Introduction to Accounting and Finance with Solved Assignments

This report provides an introduction to accounting and finance, with solved assignments and essays. It covers topics such as income statements, balance sheets, breakeven points, investment appraisals, and more. The report includes case studies for Racca Limited, Stockstone Limited, and Rockham PLC, with calculations and recommendations. Course codes and college/university are mentioned where applicable.

Introduction to
accounting and
finance

Contents
INTRODUCTION...........................................................................................................................3
PART A: Racca Limited..................................................................................................................3
a) Prepare Income statement for the year ended on 31st December 2021....................................3
b) Prepare Balance Sheet for the year ended on 31st December 2021.........................................4
PART B – STOCKSTONE LIMITED............................................................................................5
a) Find out the contribution of each electric kettle which could be used for fixed cost if the
sales price is £13..........................................................................................................................5
b) Compute the breakeven point and margin of safety if the electric kettle will be sold for £13.
.....................................................................................................................................................5
c) Compute the profit for Stockstone Ltd. If the production and selling is 48000 units of kettle
at the rate of £ 13 per Kettle........................................................................................................6
d) Analyse whether the strategy of Stockstone Ltd is good or not..............................................6
e) Identify and explain the underpinning assumptions attached to the break-even model
including analysing whether the model can successfully be utilised by a range of differing
businesses....................................................................................................................................7
PART C: ROCKHAM PLC.............................................................................................................7
a) Compute the Payback Period, NPV, ARR of the machinery with the recommendations as to
whether the company should buy the machine or not.................................................................7
b) Give a report of the pros and cons of different types of investment appraisal techniques......9
c) Give a prepare which identifies the benefits and limitations of using budget as a strategic
planning tool..............................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Accounting and Finance is a term which is involves the daily operating activities of a
business entity. These terms emphasise of the financial performance and productivity of the
company (Angel, Menéndez-Plans, and Orgaz-Guerrero, 2018). The accompanying report is
divided into three sections. In the first Section, Racca Limited is an organisation of which the
income statement and statement of financial position will be prepared at the end of 31st
December, 2021. In the Section two, the business organisation Stockstone Ltd is taken of which
the break – even point, contribution is computed. Also, certain assumptions are discussed on the
basis of the breakeven model. In section three, various investment appraisal techniques are
computed and on the basis of this certain recommendations will be given to the business entity at
the end of the report.
PART A: Racca Limited
a) Prepare Income statement for the year ended on 31st December 2021.
A financial statement which represents the incomes earned and expenses made during a
financial year in an organisation is termed as income statement. It is one of the important or core
financial statement of the company. It provides information or summary of financial
performance of an entity over a period of time. It is also known as Profit and Loss Statement. It
comprises of revenue, expenses, gains and losses arising from the sale of an asset. Management,
stakeholders and investors use it to determine the performance and future expectation or
anticipation of an entity. Gross margin ratio, operating margin ratio, interest coverage ratios are
used in income statement to analyse the performance of the organisation (Prescott, and Vann,
2018).
The income statement, along with balance sheet and cash flow statement, helps the
investors, shareholders and the management of the company to interpret the financial results of
the entity.
Income Statement of Racca Limited
For the period of Jan. 2021- Dec. 2021
Particular Amount
Revenue from operations 633000
Total Revenue (A) 633000

Less:-
Purchase 525000
Changes in the Inventory -228000
Bad debts 1500
Van running expense 33600
Electricity Expense 7725
Rent, Rates and Taxes 95775
Depreciation and amortization 9600
Employee benefit expense 119175
Total Expenses (B) 564375
Net income 68625
b) Prepare Balance Sheet for the year ended on 31st December 2021.
In the accounting term balance sheet is a summarized statement showing all the closing
balances of assets, liabilities and shareholder equity. In the financial accounting system there are
3 final statement which are to be made based on the recording, posting and transferring in the
journal, ledger and trial balance respectively. It is considered as the core financial statement of
the company's account, it is mandatory for every business entity made every year on the closing
date of the accounts. balance sheet enables to see the company's position at a glance. Balance
sheet is made based on the equation where assets side matches to the liability side of the balance
sheet (Chen, Tan, and Fang, 2018). Balance sheet is used for analysis because ratios are
calculated based on the balances available in it.
Balance Sheet Of the Racca Limited
As on 31st Dec 2021
Particulars Amount
Non- Current Assets
Property, Plant and Equity
Van 50400
Current Assets
Inventories 228000
Financial Assets
Trade Receivables 64500
Cash and Cash Equivalent -20700

Other Current Assets
Advance Tax 1125
Prepaid Rent 22500
Total Assets 345825
Equity and Liabilities
Share capital 248625
Current Liabilities
Trade Payables 93000
other Current Liabilities
Outstanding wages 2175
Outstanding Electricity Bill 2025 4200
Total Equity and Liabilities 345825
PART B – STOCKSTONE LIMITED
a) Find out the contribution of each electric kettle which could be used for fixed cost if the sales
price is £13.
Contribution is an amount left after subtracting direct cost from the sales price.
Contribution = Sales price – Variable cost
Particulars Amount
Electric kettle price 13
Variable cost ( material + labour) -8.2
Contribution 4.2
b) Compute the breakeven point and margin of safety if the electric kettle will be sold for £13.
Break-even point is a situation where the firm is not in profit nor in loss, a state where cost
and revenue is same. Margin of safety is amount of sales above break even (Cosci, Guida, and
Meliciani, 2020).
Breakeven point = fixed cost / contribution
= 106600 / 4.2

(in units) = 25380 units
(in value) = £ 329940
Here, fixed cost = Production + selling cost
= 59000+47600
= 106600
Margin of safety (MOS) = sales – breakeven point
By taking 53000 units as total sales: Sales value = 53000*13
= 689000
Margin of safety = 689000-329940
(in value) = 359060
(in units) = 27620
c) Compute the profit for Stockstone Ltd. If the production and selling is 48000 units of kettle at
the rate of £ 13 per Kettle.
Sales = 48000 * 13 = 624000
Less: Contribution = 48000 * 4.2 = 201600
Less: fixed cost = 106600
Profit = 95000
d) Analyse whether the strategy of Stockstone Ltd is good or not.
New selling price = 14.17 (13+ 9%)
Sales units = 62010 (53000+ 17%)
Sales @ 14.17 = 878682
Less: Variable cost @ 8.2 = 508482
Contribution = 370200
Less: Fixed cost = 106600
= 263600
Less: variable overhead
(62010*1.85) = 114718.5 = 148881.5
Less: selling expenses = 45000
Net profit = 103881.5

e) Identify and explain the underpinning assumptions attached to the break-even model including
analysing whether the model can successfully be utilised by a range of differing
businesses.
 The total cost is classified into two variable and fixed there is no scope for semi variable
cost. In this case electric kettle production does not have any semi variable cost (Grossi,
Ho, and Joyce, 2020).
 For calculating the BEP do not change the price of the product. while calculating
produced and sales unit are taken equal. In the situation we took 53000 units as sales,
given 53000 produced.
 The fixed cost remains the same with respect to the volume when we calculate
consideration.
 The variable cost rate remains constant. In the overall situation the variable cost remained
same.
PART C: ROCKHAM PLC
a) Compute the Payback Period, NPV, ARR of the machinery with the recommendations as to
whether the company should buy the machine or not.
Payback period: It can be understood as the total time required to recover the initial cash
outflow. In context of a company, total time period required by the company to recover its initial
cost outlay. It will be beneficial for the enterprise if the payback period is least (Nawn, and
Banerjee, 2019).
Payback Period: Initial capital investment / Total cash inflow
In case of the Rockham Plc, the Payback period is calculated as under:
= 66241263 / 17,000,000
= 3.8965449171 or 3.90 years
Accounting Rate of Return: It is also known as Average Rate of Return. It helps to calculate the
return generated from the net income of the proposed investment. It does not take into account
the time value of money.

Accounting rate of return= Average annual net income / Average Investment
In case of the Rockham Plc, the ARR is calculated as under:
= 17,000,000 / 22,500,000 * 100
= 75.55555556 or 75.56%
Net Present Value: This method is a discounted cash flow method which takes into account the
time value of money. It helps the management while making various decisions regarding capital
investment. In this method the enterprise has to calculate present value of the cash inflow and the
cash outflow and the different between these two is Net Present Value (Rampini, Viswanathan,
and Vuillemey, 2021). If it turns out positive, then the enterprise should consider the capital
investment otherwise the project required to reconsider.
Net Present Value = Present value of the cash inflow- present value of the cash outflow
In case of the Rockham Plc, the NPV is calculated as under:
year
cash
outflow
cash
inflow
PVfactor @
7%
net cash
outflow
net cash
outflow
1 40000000 17000000 1 40000000 40000000
1 6400000 17000000 0.934579439 5981308.4 15887850.5
2 6400000 17000000 0.873438728 5590007.9 14848458.4
3 6400000 17000000 0.816297877 5224306.4 13877063.9
4 6400000 17000000 0.762895212 4882529.4 12969218.6
5 6400000 5000000 0.712986179 4563111.5 3564930.9
Present Value 66241263.6 101147522.3
NPV = £101147522.30 - £66241263.60
= £34906258.70
Recommendations: Rockham Plc should make the investment as it will be beneficial for the
company to enhance its capabilities and provide quality services to the customers.
Reasons for our recommendations:
 The Payback period of this project shows that all of its initial cost will be recovered in
almost 4 years which is less than life of the asset that is 5 years in the given case.
 The ARR of this Project is 75.56% which shows that by considering this capital
investment Rockham Plc will be able to earn 75.56% more net income which will
increase its profitability.
 The NPV of this Project is Positive by £34906258.70 which shows that company will
earn more after incurring all the costs.

By considering all the above stated reasons, we advise that Rockham Plc should buy the
machine.
b) Give a report of the pros and cons of different types of investment appraisal techniques.
Investment appraisal techniques can also be termed as capital budgeting techniques. Capital
budgeting helps an organisation to decide whether an investment can offer the expected returns
in the long term or not. Also, it helps a company to choose the best project when it faces choice
between two or more products (hen, Urquhart, and Wang, 2020). These techniques are termed as
payback period, internal rate of return, net present value, accounting rate of return, net present
value, accounting rate of return and profitability index. They are the main core reasons to
appraise the performance for project.
Payback period: It is one of the simplest investment appraisal techniques. The payback
techniques states that how long it takes to generate sufficient cash flow from the project to cover
the project's initial cost.
Advantages Disadvantages
Easy to calculate and to understand - it
gives an immediate view on how long it will
take to recover the investment.
There is no consideration of time value of
money.
Useful - It helps to identify that how quickly
the cash flow of an organisation in the
company might become positive.
It ignores the fact that some of the projects with
longer payback has greater level of return (Ucar,
2019).
Less uncertainty/risk – the faster the money
is recovered the less it will be risky.
Ignores all the cash flow after the payback
period.
Accounting Rate of Return (ARR): It is an accounting techniques which is used to measure the
profit expected from an investment. It states or represents the net accounting profit arising from
the investment in the form of percentage of the capital investment. It is also known as ROI or
return on investment.
Advantages Disadvantages

It is easy to calculate and understand. Fails to consider the timing of cash flows.
Takes account of profits earned over the entire
life of the project.
Takes no consideration of the time value of
money (Uddin, and et.al., 2019).
Popular with some businesses because of its
simplicity.
Net present value: It is the most famous method of investment appraisal. It is the sum of
discounted future cash inflows and cash outflows of the project. This method mainly focuses on
the time value of money and also maximises the shareholder’s wealth in the company. Generally,
the (WACC) which stands for the weighted average cost of capital which is the discounting
factor for future cash flows in the net present value method.
Advantages Disadvantages
Takes into account the time value of money. Fails to consider the timings of cash flow.
Helps to determine profitability of projects
using
Interest may adversely change (Yang, Wang,
and Ren, 2019).
Internal Rate of Return: An internal rate of return is the discounting rate which represents the
discounted future cash flow with the initial investment. In other words, it is the discounting rate
at which the company will neither make a profit nor loss. It can also be termed as marginal
efficiency of capital. It can be measured by the trail or error method. It can also term or state that
IRR is the rate at which the NPV of the project will be zero.
Advantages Disadvantages
Simple to understand because it is expressed as
a percentage.
Fails to consider the risk and uncertainty
factors involved in a project.
Takes into account the time value of money
(Chahed, 2021).
The concept is difficult for some people to
understand.

c) Give a prepare which identifies the benefits and limitations of using budget as a strategic
planning tool.
Budgeting refers to an estimation of revenue and expenses over a specified period of time
and is re-examined on a regular basis. It is simply levelling expenses with income.
Advantages of Budgeting:
 Budgeting plays an important role in making effective use of resources and achieving
business goals. It provides a well organised and regimented approach to solve problems
in the firm, helps in decentralising the responsibilities without losing control. It also
discloses the weaknesses and incompetence in the organisation which can be corrected in
a prompt manner (Coram, and Wang, 2021).
 It compels and motivates the administration to make a timely analysis of its
complications. And makes them more aware before decisions are made. It provides a tool
through which policies are timely evaluated, tested and set as guidelines for future
working of the organisation.
 It provides help in the significant coordination of inter departmental employees. It
inspirits healthy competition, provides motive to work efficiently and gives a purpose to
every individual which leads to soaring output and employee productivity. It provides a
basis for measuring the performance of individual departments after which they can
examine and take appropriate measures to rectify them. It makes the organisation cost
conscious which helps in attaining desired efficiency and an environment of profit
mindedness is formed.
 Establishing a budget will help in pricing of the products and services. When all the
expenses are already estimated and recorded, one can have an average estimate of how
much to earn to at least reach the break-even point. It helps in making capital and other
resources as profitable as possible. Growth is the goal of every enterprise, in order to
have growth, the company needs to employ more individuals and bring in new and
improved technology & resources. So, if the company has a budget prepared, it will know
the right time to investment (Guragai, and Hutchison, 2020). Budgeting if done properly
in every organisation will help the national economy by having employment stability,
efficient use of resources and reduction in waste production.
Limitations of Budgeting:

 Since there are number of ways to prepare a budget, it would need to test methods in
order to find the right budget process which works for your company. It makes budgeting
a time consuming process. The budget process takes time, you cannot expect a lot from a
budget, if the goals are not achieved, the budget is blamed. A streamlined budget requires
attention to details, the objectives and the essentials of a budget. Over spending time on
budget results in resisting of the system by the lower level management which can
provide inaccurate estimates and fail to take advantage of the environment, it would
result in deviating from the plans, making it a droopy budget.
 Planning, Budgeting or forecasting is not an exact science, hence it can never be accurate
enough, it is just an estimate while the future cannot have predicted. Even though the top
management have the right proficiency in preparing a budget, they might not know the
regular needs and wants of the lower level employees. This will lead to flawed budgeting
(Merika, Negkakis and Penikas, 2021).
 After a budget is made, all the department are allotted the amount they can spend, the
employees might feel repressed. When one department is allotted a higher amount, other
departments might feel demotivated and question themselves regarding the position of
their department in the organisation. At the end of the period, if the employees see that
the expense allotted has not been fully utilized, temptation to spend more will arise till
the budget expense is exhausted which will result in sub optimal profits for the
organisation. The success depends on the cooperation and motivation of all the
employees in a firm including the top management. Budget will fail if the top
management misses to achieve the budget mark.
CONCLUSION
The report prepared as above helps to reach to a conclusion that the company is able to
assess what has been growth rate, inflation rate and unemployment of a company. It helps to
have a better understanding of what can be done, where the business is lacking and lagging
behind. The report would be helpful in serving as a proof in the eye of law and keeping future
course of action in mind and how the company can overcome hurdles as well as obstacles in the
stated time period. It would also help to provide guidance what can be done and how can it be
done.

REFERENCES
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