Introduction to Finance

This document provides an introduction to finance, covering topics such as sources of finance, financial analysis, and investment appraisal techniques. It also discusses the role of international regulatory organizations and audit committees. The document includes calculations and critical evaluations of various financial ratios.

Introduction to
Finance

INTRODUCTI
ON..................2
MAIN BODY..................................................................................................................................2
Question 1........................................................................................................................................2
(a). Calculate the economic order quantity (EOQ)......................................................................2
(b). Calculate the total annual cost of hard plastic.......................................................................2
(c). Critically evaluate Touchdown Sports Inc’s decision to use the EOQ mode.......................3
(d). Advise Touchdown Sports Inc’s senior executive team and it also should include an
explanation of the costs of holding inventories...........................................................................3
Question 2........................................................................................................................................4
(a) Calculate the payback period of both options........................................................................4
(b) Calculate the accounting rate of return (ARR) for both options............................................5
(c) Critically evaluate the accounting rate of return technique....................................................5
(d) Characteristics of investment appraisal decisions and the advantages and disadvantages of
the IRR technique........................................................................................................................6
Question 3........................................................................................................................................7
(a). Calculate the following ratios...............................................................................................7
(b) Critically explain the importance of considering the audience for financial statement
analysis........................................................................................................................................9
Question 4........................................................................................................................................9
(a) Explain the role of each of the following organisations.........................................................9
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(b) Critically discuss the role of audit committees in corporate governance............................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
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INTRODUCTION
Finance is a general term that covers activities related to finance, debt or borrowing, lending,
financial markets, assets, and investment (Adams and Hunter, 2019). Essentially, finance
shows the management of money and the procedure of getting the needed funds. The role of
finance in an organization is also to ensure that there will be enough resources to function and
that company spend and invest the money. This assessment based on four different types of
questions which is about the sources of finance, calculate ratios for the analysis of company’s
overall performance and how investment appraisal techniques used to evaluate the profitability
of different options. In addition, explain the role of several international regulatory framework
organizations and discuss the role of audit committee.
MAIN BODY
Question 1
(a). Calculate the economic order quantity (EOQ)
Given Information:
Annual Usage = 27,000
Holding Cost = $1.75 per KG per Year
Ordering Cost = $ 14
Cost of Hard plastic = $0.90 per KG
Maximum price = $ 1.90 per KG
Minimum price = $0.75 per KG
Formula:
EOQ = Square root of { (2 X Annual Consumption X Ordering cost) / Holding cost }
= Square root of { (2 X 27,000 X 14) / 1.75 }
= Square root of (756,000 / 1.75)
= Square root of (432,000)
= 657.267
= 657 approx.
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(b). Calculate the total annual cost of hard plastic
Total Cost = Purchasing Cost + Ordering Cost + Holding Cost
= {1.325 x 27000} + {(27000 + 14)/657} + {(1.75 x 657) / 2}
= 35775 + 575 + 575
= $ 36925
(c). Critically evaluate Touchdown Sports Inc’s decision to use the EOQ mode
In relation to the Touchdown Sports Inc, managers use EOQ model to identify the ideal
order size which helps in minimising the overall cost or fulfil customer demand (Booth, Cleary
and Rakita, 2020). Total order quantity should be around 657 which minimise the cost or helps
the Touchdown Sports Inc. to maximise their profit margin. Organization make their decision to
select this model is because it helps in minimising storage or holding cost and specified the
quantities that how much business need to hold inventory or re-order the other quantity.
This model may also recommend purchasing a greater volume in fewer orders to take full
advantage of discounted bulk purchases and reduce order costs. Alternatively, these can point to
even more orders for less products to reduce keeping costs whether they are large and the
ordering levels are usually low.
(d). Advise Touchdown Sports Inc’s senior executive team and it also should include an
explanation of the costs of holding inventories
It has been recommended to the senior executive team of Touchdown Sports Inc. that main
goal of the inventory management is to minimise the overall cost of stock and with the help of
EOQ model, managers are able to minimise it through reducing order or holding cost which
minimise the overall product cost that further meet customer demand or fulfilling company’s
objective to maximise their profit margin. Holding costs are all those cost which involved in
maintaining inventories that are not sold. Such costs also are portion of the overall inventory
cost, together with the cost of buying and the cost of shortages. Holding costs of a business
include the price of items lost or destroyed, as well as storage capacity, manpower and insurance.
It is also observed that Just-In-Time method are more preferable where customer demand
is low but in case of high demand, EOQ model is most suitable (Brealey and et.al., 2018). In
context of Touchdown Sports Inc. which is leading manufacturing company who making is
protective equipment for sports persons. In order to minimise the overall cost, it is very
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important for the managers to effectively implement the EOQ model and then identify the
maximise quantity which required to order in case of minimising storing and holding case.
Question 2
(a) Calculate the payback period of both options
Formula:
Payback Period = Year before full recovery + (Unrecovered cost / Cash flow during the year)
Year Option A Cumulative CI (A) Option B Cumulative CI (B)
0 51000 76500
Scrap Value 40110 60120
1 3200 3200 3900 3900
2 3300 6500 3600 7500
3 3100 9600 3300 10800
4 3000 12600 3100 13900
5 2900 15500 2600 16500
Payback period:
Option A = 3 + (1290 / 3000)
= 3 + 0.43
= 3.43 years
Option B = 4 + 2480 / 2600
= 4 + 0.95
= 4.95 years
From the overall analysis of payback period of both options, it has been analysed that
option A is more favourable in comparison to option B. Touchdown Trips Inc. can recover their
initial cost within 4 years if they invest in Option A which has 3.43 years payback period. They
can recover in 5 years if they invest in Option B which has 4.95 years recovery period.
Working Notes:
Initial Investment = Cost – Scrap Value
Option A = 51000 – 40110
= 10890
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Option B = 76500 – 60120
= 16380
(b) Calculate the accounting rate of return (ARR) for both options
Formula:
ARR = (Average annual profit / Initial investment) * 100
Year Option A Option B
1 3200 3900
2 3300 3600
3 3100 3300
4 3000 3100
5 2900 2600
Average Annual Profit 3100 3300
ARR for both options:
Option A = (3100 / 10890) * 100
= 28.46%
Option B = (3300 / 16380) * 100
= 20.14%
From the above calculation it has been analysed that ARR of option A is 28.46% and for
Option B is 20.14% which is lower than Option A. On the basis of ARR return, Touchdown
Trips Inc. should selected Option A because it has higher returns.
(c) Critically evaluate the accounting rate of return technique
It has been critically evaluated that accounting rate of return (ARR) is calculations that
represents in percentage form and indicate the expected rate of return of an investment or asset
relative to the cost of the initial investment (Baker, 2018). The ARR equation is to divides the
average profits of the asset by the original cost of investment in order to derive the ratio or return
that can be projected over the life of the asset or related project. ARR doesn't really recognize the
time value of money or future cash flow, which can be an essential component of the
maintenance of a company. With the help of this investment appraisal technique, organization is
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able to evaluate the profitability of each project. Managers of Touchdown Trips Inc, use this
method to estimate the better option for the investment.
Two possible investment options have been identified such as Gulfstream G650ER (option
A) and the Boeing BBJ Max 7 (option B). With the help of ARR calculation, management able
to make better decisions and Option A is the better investment plan which provides 28.46%
return on this investment (Hofmann, Strewe and Bosia, 2018). This investment appraisal
techniques has several benefits such as, it's very straightforward to quantify and simple to
comprehend the recovery period. It shall take into account the overall gains or savings made over
the overall life of the investment. This approach understands the idea of net profits, i.e. profits
after taxes and depreciation. This is a central consideration in the evaluation of the investment
plan. This approach makes it easier to equate the future project with the cost-reduction project or
other proposals of a competitive spirit. This approach offers a clear image of the feasibility of the
project. This approach alone recognises the accounting definition of benefit for the estimation of
the rate of return.
(d) Characteristics of investment appraisal decisions and the advantages and disadvantages of the
IRR technique
On the basis of above analysis, investment option A is selected which has lower recovery
period and higher ARR. In addition, with the help of investment appraisal techniques, managers
of Touchdown Trips Inc. can formulate effective decisions. There are some characteristics of
investment appraisal techniques which provide better understanding and these are as follow:
 Evaluation of the degree of projected returns received on the level of expenditure
incurred.
 Anticipates the future risks and revenues over the lifecycle of the project.
 When evaluating the future capital project, the expenses and outcomes of the
organization should be measured over the expected duration of the project (Keown,
2019).
 This is typically the estimated usable life of a non-current asset to also be acquired for
many years.
 This ensures that future cost and benefit forecasts call for long-term forecasting.
In addition, there are some advantages and disadvantages of internal rate of return technique.
These are as follow:
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Advantages:
 First and most essential factor is that the IRR takes the time value of money into account
when assessing a project. This is a major reduction in the ARR, the average rate of return
and the payback period. The IRR can be calculated by measuring the interest rate over
which the PV of cash flows is equivalent to the capital expenditure required.
 The most appealing thing about this approach which is very easy to interpret because
after IRR has been measured. Unless the IRR exceeds the value of money, approve the
project, or otherwise not. That's very easy to envision for administrators, that is why it is
best if they do not experience occasional unresolved circumstances, such as equally
exclusive programmes, etc.
Disadvantages:
 When evaluating a project using the IRR approach, it necessarily implies the
reinvestment of favourable cash flows for future to an IRR for the remaining time course
of the project (Lawler, 2018). If the proposal has a low IRR, reinvestment will be
assumed at a lower rate of return. If the other plan seems to have a very high IRR,
reinvestment will be assumed at a very high return.
 The disadvantage of the IRR is that, the method doesn't really take into account
significant aspects, such as life cycle of the project, potential costs or the scale of the
project. The IRR function correctly the cash flow of the project to the current costs of the
project, with the exception of those factors.
Question 3
(a). Calculate the following ratios
Gross profit margin:
Formula:
Gross profit margin = Gross profit / Revenue * 100
= 1313 / 3495 * 100
= 37.56%
Assets turnover ratio:
Formula:
Assets turnover ratio = Net Sales / Total assets
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= 3495 / 2898
= 1.20 times
Assets Turnover Ratio is higher than 1, and it is always fine. Since that, it means that the
business is generating enough revenue for itself.
Current ratio:
Formula:
Current ratio = Current assets / Current liabilities
= 1687 / 744
= 2.26 times
Acid test ratio:
Formula:
Acid test ratio = Quick assets / Current liabilities
= 1537 / 744
= 2.06 times
Working Notes:
Quick assets = Current assets – Inventory
= 1687 – 150
= 1537
Inventories turnover period:
Formula:
Inventories turnover period = Cost of Goods Sold (COGS) / Average Inventory
= 2182 / 126
= 17.31
Working Notes:
Average inventory = (Opening stock + Closing stock) / 2
= (102 + 150) / 2
= 252 / 2
= 126
Debt to Equity ratio:
Formula:
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Debt to Equity ratio = Total liabilities / Total shareholder’s equity
= 914 / 2898
= 0.31
(b) Critically explain the importance of considering the audience for financial statement analysis
The analysis of the financial statements can be described as the process of taking the
situation and performance of a business by analysing the reported financial information, in
particular the quarterly and annual reports (Panizza, 2018). The analysis of the financial
statements is a quantitative measurements tool for evaluating the past, present and prospective
output of a business which is more significance for the audience or investors needed for analysis
and further make effective decision on their investing in a particular entity.
The most significant advantage in the review of the financial statements is that it gives
investors the opportunity to invest of choosing to spend their funds in a specific business.
Another benefit of the review of the financial statements is that government regulators such as
IASB will ensure that the company is in compliance with the relevant accounting standards. The
review of the financial statements is useful to the government authorities in the examination of
the taxes owed to the company.
If any individual is considering to investing money in the business, it only makes perfect
sense to really want to understand how much the business is doing as per a standardised litmus
test; not the metrics that a business has made to make itself look better (Rethel and Thurbon,
2020). That's where the value of the financial statements for investors comes into play. This also
refers to credit providers and banks that suggest lending money to a business. In such cases, they
would need to achieve an overall understanding of how probable people are to be paid in full so
that they can make investment appropriately. The importance of financial statement analysis and
reporting also extends to stakeholders. If they own equity in a business or are an institutional
investor with a large equity stake, it is important to provide complete transparency of all assets,
liabilities, use of capital, sales and related company costs. Users are still going to want to
recognize why the business does something they shouldn't have to do.
Question 4
(a) Explain the role of each of the following organisations
IFRS Foundation:
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 Developing a common set of high-quality, accessible, legally binding and internationally
agreed International Financial Reporting Standards (IFRSs) via its standard setting body
that is the IASB (Taghizadeh-Hesary and Yoshino, 2019).
 Encourage the use and thorough implementation of these criteria.
 Take into account the financial statement needs of developing markets and small and
medium-sized enterprises (SMEs).
 Promote and improve the establishment of IFRSs, which are guidelines and
interpretations provided by the IASB, thru the integration of national accounting
principles and IFRSs.
IFRS Advisory Council:
 The IFRS Advisory Council is the official independent advisory committee to the IASB
and to the Trustees of the IFRS Foundation. It includes a wide variety of members from
the groups concerned and involved in the implementation of a IASB.
 This included stakeholders, financial experts and other consumers of financial reports, as
well as auditors, researchers, accountants, regulators, specialist accounting firms and
standard-setters. The representatives of the Advisory Council shall be named by the
Trustees.
 The Advisory Council usually meets in London 3 times in a year for a total of two days.
 The Chairperson of the IASB, the Director of Technical Activities, the Director of
Research, the Director of Implementation Activities and the representatives of the IASB
and the staff responsible for the things on the agendas of the Advisory Council are
usually obliged to participate in the meetings (Tanzi, 2020).
International Accounting Standards Board (IASB):
 Role of its members (currently 16 full-time members) is to be responsible for the creation
and publishing of IFRSs, such as IFRSs for SMEs, as well as for the approval of IFRSs
Interpretations as established by the IFRS Interpretations Committee (formerly IFRIC).
All IASB discussions are scheduled in public and on the internet.
 In performing its standard setting roles, the IASB implements rigorous, open and
accessible fair trials wherein the publishing of advisory documents, such as consultation
papers and disclosure proposals, is an essential element of government comment.
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 The IASB works very closely with stakeholders across the globe, like investors, analysts,
policymakers, industry leaders, financial reporting-setters and the accounting firms.
IFRS Interpretations Committee:
 The IFRS Interpretations Committee is the interpretive body of IASB. The Interpretation
Committee consists of 14 voting individuals chosen by the Trustees and selected from a
range of international and experience levels.
 The role of the Interpretations Committee is to examine, on a periodic manner, significant
accounting issues arising in the sense of current IFRSs as well as provide corrective
actions (IFRICs) on these issues.
 The meetings of the Interpretation Committee shall be accessible to the public and shall
be webcast. In forming interpretations, the Interpretation Committee works very closely
with related national committees and implements a straightforward, rigorous and
accessible due process.
(b) Critically discuss the role of audit committees in corporate governance
The audit committees must have at least one person on the panel who is deemed to be a
financial expert. It is not mandatory for all the committee members to be professionally experts,
but they'll be persons who are informed about financial difficulties or who have a good
knowledge of accounting standards and the terminology and concepts of accounting and audit.
Top management and external auditor (independent auditors) play a significant role to play in the
financial reporting system. Manager will be responsible for analysing financial reports and for
developing security processes on financial statements.
Management also needs to maintain internal processes to ensure that business audit
process is correct to efficient (Tseng and et.al., 2018). It is the duty of the independent
investigator to give an opinion on the effectiveness of the financial reports such as financial
condition of the company in terms of operating results and cash flow, and to help to ensure that
these matters comply with commonly financial accounting standards.
Before the external auditor starts its work, members of the committee may need to consider
how administration produces and reports on internal financial data. Internal records analysis
offers audit committees the ability to raise questions about the comprehensiveness, consistency
and punctuality of audit reports. Getting a good overview of the audit reports ensures that the
audit committee members are mindful of the possible effect of the financial reports. Both
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members of the audit committee should also be up-to - date on recent legislative and operational
developments and notifications.
CONCLUSION
From the above report it has been observed that finance or financial planning lies in its
ability to keep a company going smoothly without going bankrupt while also attracting long-
term investment funds. Financial ratios help the organizations to evaluate company’s profitability
and with the help of investment appraisal methods, managers able to select best investing options
which is more beneficial as well as profitable.
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REFERENCES
Books & Journals
Adams, D. W. and Hunter, R. E. eds., 2019. Informal finance in low-income countries.
Routledge.
Baker, B. D., 2018. Educational Inequality and School Finance: Why Money Matters for
America's Students. Harvard Education Press. 8 Story Street First Floor, Cambridge, MA
02138.
Booth, L., Cleary, W. S. and Rakita, I., 2020. Introduction to corporate finance. John Wiley &
Sons.
Brealey, R. A. and et.al., 2018. Principles of Corporate Finance, 12/e (Vol. 12). McGraw-Hill
Education.
Hofmann, E., Strewe, U. M. and Bosia, N., 2018. Introduction—Why to Pay Attention on
Blockchain-Driven Supply Chain Finance?. In Supply Chain Finance and Blockchain
Technology (pp. 1-6). Springer, Cham.
Keown, A. J., 2019. Personal finance. Pearson.
Lawler, G. F., 2018. Introduction to stochastic processes. CRC Press.
Panizza, U., 2018. Nonlinearities in the Relationship between Finance and Growth. Comparative
Economic Studies, 60(1), pp.44-53.
Rethel, L. and Thurbon, E., 2020. Introduction: finance, development and the state in East
Asia. New political economy, 25(3), pp.315-319.
Taghizadeh-Hesary, F. and Yoshino, N., 2019. The way to induce private participation in green
finance and investment. Finance Research Letters, 31, pp.98-103.
Tanzi, V., 2020. Advanced Introduction to Public Finance. Edward Elgar Publishing.
Tseng, M. L. and et.al., 2018. Decision-making model for sustainable supply chain finance under
uncertainties. International Journal of Production Economics, 205, pp.30-36.
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