Financial Statement Analysis for Investment Decision

The provided content discusses the importance of financial statements, including balance sheets, income statements, and cash flow statements, in helping investors make informed decisions about investing in a business. The three main financial statements are used to identify a company's financial performance, position, and changes between them. The assignment also highlights the differences in financial statement preparation based on the type of organization, such as sole trader, partnership firm, or public limited company.

Managing financial
resources and decision

Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
1.1 Sources of finance for business .............................................................................................3
1.2 Implication of the different sources of finance identified.....................................................4
1.3 Evaluating suitable sources of finance for Business project..................................................5
2.1 Analysing the cost of each of sources of finance which has been identified.........................5
2.2 Explaining the significance of financial planning ................................................................6
2.3 Identifying and measuring the information required for internal and external decision
maker............................................................................................................................................6
2.4 Explaining the impact of finance on the financial statement.................................................7
3.1 Project cash and other budget................................................................................................8
3.2 Explaining the calculation of unit cost for making pricing decision.....................................9
3.3 Assessing the viability of chosen project...............................................................................9
Task 2 ............................................................................................................................................11
4.1 Discussing the main financial statement by explaining it purposes....................................11
4.2 Describing and comparing the formats of main financial statements..................................12
4.3 Interpreting financial statement of Marriott and Hilton hotel .............................................13
Conclusion.....................................................................................................................................13
References......................................................................................................................................15
.......................................................................................................................................................15

Introduction
The business are designed to compete and come through in the marketplace through the
use of a Unique selling point. This enable business to stand at high position in competitive
market and provide valid reason to customer for buying particular company products and
services. Therefore, for achieving success through unique selling point it need to matched with
strong financial management plan. Further financial management support an organization to
cover different task and responsibility. The present report is based on Dream viewer organization
who is launching its new business project which is demanding as well as rewarding. For this
purpose it need to understand different sources of finance for its business which have been
discussed in this report. Further discussion has been done on importance of financial planning for
selected business.
Task 1
1.1 Sources of finance for business
According to the given scenario, Dream viewer is launching new project for expansion of
its business which is demanding as well as rewarding. For this purpose, the organization need to
raise finance from different sources which has been discussed below:
There are two different type of sources of finance which the organization can used in order to
launch new project.
 Equity share: Equity shares is one of the main sources of finance which dream regarding
its new project. It can take finance from public in the form of equity share. Further, it
required to pay dividend to its shareholder from its profit.
 Bank Loan: It is another type of sources of finance which is available for business.
Further the organization can take loan from bank for short period and long period. At the
time of taking loan from bank Dream viewer required to keep some security in respect to
take loan. In addition to this is also needed to pay fixed amount of interest every month
on loan amount.
 Retained profit: Retained profit it companies profit which Dream viewer can used any
time for any purpose. Further, there is no additional cost firm need to pay for using its
own money for new project. It also avoids the possibility of risk to pay amount to third
party if company may be suffer from loss.

 Bank overdraft: Bank overdraft is one of the another short term sources of finance which
is available for business. Further, at the time if dream viewer take bank overdraft facility
then in return it need to pay high interest rate. But it is beneficial for an organization
because company can easily raise fund from bank overdraft at any time.
1.2 Implication of the different sources of finance identified
From the above discussion it has been identified that there are different type of sources of
finance available for Dream viewer in order to launch new project. Beside this, the organization
need to understand implication of all the sources of finance, so that it can easily make decision
which one is appropriate for launching its new business.
Implication of different sources of finance are as follows:
Sources of
finance
Legal cost Financial cost Bankruptcy Dilution of
control
Bank overdraft Bank overdraft
can be taken any
time. There is no
need to fulfil any
legal formalities
High rate of
interest is charged
by bank.
It companies
become
bankruptcy, then
it need to fulfil its
amount by selling
its assets.
There is low
dilution of
control.
Retained profit Retained profit is
company own
money, so it no
need to fulfil any
legal formalities
for using own
money.
If company used
its own profit
then there is no
financial cost
charged.
No dilution of
control.
Bank loan At the time if
organization take
loan from bank
then it s need to
fulfil legal
Interest amount
need to pay by
organization on
loan amount if it
takes loan from
If an organization
become
bankruptcy then
bank will pay
loan from its
There is less
….....

formalities which
can consume
time.
bank. security amount
which was
deposit at the
time of taking
loan.
Equity share It company raise
fund from equity
share, then it need
to fulfil some
legal formality.
Further it should
be listed in stock
exchange market.
Financial cost in
equity share is
dividend which
the cited
organization need
to give to its
shareholder from
its profit.
If company
become
bankruptcy then
there is not
priority given to
shareholder.
Power is in
shareholder hand
because there is
high chance of
dilution of control
In equity share
capital
1.3 Evaluating suitable sources of finance for Business project
There are different type of sources of finance available for business which Dream viewer
can take for launching its new business. After identifying different type of sources of finance and
it implication on business. There are two sources of finance has been find out which is
appropriate for Dream viewer organization. Firstly bank loan, is first source of finance which is
suitable for the organization. Reason behind suggesting this source of finance is that cited
organization can easily take loan for longer period of time by fulfilling some sought of legal
formality. Further, it need to pay loan amount with fixed rate of interest every month which is
easy for the organization. In addition to this, there is less risk involved if company take loan
from bank and it can easily make payment in instalment. Furthermore, second sources of finance
which is available form business is retained profit. It is firm own money which can be used any
time by dream viewer company without fulfilling any legal responsibility. Further it not needs to
pay any interest amount for using its own money to anyone.

2.1 Analysing the cost of each of sources of finance which has been identified
There are different sources of finance which has been identified above. Further, there are some
cost which is associated with some sources of finance, this all are discussed below:
Retained earning: In retained earning there is no cost of sources of finance. But there are some
opportunity cost which comes into existence when there is alternative use of the capital.
Equity share: in equity share company need to pay dividend to its shareholder from its profit
further the payment of dividend is depend on the nature and management of discretion
2.2 Explaining the significance of financial planning
Financial planning is way of deciding what to spend, how to spend as per accordance to
the fund available for business. It is important for business plan its finance in order to carrying
out financial business activites in systematic manner.
Important of financial planning for Dream viewer is as follows:
 The organization need to plan its finance in order to make sure that they accumplated
appropriate amount of fund. Through proper planning company can easily avoid
unnecessary expenses and used available money in systematic manner. It is difficult for
business to manage and conserve its financial resources. Further, with the support of
financial planning process organization can easily identify its most important
expenditure.
 Furthermore, it supports in fixing the most appropriate capital structure. Financial
planning help in tapping the best sources and long term fund is generally contributed by
debenture holder and shareholder.
 It also assists in avoiding business shocks and surprises if any uncertain situation take
place within an organization. Further it supports in making decision that where it need to
invest and it creates a link between both the decision.
 In financial planning also make sure the consistency of goals and growth of its objectives
of the organization with its financial requirement. Further if company planned all its
finance then it can easily make its new goal because it knows how much fund is available
and how it can properly utilise for accomplishing growth. There are some process
through which company can easily plan its finance.

2.3 Identifying and measuring the information required for internal and external decision maker
At organization there are direct and indirect type of stake in a business operation which
are known as stakeholder. It is important for business to inform its stakeholder whichever
decision they make in the organization or outside the organization. Therefore, investor are
important stakeholder of an organization. They invest huge amount in business in order to make
profit form their business. So firm need to provide them information regarding financial position
of an organization and profit which they make in financial year. Further if company not make
huge profit as compare to past year then investor may not invest in their organization. It is so if
investor invest in organization they want divined from their profit in return. However,if company
unable to make profit then it cannot pay dividend to its shareholders. Furthermore, employees are
also important stakeholder of an organization. They make product and services for customer in
order to earn profit. If company can take advice from its employee at the time of making
decision. Apart from this supplier are external stakeholder of an organization, as they provide
raw material to organization for making product and services. Firm need to make payment on
right time so they impact the decision made by an organization. Apart from this, government
need to financial statement in order to make sure that company is paying tax amount accurately
or not. Furthermore, bank need to income statement, cash flow statement and balance sheet so
that they came to know firm financial position and its profitability. This support organization in
accessing debt payment capability of the firm.
2.4 Explaining the impact of finance on the financial statement
Finance mainly affect the financial statement of the firm. The organization is taking loan
a the end of year. Further on receipt of loan, cash balance in the balance sheet will be enhanced.
Liability is loan which is taken by firm from bank and different sources. Along with this the
creditor side of liability will also enhance.
 There are different type of financial statement that is
 profit and loss account, balance sheet
 The cash flow statement
Balance sheet: It prepared at the end of every financial year. In cover three components that is
assets, liabilities and capital. Capital side is one of the balance sheet which is cover and amount
which is invested by owner of organization (Eckerd, 2015). On the other hand in liabilities it
include payment which are due from creditor side. In long term liability it mainly cover bank

loan while in short term liability it cover debt of creditors. Further, in assets it includes different
type of assets that is fixed, current and liquid.
Profit and loss statement; it is a statement which reflect the revenue earner by an
organization and all the expense. Further it also shows all the profit and loss organization faced
at the time of operating business activity.
Cash flow statement
it is a statement which is show all the outflow and inflow of an organization. It covers three
business activities that is financing, investing and operating. All the money which is invested in
business show in cash inflow.
3.1 Project cash and other budget
Decemb
er January February March April May
Opening balance 25000 63800 102700 139200 182000 225150
Sales 56000 61000 62000 71000 76000 81000
Total 81000 124800 164700 210200 258000 306150
Expense
Purchase 14000 18000 21000 23000 28000 34000
Creditors 1200 1700 1900 2300 1900 1700
Logistic expenses 700 900 1000 1200 1150 1250
Employee cost 1300 1500 1600 1700 1800 1900
Total 17200 22100 25500 28200 32850 38850
Closing balance 63800 102700 139200 182000 225150 267300
Cash budget is known as the statement that reflects whole items which cover inflow and out flow
of finance taken place within an organization. Cash budget is very important for an organization

as it used for controlling all cash activity which taken place at the time of carrying out business
function.
Interpretation: From the above cash flow it is interpreted that that closing balance is increasing
from the December month till upto July. Further, there is appropriate demand of the firm product
in the market so closing balance increases. Further it also show that employee cost also increase
every month.
3.2 Explaining the calculation of unit cost for making pricing decision
Cost is known as simply amount which incurred by the business firm for producing goods
at the organization. These cost is categorized into different categories that is fixed cost which
show cost that remain fixed. Fixed cost never changed with any other cost change. On the other
hand variable cost is can be classified that is changes consistently. Purchase of material is known
as fixed cost. On the other hand direct cost which can be incurred directly at the time of
production process. Logistic expenses which comer under indirect cost. Pricing decision of
business can directly impact by cost. Along with this, if demand of product is high and
bargaining power is low, then in such case company kept high price of its product for making
good profit.
Interpretation: per unit cost of product is £144 it is computed by dividing total cost of
production of all months by the budget unit. Thereofre it show that, firm is using cost plus
pricing strategy. I firm is reducing its per unit cost and elevate its profitability. Therefore, for this

purpose it make good control on its expenses and make high profit. Further, for reducing cost per
unit it can used cost control strategy.
3.3 Assessing the viability of chosen project
Pay back period
Project A Project B
Initial investment -60000 -70000
1 25000 -35000 30000 -40000
2 30000 -5000 37000 -3000
3 37000 32000 43000 40000
4 43000 75000 47000 87000
5 47000 122000 53000 140000
6 50000 172000 63000 203000
Interpretation: From the above pay back period it show that in project A the organization can
recover its initial amount in a 3 years. On the other hand in project B it show that initial amount
can be recovered in 2 year. Therefore company accept the project B in order to earn high profit.
Average rate of return
Project A Project B
Initial
investment 60000 70000
1 25000 30000
2 30000 37000
3 37000 43000
4 43000 47000
5 47000 53000

50000 63000
Total 182000 273000
Average 30333 45500
ARR 50.56% 65.00%
Interpretation: from the above calculation it show that in project A average rate of return amount
is 50.56% and in project B it is 65.00%. it show that company choose project B as it is viable
then project B. ARR indicate the average rate of return from particular project invested amount.
Further the Plus point in project show that company gain its investment amount with profit. On
the other hand negative amount show that company cannot make return from its given project.
Net present value
Project A
Pv @
10% Present value Project B PV @ 60%
Present
value
Initial
investment 60000 50000
1 25000 0.909 22727 30000 0.909 27272.73
2 30000 0.826 24793 37000 0.826 30578.51
3 37000 0.751 27799 43000 0.751 32306.54
4 43000 0.683 29370 47000 0.683 32101.63
5 47000 0.621 29183 53000 0.621 32908.83
6 50000 0.564 28224 63000 0.564 35561.86
Total 162096 190730
NPV 102096 140730.10
170.16% 281.46%

Interpretation: Net present oil is which indicate that remain after deducting the initial amount of
project. From the given cash flow. In present calculation is show that in project A 170.16% on
the other hand in project 281.46%. Hence, it shows that net present value of project B is high as
compared to project A. so company will choose project B for making profit.
Internal rate of return
Project A Project B
Initial investment -60000 -50000
1 25000 30000
2 30000 37000
3 37000 43000
4 43000 47000
5 47000 53000
IRR 45.66% 61.31%
Interpretation: IRR is known as internal rate of return, it indicates that the interest on rate of
return. In project A it is internal rate of return is 45.66%. on the other hand in project B it is
61.31%. it show that company will choose project B because in that there is high rate of return as
compare to project B. if internal rate of return is high then it means company earn profit because
they got high rate of return which is profitable for their business. If company can get higher rate
of interest then they will make huge profit which is benefited for an organization
Task 2
4.1 Discussing the main financial statement by explaining it purposes
The main financial statement which is encompasses three varied statement that is income
statement, balance sheet and cash flow statement.
Balance sheet: balance is always prepared at the end of financial year which help in
determine financial position of company. Further all the information which is provided in
balance sheet is related to assets and liabilities of organization. It shows debt of on outstanding
liability of an organization. Further it also reflects assets available to business such as current

assets, fixed assets etc. this balance sheet is mainly used by investor for identifying how much
profit company generated in whole year (Ko, and Lee, 2015.). Then they make decision
whether they will invest in business or not.
Income statement: Income statement is known as profit and loss statement. It shows
whole year profit of an organization and also show how many expenses incurred by an
organization. It is prepared so that company can identify how much profit it makes and all its
expense which is generated within a year. The main purpose of making profit and loss statement
so that company came to know its financial performance.
Cash flow statement; it is prepared by an organization to see the cash flow inside and
outside the business (Matheson and et.al., 2016.). Further it also show changes which take place
between income statement and balance sheet. It is used by financial manager to identify all the
cash inflow and outflow activity.
4.2 Describing and comparing the formats of main financial statements
There are different type of financial statement which is made by different type of an
organization. There type of firm such as sole trader, partnership firm, public company etc.
therefore sole trader organization make prepared only balance sheet. It make only balance sheet
to identify company financial position (Akhtar and Kröner-Herwig, 2015). Further, it no need to
make any profit and loss statement because it have no partner to who it prepares income
statement. It also reflect assets and liabilities of the company. It helps owner in identifying how
much assets its currently have an organization
On the other hand partnership firm prepare both balance sheet, profit and loss statement.
Is is so in profit and loss statement different partners account reflected their profit and loss.
Captial accoung of all partner need to make in balance sheet of on organization. Further public
limited company prepare different type of statement that is International financial reporting
standards (IFRS), generally accepted accounting principal (GAAP).

4.3 Interpreting financial statement of Marriott and Hilton hotel
Interpretation: From the above report it can be interpreted that Marriott hotel gross profit is
14.66% and 5.93% in 2015. it is so because company sale is increase and its expenditure is
controlled by an organization. Further, current ratio of Marrot hotel is 0.63% and 0.43% in 2015
and 2014. this show that in 2015 its current ratio decreases. While its quick ratio reflect the
ability of company in converting its assets into cash. In 2015 its quick ratio is 0.37 which means
that it is performing well. Further more debt ratio of Marriott hotel is declared in 2015 this show
Conclusion
From the above report it can be concluded that, there are different sources of finance
which are available to business in order to expansion of business. Further, for proper utilisation
of resources company need to make sure that is make prepare budget. Through budget company
can easily avoid unnecessary expenses and make huge profit. Further it can be concluded that

company can easily identified which sources of finance is suitable for business through the help
of net present value, and pay back period. There are different type of financial statement which is
prepared by an organization in respect to see the financial position of an organization. Further,
balance sheet is important financial statement of an organization because it shows company
profitability and financial condition. Profit and loss statement show company expenses and
revenue which is generated from business activities.

References