Introduction to Accounting and Finance

This document provides an introduction to the concepts of accounting and finance. It covers topics such as income statements, balance sheets, and investment appraisal techniques. The document also includes solved assignments and study material for further learning.

Introduction to Accounting and Finance

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Part A – Collins Colman Limited....................................................................................................1
a. Income statement.....................................................................................................................1
b. Balance sheet...........................................................................................................................2
Part B – Parks mead Limited...........................................................................................................3
a. Calculate the contribution of each microwave.........................................................................3
b. Calculate the break-even point and margin of safety..............................................................4
c. Calculate the profit of Parks mead Limited.............................................................................5
d. Selling price increased by 8% and quantity 15%....................................................................5
e. Explain the underpinning assumptions attached to the break-even model..............................6
Part C – Skipsey Clifford Plc...........................................................................................................6
a. By using investment appraisal technique, calculate several aspect and recommend that
company should purchase this machinery or not.........................................................................6
b. Explain and analyse the key merits or demerits of different investment appraisal technique.9
c. Explain the key benefits or limitations of using budgeting as a tool for strategic planning..11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Accounting is a method of tracking and documenting a firm's financial transactions. Finance
is the concept behind a company's asset control. Financial accounting, cost accounting, expense
control, tax planning etc. is the branches of accounting (Aiken, Lu and Ji, 2013). The distinction
among accounting and finance is that accounting deals on the daily basis movement of funds
inside and beyond a company or entity, while finance is a wider concept for wealth and liabilities
strategy and innovation successful marketing. Investors will use financial reports to gain useful
knowledge that has been used in businesses' assessment and debt research. Accounting
information allows analysts to assess the worth of an asset, identify the financing streams of a
company, measure performance, and quantify risks inherent in a balance sheet of a company.
This report based on several concepts of accounting and finance, this assessment classify in
three parts. First part is based on the preparation of income statement or balance sheet of Collins
Colman Ltd, another one is about calculating breakeven point or margin or safety of Parksmead
Limited Company. In addition, last part of this report based on the assessment of investment
appraisal techniques which helps the Skipsey Plc to identify whether they purchase new
machinery or not.
MAIN BODY
Part A – Collins Colman Limited
a. Income statement
This is also defined as the declaration of benefit and loss or the declaration of profits and
cost, the statement of income generally reflects on the sales and expenditures of the company
over a given period (Ainsworth and Deines, 2019). Below mention income statement provide
better understanding.
Income statement for the year ended
Particulars Details Amount
Sales revenues £759600
Less: cost of sale -£356400
£403200
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Less operating expenses
Rent paid £135000
taxation £8280
Depreciation on delivery Van £11000
Wages £143010
Electricity bills £9270
van running expenses £40320
Bed debt expenses £1800 -£348680
Profit for the year £54520
Working Notes:
Sales Revenue = £604800 + £154800 = £759600
Cost of Goods Sold = 291600 + 64800 = £356400
Gross profit = Sales revenue - COGS
= £759600 - £356400 = £403200
Wages = 140400+2610 = £143010
Electricity = 6840+2430 = £9270
Depreciation on Van = Cost – Resale Value/ life
= £72000 - £6000/6 = £11000
Cash account:
Particulars Amount Particulars Amount
To cash from equity £216000 By rent paid £135000
Cash sales £154800 Tax £8280
Received form debtors £525600 wages £140400
Electricity £6840
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Inventory £46800
Payment to trade payables £471600
Van running expenses £40320
closing cash balance £47160
£896400 £896400
b. Balance sheet
This financial report shows company's financial performance that contains at a certain
particular moment in time liabilities, assets, equity capital, net debt etc. To represent the true
image of the balance sheet, list of asset and liabilities mentioned in this report. Further internal or
external parties use this reports to make effective decisions.
Liabilities Amount Assets Amount
Equity £216000 Delivery van £61000
Profit £54520 Cash at bank £47160
Outstanding wages £2610 Prepaid rent £27000
Outstanding bills £2430 Advance tax £1350
Trade payables £111600 Trade receivables £77400
Closing inventory £173250
Total liabilities £387160 Total assets £387160
Part B – Parks mead Limited
a. Calculate the contribution of each microwave
Particulars Details Amount
Selling price £40.00
Less: variable cost
Material £15.75
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Labour £8.85
Variable overhead £5.55 -£30.15
Contribution per unit £9.85
Sales £2400000
Less: Variable cost
Material £945000
Labour £531000
Variable overhead £333000 -£1809000
Contribution per unit £591000
Working notes:
Materials 15.75
Labour 8.85
Variable overheads 5.55
Total variable cost per unit 30.15
b. Calculate the break-even point and margin of safety
Break Even Point: The breakeven point is determined in accounting by calculating the
fixed manufacturing costs by price per item and minus the variable costs (Chiang, Nouri and
Samanta, 2014). The breakeven seems to be the output price during which the manufacturing
costs are equal to the sales for a commodity. Further calculation mentioned below:
Particulars Formula Calculation Amount
Fixed cost Production fixed +
selling fixed cost 177000+142800 319800
Contribution per unit 9.85
BEP (in units) Fixed cost / contribution
per unit 319800/9.85 32467.00508
BEP (in £) Fixed cost / contribution 319800/24.62 1298943.948
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margin
Working Notes:
Fixed cost = Production fixed + selling fixed cost
= 177000+142800 = 319800
BEP (In Units) = Fixed cost / contribution per unit
= 319800/9.85 = 32467.00508
BEP (in Value) = Fixed cost / contribution margin =
= 319800/24.62 = 1298943.948
Margin of Safety: In accounting, the safety margin is determined by deducting the total
of the break-even point from real or budgeted revenue and then separating by revenue; the
outcome is measured as a proportion. Further calculations are as follow:
Particulars Formula Units/amount
Actual sales 2400000
BEP sales 1298944
MOS (in £) Actual sales - BEP
sales 1101056
Working Notes:
Margin of Safety = Actual sales - BEP sales
= 2400000 – 1298944
= 1101056
c. Calculate the profit of Parks mead Limited
Particulars Formula Amount
Sales 60000*40 2400000
less: Variable cost 60000*30.15 1809000
Contribution 591000
less: Fixed cost 177000+142800 319800
Profit 271200
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d. Selling price increased by 8% and quantity 15%
Particulars Formula Amount
Sales 69000*43.2 2980800
less: variable cost 69000*30.15 2080350
contribution Sales – variable cost 900450
less: fixed cost 454800
Profits 445650
Working notes:
Particulars Increase 8% in selling price
Sales price 40
% increase 3.2
New sales 43.2
Particulars Increase in sales by 15 %
Old sales £60,000
% increase £9,000
New sales £69,000
e. Explain the underpinning assumptions attached to the break-even model
Assessment of break-even is vitally important when assessing the utility of value variables.
It depends heavily on various factors such as output quantity, quality, and benefit (Fischer-
Pauzenberger and Schwaiger, 2017). This is supposed to clarify the difficult connection among
total annual investment and productivity. For break-even analysis listed below, a number of
concerns have arisen:
 It is important to define fixed as well as variable costs benefit of the entire, where all
semi-variable effects are overlooked.
 Linear price and benefit feature stay, and the cost of manufacturing are assumed to
remain stable.
 Research break-even implies steady rate of maximization of variable cost.
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 This anticipates continuous development and not indispensable for enhancing labour
performance.
 The price of the good in this system is believed to be fixed.
 Changes in commodity prices or fluctuations are left out.
Part C – Skipsey Clifford Plc.
a. By using investment appraisal technique, calculate several aspect and recommend that
company should purchase this machinery or not
Payback period:
Initial investment = £ 8000,000
Life of Machinery = 5 years
Year Net cash flow Cash Flow
0 year -8000,000
1 year £2,120,000 £2,120,000
2 year £2,120,000 £4,240,000
3 year £2,120,000 £6,360,000
4 year £2,120,000 £8,480,000
5 year £3,120,000 £11,600,000
3 +
0.773584906
Payback period 3.77 years
As per above calculation, it has been analysed that recovery period of Skipsey Clifford
Plc’s investment will be 3.77 years and life of machinery is 5 years (Gao, 2013). It will be
recommended that company should purchase new machinery that is beneficial for them or helps
in maximising productivity as well as profitability.
Accounting Rate of Return (ARR):
Formula:
ARR = Average income / Average investment * 100
Year Earnings After Tax (EAT)
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1 720000
2 720000
3 720000
4 720000
5 1720000
Average income 920000
Cost 8000000
Scrap value 1000000
Average investment 8500000
ARR 10.82 %
On the basis of above calculation of Accounting Rate of Return, the average return yield
of Skipsey Clifford Plc. is 10.82 %. This ensures that they can receive returns which are
beneficial for organizations at an annual average of 10.82 per cent.
Working Notes:
Calculation of depreciation:
Particulars Amount (in £)
Cost 8000000
Scrap Value 1000000
Expected useful life 5
Depreciation 14,00,000
Net cash inflow:
Year Cash
inflow
Cash
outflow Depreciation
EBIT (Inflow -
(outflow -
depreciation)
Add:
depreciation
Net cash
flow
1 3400000 1280000 1400000 720000 14,00,000 21,20,000
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2 3400000 1280000 1400000 720000 14,00,000 21,20,000
3 3400000 1280000 1400000 720000 14,00,000 21,20,000
4 3400000 1280000 1400000 720000 14,00,000 21,20,000
5 3400000 1280000 1400000 720000 14,00,000 21,20,000
Total cash inflow of machine 1000000
Net Present Value (NPV):
Year Net cash
flow
PV factor
@ 9%
Discounted
cash flow
1 2120000 0.917431193 1944954.128
2 2120000 0.841679993 1784361.586
3 2120000 0.77218348 1637028.978
4 2120000 0.708425211 1501861.447
5 3120000 0.649931386 2027785.925
Total discounted cash flow 8895992.065
Less: initial investment 8000000
Net Present value 895992.0646
The NPV of the above calculation for new machinery is 8,95,992.06 pounds which means
their project is successful and organization should invest because of successful result of NPV
shows the organization would benefit from the project (Hyndman, 2018).
From the overall analysis, it has been analysed that Skipsey Clifford Plc should purchase
this machinery and as per the investment appraisal techniques, company can recover their initial
investment within 3.77 years and average return should be 10.82%. In addition, NPV is position
which means this project is beneficial as well as profitable for the organization or helps in
achieving business goals & objectives.
b. Explain and analyse the key merits or demerits of different investment appraisal technique
Introduction
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Investment appraisal techniques include several methods which help the manager to make
strategic decisions such as payback period, IRR, NPV, ARR etc. It helps in evaluating
profitability of the particular project. This part consist merits or demerits of different investment
appraisal techniques.
Payback period: This method determined that how many years it requires to recoup the
original investment. The method is to develop out the original investment and split by annual
cash balance. Lower the payback period is accepted and higher one rejected because
organizations wants to recover their initial investment as soon as possible. Followings are the
merits and demerits of this approach:
 Merits: The payback method's greatest single benefit is its ease. Comparing many
projects and only choosing something that has fastest payback period is a simple way to
do so (Leauby and Wentzel, 2012). It helps the manager to make quick decisions on the
basis of low recovery period. In addition, by using this investment appraisal techniques
organization able to minimise the risk of losses.
 Demerits: The far more serious drawback of this method is that, it does not accept the
time value of money. Investment returns obtained throughout a proposal's early days get
a larger weight just like cash flows earned in final decades. Two tasks might have
similar payback period, but one proposal in the early days has the most cash flow, while
another proposal has higher revenues in the later life. The payback period method in this
case will not provide a thorough description about which proposal to choose.
Accounting Rate of Return (ARR): It is one of the effective methods of capital budgeting
which are used for evaluating different options of investment. Overall findings helps the
managers to make their decisions whether to invest or not in the particular project. It is a
calculation that represents the estimated profit margin of return on initial investment, or asset,
relative to the value of the original investment. The ARR equation splits the total profit of an
asset by the original cost of the business in order to calculate the amount or profit one would
assume over the lifespan of the asset or associated project. There are some merits or demerits
which are discussed below:
 Merits: This approach aims to equate a proposed project with those of cost-effective
programs, and with profitable projects. The payback time is easier to comprehend, and
quantify. This takes into account the gains or the gains that exist over the entire financial
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duration of the project duration (Power, 2012). This approach provides a net earnings view
that is, following taxable income and depreciation. Always has a strong view of
competitiveness.
 Demerits: The approach is known to disregard the time element when determining an
appropriate use of funds and therefore not to take in account the environmental forces which
hinder a proposal's profit earning potential. If the return on investment (ROI) and accounting
rate of return (ARR) are measured independently, individuals will take place at different
conclusions. The system doesn't consider the lifespan of many assets. Yet when measuring
the annual profit, account is taken of the lifespan of the investments. The approach bypasses
the time the funds take to gain money.
Net Present Value (NPV): This is another approach of investment appraisal techniques
which help the managers to make effective decisions before selecting any profitable project. If
the overall value of project's cash flows produced by a company can outweigh the expense of
implementing the specific project. It will literally inform them whether there is a positive or a
negative view for the idea. This is, whether to pursue the idea or not. If NPV is positive is
positive or higher value in comparison to other one will be selected and lower or negative one
should be rejected. Further discussion based on the below mentioned merits or demerits.
 Merits: NPV carries out an indisputable indicator. It predicts wealth formation in current
money from future investment, provided the rate of discount imposed. The NPV provides
the scale of the project. This works to equate marginal investments in logging to massive
international projects or investments. NPV is calculable easily. NPV uses capital
balances instead of net profit (which contains non-financial things like maintenance
costs). This understands cash’s time worth (with exception of cash-on - cash gains or
pure payback). This is fundamentally and completely fitting for projects, which aim to be
gain profit in long-term.
 Demerits: Organizations need to pick a discount rate because NPV claims the rate of
discount from over lifetime of transaction or initiative will be the same (Shah, 2013).
Discount rates, including interest rates which can vary year by year. Consider level of
capitalisation in industrial properties. Shift in the costs of investment and vary
throughout stakeholders. NPV believes they can calculate and forecast investment returns
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correctly. While the time machine can prove to be infallible, mine has sometimes showed
cracks. To others it is a term that is instinctively difficult to comprehend.
Conclusion
It has been concluded that, there are several method of investment appraisal which are used
by the managers or organizations to evaluate project profitability. Also ensure that investment
will be beneficial or not.
c. Explain the key benefits or limitations of using budgeting as a tool for strategic planning
Introduction
A budget is an important strategic approach to meet a company's monetary and
organizational goals. A budget utilized properly will help the managers to formulate financial
strategy for the organization. When in operation, it is a critical test to assess how effective the
management practices are maintaining targets are met. Budgeting used as a strategic tool for
operational planning which helps in maximising production and profitability. This section covers
the benefits or limitations of budgeting tool and other type of budgeting.
Budgeting: It is a method of measuring actual outcomes with expectations and changing
output to meet financial and interest targets as appropriate. The company is effective in seeking
viable solutions through expense management and expenditures in the context of financial
forecasting and system requirements. There are some benefits and drawbacks which are
discussed below:
 Benefits: Budgeting is largely focused on the administration of division wide operations,
which transforms into overall strategies in motion. Understand the money, sales, and events
necessary to execute the growth plan program next year (Smith and Urquhart, 2018).
Budgets optimize resource distribution, as all parameters are simple and logical.
 Limitations: They can be demoralized from the different workplaces since there is no
presence of workers in budgeting unit. When expenditures are raised unilaterally, workers
do not understand, and therefore do not obey the spending justification. A rigid budget
structure eliminates low level creativity and development, rendering it difficult for managers
to shift funds for new initiatives to other alternatives to raise total costs.
Rolling budget: Rotating budgeting technique is a form of financial management that
encourages expense adjustments to the business climate to meet the goals. The concept of roll-
out is also to include an investment and profit, a reasonable 12-month cycle. This also
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encourages leaders in a fast-changing corporate climate to remain focused on company priorities.
Some of merits or demerits are as follow:
 Benefits: The complex recruiting method allows administrators to make the required
changes to match the company's operating needs. Different variants can consider changes in
rotational plans.
 Limitations: It is also very time consuming budget of money planning which requires
specialized expertise and expertise to contribute to more successful budget reforms. This
budgeting tool is not ideal for small enterprise.
Zero based budgeting: For each period this form of budget starts from zero and therefore
will decide the specific spending factor (Suratno, 2020). It is an important method that is created
by ensuring no costs have been accrued over the past year and all elements have a fixed base of
zero. A company may use this form of budget as it is necessary to plan budget for the specific
recently introduced operations. Its benefits and limitations are as follow:
 Benefits: Expenditure is structured and controlled to preserve the methodology of financial
implementation by way of this program for a long period of time. As well as assisting in the
accomplishment of strategic objectives in the absence of situations for the organization. It
helps an organization to keep an eye on any sub-unit that is spent which contributes to low,
insignificant costs.
 Limitations: The concept of producing zero-based budget is pretty difficult and time-
taking and costly. Once the ZBB is adopted, the management wants a sharp emphasis which
is not easy for all forms of organizations. This proposal is not very good and efficient for
long-term projects and even for plans.
Marketing & distribution budget: This is just another financial budget that estimates the
distribution process as well as the selling costs. Budgets for promotion or delivery
specially depend on the sales budget. In all this, spending will vary in duration with the projected
revenue. For such a type of budgeting, a firm's marketing department is responsible for
budgeting of distribution or marketing cost. Benefits and limitations are as follow:
 Benefits: Marketing budget supports a company by providing reliable information on the
expenditure of marketing strategies (Wilson, 2012). It helps reduce the advertising costs.
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 Limitations: The budget for promotion and delivery takes extra time and added expense for
a company and is the greatest downside. Because it is not beneficial for an organisation,
specific services are often required and often take the full time of the client.
Conclusion
On the basis of above discussion it has been analysed that, there are several budgeting
methods which helps the organization to follow one of them and done strategic planning to
achieve operational or financial goals & objectives.
CONCLUSION
From the overall analysis, it has been concluded that each part of this project defines
corporate goals and objectives. It clarifies feasible accounting information operations.
Implementation of accounting principles and definitions practically compels the financial
statements. Income Statement or financial Position shall be generated in accordance with the
rules and regulations clearly applicable. The part two explicitly explains the use of a break-even
model that provides an understanding of attaining through sales the requisite degree of
efficiency. Using portfolio analysis techniques explicitly guides the production of decisions with
a defined purpose.
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REFERENCES
Books & Journals
Aiken, M., Lu, W. and Ji, X. D., 2013. The new accounting standard in China. Perspectives on
Accounting and Finance in China (RLE Accounting). 8. p.159.
Ainsworth, P. and Deines, D., 2019. Introduction to accounting: An integrated approach. John
Wiley & Sons.
Chiang, B., Nouri, H. and Samanta, S., 2014. The effects of different teaching approaches in
introductory financial accounting. Accounting Education. 23(1). pp.42-53.
Fischer-Pauzenberger, C. and Schwaiger, W .S., 2017, November. The OntoREA© Accounting
and Finance model: ontological conceptualization of the accounting and finance domain.
In International Conference on Conceptual Modeling (pp. 506-519). Springer, Cham.
Gao, S., 2013. Accounting education and practice in China: perceived problems and solutions.
In Perspectives on Accounting and Finance in China (RLE Accounting) (pp. 311-330).
Routledge.
Hyndman, et.aI., 2018. Legitimating change in the public sector: the introduction of (rational?)
accounting practices in the United Kingdom, Italy and Austria. Public Management
Review. 20(9). pp.1374-1399.
Leauby, B. A. and Wentzel, K., 2012. Linking Management Accounting and Finance: Assessing
Student Perceptions. Strategic Finance. 93(11).
Power, M., 2012. Accounting and finance. In The Oxford Handbook of the Sociology of Finance.
Shah, P., 2013. Financial Accounting. OUP Catalogue.
Smith, S. J. and Urquhart, V., 2018. Accounting and finance in UK universities: Academic
labour, shortages and strategies. The British Accounting Review. 50(6). pp.588-601.
Suratno, S., 2020. Analysis of learning difficulties about “Introduction to Accounting and
Finance of worksheet material learning” A Case study of student at Financial Expertise
Class Program-SMK Negeri 1 Banjarmasin.
Wilson, R. M., 2012. Introduction: A Continuing Discussion on Journal Quality Rankings and
their Likely Impact on Accounting Education Scholarship in the UK. Accounting Educati
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