
69.9%. In ARR, that project is selected which gives maximum future net earnings after
comparing it with the cost of capital (Hossain, 2021). It is a very common method which is
adopted by maximum organizations to evaluate the investment outlays.
c) Critically evaluating Payback technique
In Capital budgeting, payback period is the time period which is needed to get a return on
investment in order to repay the original investment amount. It takes into account how much
time it takes for cash flows from project to be equal to initial outlay cost (Idehen, 2021).
Basically, it aids in retrieving initial investment cost of a proposal promptly so that company can
earn profit after that. The method is very simple to use and easy to understand by individuals
which is a stand-alone tool to compare investment outlays.
However, this technique is avoided by strategic decision makers because it dos not take
into account time value of money, risk and other important factors like opportunity cost. Time
value of money concept is very important to be included because value of money today is more
than it will be in the future (Asika, 2021). Further, it does not consider inflows of cash earned by
company after the payback period, thereby not comparing overall profitability of projects. Also,
in reality, there is a lot of complexity in cash inflows and sometimes, there are cash outflows.
Due to these limitations, pay back technique is just used as preliminary evaluation which is
supplemented by other techniques such as Net Present Value or Internal Rate of Return, etc.

d) Explaining characteristics of investment decision techniques with advantages & disadvantages
of IRR
Before investing in long term investment proposals, Flyers Plc must evaluate all proposals so
that profitability level of each project can be identified. The basic characteristics of investment
appraisals are as follows:
 It helps in assessing the level of anticipated returns according to the expenditure incurred
so that company can decide whether it will be having profit or loss from a particular
investment (Coletti, Landoni and Frattini, 2021).
 In addition to this, it also estimates costs and benefits arising in the future over the life of
project which is generally the expected life of asset.
 Flyer Plc. can identify whether it has sufficient funds or not to invest in the project by
analysing the feasibility through net present value.
 Capital investment once considered and accepted cannot be recovered, therefore,
investment appraisal techniques help in examining the potential of each project so that
risk is minimized and returns are enhanced.
Advantages and disadvantages of IRR
Advantages Disadvantages
It considers time value of money at the time of
evaluating the proposal.
It does not take into account the actual dollar
value of benefits.
This technique is very simple to use and
interpret. If IRR is greater than cost of capital
then project is approved (Jin, Liu and Long,
2021).
When two projects are considered where one
ends after 3 years and other after 4 years. The
first investment is having an additional point of
reinvestment of money. This point is not
examined under IRR method.
Minimum requires rate i.e. Hurdle rate is not
required in this technique which is very had
and difficult to estimate.
IRR cannot be calculated if at later stage cash
inflows are not adequate to cover up initial
outlay.
Profitability is evaluated for the entire life of
the project so that a true viability can be
Only importance is given to profits generated
without considering the recouping of capital

examined. expenditure (Kim, Kim and Yook, 2021).
Determining the cost of capital is very difficult
job, therefore, internal rate of return is
beneficial to examine project.
Lengthy and tedious calculations are involved,
that is why managers try to avoid this
technique.
QUESTION 3
a) explaining the concept of contribution and its importance to CVP technique
Contribution in marginal costing is associated with providing information regarding the
amount of earning remaining after all direct expenditure has been deducted from revenue. It
aids in getting the information regarding the amount that shows contribution margin which is
residual amounted divide by sales. In the break even analysis, contribution play significant role
in assessing how much margin of product is obtained that is excess of direct variable cost ,
covered from chosen selling price.
CVP is one of the widely used technique that is concerned with understanding relationship
among cost, profit, volume and prices so that higher ability to take management decision can
become possible. This is concerned as integral pat of enterprise that provides assistance in
conducting profit planning. This is widely used to make proper assessment regarding planning
& control activities in turn budget & forecasting can be done in efficient manner (Cost Volume
Profit Definition, 2021). There are various types of benefits which can be attained by an
organization. One of the most significant benefit that can be attained by firm insights regarding
effect & inter relationship of factors that contribute in profits. In order to avoid losses, insights
regarding maximum sales is required to be made is stated by cost volume profit technique.
Impact of short term decision taken in respect to fixed, marginal, volume and selling price of
profits can be derived by CVP technique. The particular technique allows organization to get

deeper knowledge regarding the components like level of activity, unit selling price, variable &
total fixed cost and sales mix so that appropriate decision can be formulated.
b) Explaining CVP usage in dropping a product or service special contract decision
There are several decision which can be taken by organization through considering different
aspects so that higher reliability & sustainability can be derived. In addition to this, CVP
analysis helps determining the outcome that can play role of adding value to organization. The
main role play in taking decision regarding the price policies so that higher profitability can be
attained. For achieving higher profitability & sustainability there are various kinds of decision
that are taken so that ability to accomplish objective can become possible. Dropping profit and
service decision require to pay attention the factors like profits, cost, etc so that better
comparison can be made. These requires firm to pay attention on such technique that can be
useful in ascertaining impacting factor in deeper manner. CVP is one of the significant
technique that shares in assessing such all the factor that is highly useful in assessing that
product is useful in attaining those objectives or not.
CVP as well concentrate on getting the data regarding break even point, fixed cost, etc. The
special contract is required to make assessment that it should be accepted or rejected. CVP
technique aids in evaluating aspects like qualitative factors, role of fixed cost, capacity require
to fulfill order, etc. Takings decision by considering such factor can allow firm to analyse that
it should be accepted or rejected in order to have smooth functioning.
c) Describing CVP & its related limitation in context of both economies model and other
interpretation
Each model has certain limitation which need to be specified while taking decision so
that overall criteria required for smooth function can be derived. According to economic model
and other interpretation it can be identified that there are various limitations which need to be

highlighted so that possible of wrong business practice can be avoided (Cost Volume Profit
Analysis: Definition, Objectives, Assumptions, Limitations, 2020). There are assumptions like
constant selling price, sales mix,inventories do not change, etc that are not possible in realistic
world.
The limitation comprises identifying difference in fixed & variable cost which tend to
provide inaccurate results. Relationship between variable cost & volume of cost output is not
always effective. CVP technique is not suitable for the company providing multi products as
well selling price is not constant. This keeps on changing due to various external factor and
ignore influence of these factor on variable & fixed kind of cost. Major limitation that need to
be specified for achieving deeper knowledge of its drawback in turn respective course of action
can be applied. There is presence of inventory which is assumed to be kept constant that leads
this particular technique towards failure. It is not effective for longer run that interrupt in
having crucial information so that overall objective of business can be accomplished. On the
basis of this, it can be identified that these limitation results in getting efficiency & accuracy
of business operation in turn greater emphasis on this should be provided.
QUESTION 4
a)
Opening statement of financial position at the start of July 20X5
Assets Amount £
Tangible non current assets 150000
bank account 50000
Total assets 200000

Liabilities
Capital 200000
Total liabilities 200000
From the above table it can be interpreted that opening financial position for the statement
indicates information regarding financial condition at the begging of year. The statement is
comprising capital and non current & cash balance as in its financial position. Financial position
allows to give information regarding monetary health condition of organization. It can be
articulated that fashion clothing firm is having good financial condition.
b)
Cash flow forecast
Particulars July August September October Novembe
r
Decembe
r
Opening balance 50000 -125000 -160000 -125000 -30000 115000
Income
Sales 150000 120000 150000 210000 260000 285000
expenditure
for material 120000 100000 60000 60000 60000 60000
other expenses 55000 55000 55000 55000 55000 55000

tangible non current
assets 150000
Tax 20000
total expenses 325000 155000 115000 115000 115000 115000
Closing bank
balance -125000 -160000 -125000 -30000 115000 285000
On the basis of above illustrated table it can be articulated that cash outflow is more than
inflow and indicating negative closing bank balance. From the evaluation it can be articulated
that income is generated from one stream that is making sales. There are several types of
expenses which are incurred by specified firm includes marketing, labour, cost of material,
etc. These expenses are hindering organizational current financial position as exceeding than
income which is providing unfavorable closing bank balance. It is indicating situation of
overdraft in turn requirement of business can be accomplished. In the 6 respective month from
July to December, the level of overdraft facility is -125000, -160000, -125000, -30000, 115000
and 285000. This is indicating that organization requires overdraft facility from July to October
so that proper functioning can be conducted.
From the evaluation it can be interpreted that there is higher requirement of consulting
with bank manger in respect to derive such mentioned kind of facility for overcoming such
negative circumstance and getting ability to accomplish business objective. It can be articulated
that there is need to assess proper evaluation of balances remaining after conducting overall
operational practices so that analysis can be exerted (Mariana, 2018). Cash flow forecast aids in
making prior planning in turn greater ability take strategic decision becomes possible

c) Explaining additional expenses business should take into account as result of needing
financial assistance
From the above prepared cash flow forecast, it can be interpreted that there much
expenses that are incurred by firm to meet its operational practices (Pekkala, 2021). There are
several expenses incurred by firm and out of which few expenses are required to be highlighted
so needing assistance of overdraft facility can be clearly assessed.
This includes marketing and labour expenses as it is resulting in increasing cost of
firm. In order to decline proportion of overall cost, it can be articulated that business is required
to highlighted less consumption of monetary resources for the purpose of incurring expense on
larger marketing & additional labor cost. There is requirement of installing such policies and
cost structure in turn higher ability to reduce and eliminate irrelevant aspect which are not
contributing in having success. On the basis of this, it can be identified that there is need of
providing attention on it to avoid taking overdraft facility.
CONCLUSION
From the above report it can be concluded that finance is one of the important
determinant of success. The current report has comprised information regarding corporate
governance that play significant role in conducting fair & ethical practices so that adhering to
prevailing law can become possible. Characteristics for filling financial statement by Plc that
are incorporated In UK are included in present report. In addition to this, capital appraisal
techniques like IRR, pack back, etc has been comprised in current study by paying attention on
its advantages and drawbacks for taking investment decision. CVP is an important technique
that allows to get insights regarding profit, cost, price, etc so that crucial decision can be taken.
Limitations like constant sales mix, etc regarding CVP technique has been included in presents
report fro gaining deeper knowledge. Cash flow forecast and need of overdraft facility has been
ascertained in current study so that proper insight bout financial health can be derived.

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