Financial Accounting and Investment Analysis

This assignment provides a comprehensive overview of financial accounting and investment analysis. It covers various techniques such as break-even analysis, payback period, and budgeting. The report includes a preparation of financial statements for Dexter Plc and discusses the importance of financial accounting in business decision-making. Additionally, it explores different investment appraisal methods, including the payback period of Sankrust Ltd and the average rate of machinery. The assignment also touches on the concept of beyond budgeting and its potential to improve business performance.

Introduction to accounting
and finance assessment

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A - DEXTER Plc..................................................................................................................1
PART B – PHILLY Ltd...................................................................................................................2
A. Calculation of Contribution per unit.......................................................................................2
B. Calculation of Break-even point and Margin of safety in units and revenue terms................2
C. Profit earns by company at 48000 shelves production at £13 per shelf..................................3
D. Commenting on new strategy adopted by Philly Ltd..............................................................3
E. Explaining viability of break-even model...............................................................................4
PART C – SANKRUST Ltd............................................................................................................6
A. Calculation of ARR, NPV and Payback period......................................................................6
B. Advantages and disadvantages of different investment appraisal techniques.........................1
C. The key benefits and limitations of using budgets as a toll for strategic planning.................3
CONCLUSION ...............................................................................................................................4
REFERENCES ...............................................................................................................................5

INTRODUCTION
Financial accounting is a process of tracking transactions of the company by making
financial statements, balance sheets, income statements and reports (Schroeder, Clark and
Cathey, 2019). The main purpose of this report is to disclose the and reflect the current position
and performance of organisation. Financial accounting is beneficial for company to forecast the
growth, revenue and expenditure of the company. Financial report is beneficial for both internal
and external stakeholder such as investors, creditors, suppliers, vendors, employees, customers
etc. Accounting and finance is one of the most vital element in every part of business. Company
should have sound and effective accounting policies so that daily business activities can be
performed smoothly. In the present report there are 3 companies named Dexter Plc, Philly Ltd
and Sankrust Ltd for which income statement, financial position, contribution, evaluation of
break-even model, pay back period, average rate of return and net present value are need to be
identified. Further report will also include merits and limitations of investment appraisal
techniques such as payback period, average rate of return, net present value and internal rate of
return and budgets as a tool for strategic planning.
PART A - DEXTER Plc
Statement of Income for the year ended 31st December 2018
Profit and loss account for the year ended 31 December 2018 for Dexter plc
Particulars Amount Total
Sales 633000
less: cost of sales 297000
gross profit 336000
less: Operating expenses:
rent 112500
wages 117000
depreciation 9600
van running expenses 33600
bad debts 1500
Electricity bill 5700 279900
Profit 56100
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Statement of Financial Position as at 31 December 2018
Balance sheet for the year ended 31 December 2018 for Dexter Plc
Particulars Amount Total
Liabilities
capital 180000
Add: profits 56100
Net capital 236100
trade payable 393000
Total liabilities 629100
Assets
Fixed assets
Van 60000
Less: depreciation 9600
50400
Current assets
Inventory 525000
Prepaid asset 525
cash -178800
bank 180000
closing stock 51975 578700
Total assets 629100
PART B – PHILLY Ltd
A. Calculation of Contribution per unit
Particulars Amount (in £)
Sales 910000
less Variable cost 703500
Contribution (in revenue) 206500
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less Fixed cost
Production 59000
Selling 47600 106600
Operating profit / EBIT 99900
Particulars Amount (in £)
Sales Price per
unit 13
Variable cost per
unit 10.05
Contribution per
unit 2.95
B. Calculation of Break-even point and Margin of safety in units and revenue terms
Break-even point -
Particulars Amount
Break even point (in
units)
Fixed cost 106600
Selling price – Variable
cost = Contribution 2.95
BEP (in units) 36136
Break even point (in
revenue)
Fixed cost 106600
PV ratio = 1 – (VC/ SP) 0.227
BEP (in revenue) 469763
Margin of safety -
Particulars Amount
3

Margin of safety (in units)
Number of units sold 53000
BEP (in units) 36136
MOS (in units) 16864
Margin of safety (in
revenue)
Total revenue 689000
BEP (in revenue) 469763
MOS (in revenue) 219237
C. Profit earns by company at 48000 shelves production at £13 per shelf
Particulars Amount (in £)
Sales 624000
less Variable cost 482400
Contribution 141600
less Fixed cost
Production 59000
Selling 47600 106600
Operating profit / EBIT 35000
D. Commenting on new strategy adopted by Philly Ltd.
Particulars Amount (in £)
Sales 878681.7
less Variable cost 623200.5
Contribution 255481.2
less Fixed cost
Production 59000
Marketing and advertising 45000
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Selling 47600 151600
Operating profit / EBIT 103881.2
Working notes:
 Increase in sales units
Particulars Amount
Sales units 53000
Increase by 17% 17.00%
New sales units 62010
 Increase in selling price
Particulars Amount (in £)
Selling Price 13
Increase by 17% 9.00%
New selling price 14.17
Assumptions made:
 Increase in sales unit by 17% i.e. from 53000 units to 62010 units. Also, it has resulted in increasing the amount of selling price from £13 to £14.17. This
increase in the amount of selling price is 9% as compared to previous selling price
amount.
Interpretation - From implementing new strategy and plan related to marketing and
advertising expenditure, Philly Ltd has been able to increase its profitability aspect along with
increase in the level of sales volume from 53000 units to 62010 units. Also, its overall profit
margin has increased from £99900 to £103881.2
E. Explaining viability of break-even model
Break even model is defined as a proces of making in depth analysis related to the
relationship in between the amount of variable cost, revenue and fixed cost. Break even model is
an important function used to determine the application of cost function. It is a financial tool
used to identify that at what pint or stage a company, product or services will generate profits. In
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simple words it is defines as a financial calculation to determine the number of product sold in
order to cover the cost of a product.With the help of break even analysis tool helps the company
in calculating margin of safety wherein the price of asset as well as revenue of firm use to falls or
can remain above the break even point as defined. This technique helps the production
management as well as accountants in making crucial business decisions (Hatch and et.al.,
2017). The amount of total variable and fixed cost are compared along with the revenue amount
so as to identify the margin or level of sales volume at which the operations of business is able to
make neither profit nor loss.
Assumption made in case of break-even analysis includes:
 The cost related to production, sells, manufacturing etc. can be bifurcated under the
categories of fixed and variable.
 Amount of fixed cost remain constant at each level of output whereas in case of the
variable cost fluctuation is there in direct proportion to output level.
 Amount incurred in form of price for inputs including wages, materials, rent etc. shall
remain same.
 No changes will be made in case of technological methods, techniques as well as related
to the efficiency aspects of both the men and machine resources of the business.
 Level of sales volume will be assumed as one of the most important factor which affects
cost structure of the company.
 Selling price will remain constant at each level of sales, it means that alteration in the
supply of a product will not change the selling price.
 Price will also remain constant towards the input section like rent, advertisement, wages
and materials.
Usefulness of Break-even model:
 It assists in identifying the amount of selling price which will yield profit.
 Aids in making proper forecasting and estimation related to the cost and profit amount
with the changes made in the sales volume.
 It supports the management of the company in determining the amount of cost and
revenue at different levels of sales output (Park and et.al., 2016).
 Further, with the help of break-even analysis tool, company can makes decision in more
effective and efficient manner. Also, it will help in making long term plans and strategies
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in line with business objectives for improving overall business performance and
profitability level.
Analysis of break even point:
It is beneficial for all range of business as it helps in measuring profits and loss at various
level of production, it assist in planing production of products which generates maximum
contribution towards fixed cost and profits. Break even is also beneficial for business to control
cost, it helps company in understanding the relation between output and profits which further
help in planing the financial structure of firm. It assist management of companies in decision
making at time of uncertainty.
PART C – SANKRUST Ltd
A. Calculation of ARR, NPV and Payback period.
Year Cash
inflow
Cash
outflows
Net cash
flows
Less:
dep.
EBT/
EAT
Add:
deprecia
tion
Salvage
value
Final
cash
inflow
1 1700000
0
6400000 1060000
0
7000000 3600000 7000000 1060000
0
2 1700000
0
6400000 1060000
0
7000000 3600000 7000000 1060000
0
3 1700000
0
6400000 1060000
0
7000000 3600000 7000000 1060000
0
4 1700000
0
6400000 1060000
0
7000000 3600000 7000000 1060000
0
5 1700000
0
6400000 1060000
0
7000000 3600000 7000000 5000000 1560000
0
CALCULATION OF NPV
Year Final cash inflow PV factor @ 7% Discounted cash
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inflows
1 10600000 0.94 9906542
2 10600000 0.87 9258451
3 10600000 0.82 8652757
4 10600000 0.76 8086689
5 15600000 0.71 11122584
Total discounted cash
inflows
47027024
Less: initial investment 40000000
NPV 7027023.72
Interpretation: The net present value of the company determines the value of the present
amount of cash in comparison with the future value it will generate at compound interest. NPV is
the variation of cash outflows and inflows for the particular set period. It helps in analysing the
profitability of the particular projected investment. In the present case the NPV of the company
is positive i.e., 7027023, which states that the company is going to generate higher revenues by
investing in that machine.
CALCULATION OF PAY BACK PERIOD
Year Final cash inflow Cumulative cash inflow
1 10600000 10600000
2 10600000 21200000
3 10600000 31800000
4 10600000 42400000
5 15600000 58000000
Initial Investment 40000000
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Payback period 3.8 (3 years and 8 months)
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Interpretation: Pay back period is referred to as the amount of time needed to recover the
initial cost of investment. It helps in determining the most profitable unit of the project. The
company will take 3.8 months to effective recover the cost of investment. It is recommended to
select this machinery because it helps in fast recovery of the initial money invested and will
generate higher profits (What is a Payback Period?, 2019).
Computation of ARR
Year Cash inflow
1 10600000
2 10600000
3 10600000
4 10600000
5 15600000
Average cash inflow 11600000
Average initial investment [(initial investment
+ scrap value) / 2]
22500000
ARR 51.56%

Interpretation: It is percentage return on the particular investment in contrast with the
initial investment. This does not take into consideration time value of money. It is referred to as
the net gain and net loss on a particular investment. A higher rate of return indicates that the
machine is going to generate higher revenues and profit for the future. The average rate of the
machinery is 51.56% which states that the machine is going to generate higher returns in the
future.
It has been recommended that, the Sankrust Ltd. Should purchase a new machinery
because the net present value of the company is positive and the average rate of return of the
company is high. This in turn helps in generating higher revenues in the future which leads to
high operational growth and standards. The pay back period of the company is less, which
indicates that the company is going to recover the initial investment amount within 3 years and 8
months. So, the company will invest in this machinery for higher generation of profit and
revenue.
B. Advantages and disadvantages of different investment appraisal techniques
Investment appraisal is accumulation of various techniques which aims at identifying the
attractiveness of a particular investment (Lane and Rosewall, 2015). The main objective of
investment appraisal is to evaluate viability of project, program or portfolio decision. There are
various investment appraisal techniques which are as follows:
Pay back period:
It is used to find out the time duration which is required to recover the initial investment
of cash in the project. In simple words it refers to the total time needed to earn the incurred cost
in the project through orderly cash flow. It is usually used in capital and financial budgeting.
Payback Period = Initial Outlay/Cash Inflows
Merits Limitations
 It is a simple and popular techniques in
large organisations in making small
decisions. It is a viable investment
option for company to make profits
further.
 It provides estimation on the basis of
short tern instead of long term (Harris,
 It does not consider time value of
money and ignores the cash inflow and
outflow which is one the the main
disadvantage.
 It ignores cash flow statements and
focus on short term investment.

2017).  It mainly focus on liquidity aspect
regardless to the profitability factor.
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Net present value:
It is the variance between the present value of cash inflows and outflows over a period of
time. It is used in investment planning and capital budgeting to analyse and evaluate profitability
of a project. Positive NPV shows that projected earnings exceeds the expected cost, it states that
investment is positive and will generate cash flows.
Merits Limitations
 It considers time value of money and
makes it more accurate.
 It uses cash flow in determining the
profitability of a project (Alkaraan,
2017).
 It does not consider time of cash flow.
 It is difficult in identifying appropriate
cost of capital.
Internal rate of return:
It is also used to forecast the profitability of investment, it is a discount rate which makes
the NPV of cash flows equal to Zero. The main aim of IRR is to compare investments and decide
whether a particular project is viable or not. IRR is the rate where Sankrust Ltd will neither have
loss nor have profits. There are various merits and limitations of IRR which are as follows:
Merits Limitations
 It is easy to understand as it is stated in
percentage.
 It considers time value of money.
 It is easy to understand and one of the
simple methods.
 It does not succeed in considering the
uncertainty and risk involved with the
project (Lane and Rosewall, 2015).
 The value of cash flows is not
determined correctly if the project life
is not estimated properly.
 It is costly and time taking process.
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Average accounting rate of return:
ARR is a % of return expected from an investment compared with the initial investment.
It does not take into consideration time value of money which is an essential part to maintain and
control the business. Its merits and limitations are as follows:
Merits Limitations
 It allows option of share availability to
employees in the form of incentives.
 Time is not taken into consideration.
 It focuses on historical figures and
ignores market value (Harris, 2017).
Profitability Index:
It is useful in identifying the viability and profitability of the project or a particular
investment. It determine the amount of profit generated by the company by making an
investment. It is calculated by dividing the present value of anticipated future cash flow with the
initial outflow of the investment.
Merits Limitations
 It is beneficial for Sankrust Ltd in order
to determine whether a particular
investment is viable and profitable.
 Once a large project is selected with
high NPV then small projects are not
considered regardless of higher NPV
then large projects (Lane and Rosewall,
2015).
C. The key benefits and limitations of using budgets as a toll for strategic planning
Budget give an excellent record of company's activities, it improves the allocation of
resources and communication among employees. Budgets are prepared by considering the past
years expenses and income so that business operates smoothly. It is used in strategic planning of
business because it allocates scare resources effectively, it provides a a monetary boundary
within which company need to perform their business activities (Bogsnes, 2016).
Importance of budgeting
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 It helps business to make changes in future time by forecasting the sales, revenues and
expenditure.
 It is important for business to measure their actual performance with the standard
performance and take necessary actions to maintain their level of performance.
 It is also essential for business to spend money according to the prepared budget so that
the organisation does not go out of fund.
 Planning a budget is important for business to control cost and improve profits to achieve
the objective of business.
There are various advantages and disadvantages of budget which are as follows:
Advantages Disadvantages
 Budgeting helps in stimulating and
motivating management of company by
making them identify the problem so
that management takes decisions.
 It controls and monitors the income
statement in order to plan new budget.
 It benefits company in coordinating
activities of all departments.
 It helps company in converting
strategic plans into actions. It states all
the resources, activities and revenues
carried out in the plan (Wildavsky,
2017).
 It improve allocation of resources
effectively which help organisation to
achieve their plans.
 Budgeting measure the performance of
each department and take measures to
improve their performance.
 It is a planning oriented process and it
helps Sankrust Ltd to set goals and
 Planning or forecasting budgets are not
always correct, approximation and
judgements are used which may be
inaccurate. Thus, it may lead to
shortage of funds in future and business
objectives are not achieved.
 Planning a budget is very time
consuming and costly process. For
preparing a budget skill, experience and
knowledge is required.
 It refers to allocation of cost, overhead
to different departments which may
create issues among the department at
the time of resource allocation.
 A rigid structure of budget decrease the
participation of employees and
innovation at lower level which leads to
decrease in profits.
 It creates competition of resources
which affect employees quality of work
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