Introduction to Finance ( Distinction Criteria ) Importance of Finance

Importance of Finance
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Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
Question 1........................................................................................................................................3
a) Calculate the financial ratio for the year ended as 31 march 2018-19....................................3
b)USERS OF FINANCIAL STATEMENTS-.............................................................................5
QUESTION 2..................................................................................................................................6
a) financial status's opening statement at the beginning of July 2015........................................6
b) Computation of forecast cash budget for next 6 months.........................................................6
c) Clarification of additional disbursements................................................................................7
QUESTION 3..................................................................................................................................7
a ) Calculation of Break even point (BEP)..................................................................................7
b) Margin of safety ( MOS ) for the year ended 2019 and 2020.................................................9
c) Evaluate the new strategies that can be made by Jessica.........................................................9
QUESTION 4..................................................................................................................................9
a) calculation of pay back period, Net present value and average rate of return.........................9
b) Determine the most effective method of project appraisal....................................................13
c)Capital budgeting methods and techniques that can used for investments decisions.............13
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18
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INTRODUCTION
Finance plays an important role in an organisation stability, growth and expansion, it
basically the backbone of a business entity. There are various components indulge in managing
the finance, planning, organising, directing and controlling (Baker, Kumar and Pandey, 2020)
(Black and Stafford, 2018). In this report, ratio analysis has been used for finding out the
position of the company. In the second part cash budget have been prepared to forecast the
estimated expenses and income of specific period. In third question breakeven point, margin
safety concepts are used for determining the sales related decisions in order to develop a new
strategy to compete in the market. The other question asks for finding out the pay back, NPV and
ARR for finding out the most viable investment project.
Question 1
a) Calculate the financial ratio for the year ended as 31 march 2018-19.
1) Gross profit margin
= (sales revenue – Cost of goods sold) * 100/ Revenue
= (3495.00-2182) *100 / 3495
= (1313/3495.00) *100
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= 35.6700%
Interpretation: It is a ratio which tells about the organisation ability to earn from the product
and services sold. Ideally a gross profit margin of an organisation must be 20% after deducting
the COGS. In the current case it is 35.67% which is effective ratio. This depict that company's
sales performance is recognisable.
2) Assets usage ratio
= total sales/ average total assets
=3495.0/ [(3812+2503)/2]
= (3495/3157.5)
= 1.100
Interpretation: This measure of financial analysis is used for determining the capability of the
organisation to make income from its assets. Higher ratio implies a better position of the business
entity. Ideal assets ratio must be 2.5 in the current case it is just 1.10. this implies that company
is not able generate enough income from its assets. The efficiency must be increased by
increasing the overall sales and productivity (Chin and Gallagher,2019).
3)Current ratio:
= current assets / current liabilities
= 1687 / 744
= 2.27
Interpretation: The metrics of financials states that how much a company is capable to pay its
short term liabilities. In general analysis the ratio should be 2:1 but the business organisation has
2:27 which means that the business entity is in good position. It is capable to meet its
obligations.
4) Acid test ratio
= (current assets – inventory)/ current liabilities
= (1687- 150)- 744
= 1537 / 744
= 2.06
Interpretation: The ratio accounts the most liquid assets of the organisation such as debtors,
cash and cash equivalent. This considers that can convert into cash easily, are available to readily
liquidate (Choudhury, 2018).
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