Introduction to Accounting and Finance - Analysis of Financial Statements, Cost of Capital, Capital Budgeting, Product Planning and Budgeting

This article provides an introduction to accounting and finance, covering topics such as analysis of financial statements, computation of cost of capital, evaluation of project using capital budgeting tools, and product planning and budgeting. The article includes tables and computations to support the analysis. References are also provided. The article is relevant for students studying accounting and finance courses in universities and colleges.

Running head: INTRODUCTION TO ACCOUNTING AND FINANCE
Introduction to Accounting and Finance
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Author’s Note:

1INTRODUCTION TO ACCOUNTING AND FINANCE
Table of Contents
Analysis of financial statements of Track Lock Stones Ltd:...........................................................2
Analysis of financial statements:.....................................................................................................4
Computation of cost of capital:........................................................................................................6
Evaluation of project using capital budgeting tools:.......................................................................7
Product planning and budgeting:.....................................................................................................8
Recommendation:............................................................................................................................9
References list:...............................................................................................................................11

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Analysis of financial statements of Track Lock Stones Ltd:

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Analysis of financial statements:
Profitability ratios have been evaluated by computing different ratios such as return in
equity, return on capital employed, operating profit margin and gross profit margin. Return on
equity employed is decreasing from 17% in year 2019 to 14.3% in year 2021. ROCE is
increasing to 10% in year 2020 compared to 9.8% in year 2019 and again to 9.8% in year 2021.
Operating profit margin is has reduced by fewer points from 11.2% in year 2019 to 10.6% in
year 2021.
Efficiency ratio is evaluated by computation of ratios such as sales revenue to capital
employed, inventory turnover period and average settlement period for account receivable and
for accounts payable. Inventory turnover period has reduced from 79.3 in year 2019 to 62.9 in
year 2021. Settlement period for accounts payable has reduced considerably as against accounts
receivable period that has increased in year 2021.

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Liquidity ratio is evaluated by computing current ratio and acid test ratio. Current ratio is
increasing from 3.48 in year 2019 to 4.76 in year 2021 indicating that ability of current assets to
meet short term obligations have reduced. Acid test ratio on other hand has increased from 2.23
in year 2019 to 3.31 in year 2021.
Looking at leverage ratio, gearing ratio has reduced considerably from 66.2% in year
2019 to 58% in year 2021 indicating that proportion of borrowed fund has reduced compared to
equity. Interest cover ratio on other hand has increased from 5.10 in year 2019 to 5.96 in year
2021 which is indicative of the fact that the ability of company to make interest payment has
increased.
Now, looking at investment ratios, there is decline dividend payout ratio to 51.1% in year
2021 compared to 55.3% in year 2019. This depicts that dividend payment has increased by
company. Dividend yield on other hand has reduced to 3.26% in year 2021 compared to 4.7% in
year 2019. Earnings per share have reduced from $ 0.18 in year 2019 and 2020 to $ 0.16 in year
2021. There has been significant increase in price earnings ratio from 10.0 in year 2019 to 13.5
in year 2021 respectively.

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Computation of cost of capital:
The weighted average cost of capital is computed at 11.6%.

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Evaluation of project using capital budgeting tools:
The above table shows the computation of net present value of project that takes into
account present value of cash flows, weighted average cost of capital and applicable rate of tax.
It can be seen that net present value of project stood at -66.30 which is a negative figure
indicating that project should be rejected.

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Product planning and budgeting:

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It is depicted from the above table that sales made is initially decreasing to 21000 in the
first three months compared to 35000 in the last months of year.
The above table presents the breakeven point that has come to 240 units.
Recommendation:
From the analysis of various financial statements presented above, it can be seen that
total amount of assets stood at $ 2828. It is required by business to further lower the weighted
average cost of capital for acquiring the funds at lower cost. The computed net present value is
indicating negative which is indicative of the fact that such project should be rejected. Looking at
the industry average, there is a need to improve the profitability position of company. However,

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efficiency in investment is more than industry average and therefore, there should be lower
dividend payment made to shareholders as this would also satisfy them.

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References list:
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson
Higher Education AU.
Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.