Introduction to Accounting and Finance Assessment

This study provides a comprehensive account of the basic models, principles, and methods used in financial accounting and management accounting. It covers topics such as profit and loss statement, balance sheet, contribution calculation, break-even point, margin of safety, investment appraisal techniques, and the use of budgets as a strategic planning tool.

Introduction to Accounting and
Finance Assessment
1

Contents
INTRODUCTION...........................................................................................................................3
PART-A: RACCA LIMITED..........................................................................................................3
a. Profit and Loss Statement...................................................................................................3
b. Statement of Balance Sheet................................................................................................7
PART-B: RECKTURK PLC.........................................................................................................12
a. Determining contribution per electric kettle made towards covering fixed costs when selling
price is £13:..........................................................................................................................12
b. Calculating Break-even Point and Margin of Safety when selling price is £13:..............12
c. Ascertaining Company Profit when Unit Production is 48,000 electric kettles at £13 per
unit........................................................................................................................................13
d. Assessing strategy for Stock stone Ltd Plc.......................................................................13
e. Identification of Underpinning Assumptions in Break-even Model................................14
PART-C: ROCKHAM PLC..........................................................................................................15
a. Recommendation of acceptance or rejection of Capital Budgeting Projects using Investment
Appraisal techniques............................................................................................................15
b. Report on key merits and limitations of various investment appraising techniques........17
c. Report on identification of key merits and demerits of using Budgets as a strategy planning
tool........................................................................................................................................19
CONCLUSION..............................................................................................................................20
REFERENCES..............................................................................................................................21
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INTRODUCTION
Accounting Process and Finance both these concepts are extremely interrelated yet
diverse fields. Concept of accounting is primarily associated with recognizing purchases and can
be assessed monetarily. While the Finance concept involves presentation in form of
different reports to the firm ’s stakeholders. These two components ensure that all the financial
transactions of corporation are properly recorded and communicated effectively to the business's
stakeholders. These allow both the acquisition and distribution of different financial resources
on part of managing personnel who really are accountable for making informed decisions
about same in an acceptable way (Ainsworth and Deines, 2019).
This study seeks to give a comprehensive account of the basic models, principles and
methods used throughout financial accounting as well as management accounting. For this
object, it highlights concept of preparation of company's financial statement such as P&L or
income statements, Statement of financial position, contribution calculation, Margin of
Safety, break-even level as in revenue and units. Further, various investment appraisal methods
used in decisions relating to the capital budgeting are evaluated along with advantages and
drawbacks of budget as strategic planning tool.
PART-A: RACCA LIMITED
a. Profit and Loss Statement
To assess whether or not entity can expand or step in direction that aligns its goal and targets, an
entity seeks to assess the net profits gained for a particular time-span. An organisation’s Income
Statement is formed for this purpose, as well as aims to report company profits after paying for
taxes, debt, depreciation, as well as other expenditures (Shawver and Miller, 2017). This
gives Management and stakeholders of certain company, like Racca Ltd, a summary of
organisation’s profitability. organisation's profitability. This can be seen as follows:
Statement of Income for the year ended December 31, 2018
Particulars £ Particulars £
To Opening Stock - By Revenue3 633000
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To Purchases1 525000 By Closing Stock4 228000
To Wages2 119175
To Gross Profit (Balancing figure) 216825
Total 861000 Total 861000
To Electricity Bill Payments5 7725 By Gross Profit b/d 216825
To Van Running Expenses 33600
To Irrecoverable Debts 1500
To Rent paid to owner6 90000
To Rates7 5775
To Depreciation on Van 9600
To Net Profit for the year 68625
Total 216825 Total 216825
Working Notes:
1. Purchases:
Particulars £
Credit Purchases 486000
Cash Purchases incurred 39000
Total Purchases made during the year 525000
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2.Wages:
Particulars £
Total Wages paid during the year 117000
Add: Wages owed for the last week of the year 2175
Total Wage Expenses 119175
3. Revenue for the year ended December 31,
2018:
Particulars £
Credit Sales 504000
Cash Sales 129000
Total Sales made during the year 633000
4. Determining Closing Stock Value:
Particulars £
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Stock available as on 01.01.2018 -
Add: Total Purchases made during the year1 525000
Less: Cost of Goods Sold 297000
Stock available as on 31.12.2018 228000
5. Electrical Bills Payments:
Particulars £
Bills paid during the year 5700
Add: Wages owed for the quarter as on
31.12.2018 2025
Total Wage Expenses 7725
6. Rent paid:
Particulars £
Total Rent paid to the owner of the premise 112500
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Less: Rent payments made in advance 22500
Total Rent Paid 90000
7. Rates:
Particulars £
Payments for the period 01.01.2018 to 31.03.18 2400
Payments for the period 01.04.2018 to
31.03.2018 (=5400*9/12) 4500
Total Rates for the year 6900
b. Statement of Balance Sheet
An additional element of process of financial reporting that shows financial
position of company at specific given time-frame is statement of Financial Position (Balance-
sheet). This offers comparability to those other organisations working within same sector and the
financial performance of the organization during past years in relative to current year (Webb and
Chaffer, 2016). Overall financial status of Racca Limited is shown in following statement, as
follows:
Statement of Financial Position for the year ended December 31, 2018
ASSETS (I) £
Current Assets
Advance Rent 22500
Advance Rates 1125
Accounts Receivables1 64500
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Closing Stock Value 228000
Total Current Assets (A) 316125
Non Current Assets
Delivery Van2 50400
Total Non-Current Assets (B) 50400
Assets (I) [= (A) + (B)] 366525
LIABILITIES AND SHAREHOLDER'S EQUITY (II)
Current Liabilities
Owed Wages 2175
Owed Electricity Expenses 2025
Accounts Payables3 93000
Bank Overdraft4 20700
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Total Liabilities (C) 117900
Owners’ Equity (D)
Capital 180000
Add: Net Profit for the year 68625 248625
Shareholder's Equity and Liabilities (II) [=(C)+(D)] 366525
Working Notes:
1. Accounts Receivables as on 31.12.2018:
Particulars (£) (£)
Credit Sales 504000
Less:
Cash recived from accounts receivables 438000
Irrecoverable debt 1500 439500
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Closing Balance 64500
2. Depreciation Charged on Delivery Van using Straight-
Line Method:
Particulars (£)
Cost of Delivery Van Purchased on 01.01.2018 60000
Less: Depreciation on Van ((60000-12000)/5)* 9600
Cost of Van as on 31.12.2018 50400
*-It is important to note that salvage value of van is
12000 with an expected useful life of 5 years.
3. Accounts Payable:
Particular (£)
Goods purchase on credit 486000
Less: Account Payables repaid during the year 393000
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Closing balance of Accounts Payables 93000
4. Cash and Cash Equivalents at the end of the year:
Cash/Bank Account
Particular (£) Particular (£)
To Capital Account 180000 By Purchases 39000
To Cash received from receivables 438000 By Cash paid to
Creditors 393000
To Cash Sales 129000 By Delivery Van
Expenses 33600
To Balance C/d (Overdraft) 20700 By Wage Payments 117000
By Electricity Bill
Expenses 5700
By Rates 6900
By Rent 112500
By Delivery Van
Purchased 60000
Total 767700 Total 767700
PART-B: RECKTURK PLC
a. Determining contribution per electric kettle made towards covering fixed costs when selling
price is £13:
Given data:
Selling price= 13 Pounds per electric kettles
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Variable cost= Material + Labour + Variable overheads
= £ (5.25+2.95+1.85)
= £10.05
Fixed cost= Production + Selling
= (59000+47600)
= 106600 Pounds
= Contribution = Selling price per unit – variable cost per unit
= 13 – 10.05
= 2.95 per unit
b. Calculating Break-even Point and Margin of Safety when selling price is £13:
Breakeven point (In units) = Fixed cost / contribution per unit
= 106600/2.95
= 36135 Units
Breakeven point (In revenue) = Fixed cost / PV ratio
= 106600 / 22.69%
= 469810 Pounds
Working Note:
PV ratio= Contribution per unit / selling price per unit*100
= 2.95 / 13 * 100
= 22.69%
Margin of safety (In units) = Budgeted sales – Breakeven point (In units)
Budgeted sales= 53000 Units
BEP= 36135
SO,
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MOS= 53000-36135
= 16865 Units
Margin of safety (In revenue) = Budgeted sales revenue – Breakeven point (In revenue)
= 689000-469810
= 219190 Pounds
Working Note:
Budgeted sales revenue= Units * sales price
= 53000*13
= 689000
c. Ascertaining Company Profit when Unit Production is 48,000 electric kettles at £13 per unit
Particulars Amount (In pounds)
Sales (48000*13) 624000
Less- Variable cost (48000*10.05) 482400
Contribution 141600
Less- Fixed cost 106600
Profit 35000
d. Assessing strategy for Stock stone Ltd Plc
Profit in existing strategy:
Particulars Amount (In pounds)
Sales (53000*13) 689000
Less- Variable cost (53000*10.05) 532650
Contribution 156350
Less- Fixed cost 106600
Profit 49750
Change in strategy:
Selling price (13*9%+13) = 14.17
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Sales units (53000*17%+53000) = 62010 Units
Increase in fixed cost (106600+45000) = 151600
Particulars Amount (In pounds)
Sales (62010*14.17) 878681
Less- Variable cost (62010*10.05) 623200
Contribution 255481
Less- Fixed cost 151600
Profit 103881
This is showing that company will be able to generate higher profit if they go with new
strategy. This is so because if they will go old strategy then it can be finding out that there is
profit of 49750 pounds. While in new strategy, the volume of profit is almost double that is of
103881 pounds.
e. Identification of Underpinning Assumptions in Break-even Model
Break-even analysis could be defined as technique that a business generally employs to
accomplish that point/level whereby entity will be capable of earning revenues that really are
adequate to fulfil its overall production costs. Through this way the managing personnel takes
account of various costs through regard to changing demands of a given commodity demanded
when conducting Break-even evaluation (Alamad, 2019). This allows management to
determine exact level of sales/revenue that would fully cover total fixed
costs/expenditure of company. It is vital to emphasize that Overall fixed costs/expenses are those
elements that are accrued irrespective of quantity produced/manufactured and sold
by organisation. Setting such cost element thus allows manager to pursue informed decision-
making processes within the organization (Brusca, Gómez‐villegas and Montesinos, 2016). It is
computed using formulae below:
Break-even Point: In Units:
BEP= Fixed Costs/ (Revenue earned per unit-Variable Cost incurred per unit)
 In terms of Sales:
Contribution (£) = Sales- Total Variables Cost
Contribution Margin (%) = Contribution (£)/ Total Sales
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BEP= Fixed Costs/ Contribution Margin
Several main assumptions underlying conduct of the Break-even Analysis are being listed
as following:
 Overall Cost could be divided into Fixed-costs and Variable Costs. Here, Semi-Variable
costs are not taken into consideration (Kai, Loh and Lian, 2017).
 Prices of products are remained unchanged.
 Unit Sold (Volume) = Units Actually Produced.
 Fixed Costs will remain unchanged regardless of the unit volume manufactured.
 Increment rate here is stable in case of Variable Costs.
 Factor of improvements in technologies or increases in labour-efficiency are not
considered here.
By evaluating these assumptions, this can be stated that on grounds that promote
similarity, the BEP Analysis technique is theorised. As a consequence, different companies can
pursue such activity regardless of its size, essence and complexity (Kai, Loh and Lian, 2017).
PART-C: ROCKHAM PLC
a. Recommendation of acceptance or rejection of Capital Budgeting Projects using Investment
Appraisal techniques
Payback Period
Initial Investment 40,000,000
Net Annual Cash inflow (17000000 – 6400000) 106,00,000
Cash Flow Net Cash Flow
Year 0 -40,000,000.00 -40,000,000.00
Year 1 10,600,000.00 -29,400,000.00
Year 2 10,600,000.00 -18,800,000.00
Year 3 10,600,000.00 -8,200,000.00
Year 4 10,600,000.00 2,400,000.00
Year 5 10,600,000.00 13,000,000.00
Thus, Payback Period would be: 2 year + (8200000/10600000) = 2.774 years
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Accounting Rate of Return
Purchase Cost of New Machine 40000000
Total expected net Cash inflow (17000000 – 6400000) *5 53000000
Depreciation per year [(40000000 – 5000000)/5] 7000000
Accounting Rate of Return 26.50%
Net Present Value
Year Cash Inflow
Cash
Outflow
Net Cash
Inflows
Discounting
Factor
PV of Net Cash
Inflows
1 3400000 1280000 2120000 0.917 1944954.128
2 3400000 1280000 2120000 0.842 1784361.586
3 3400000 1280000 2120000 0.772 1637028.978
4 3400000 1280000 2120000 0.708 1501861.447
5 3400000 1280000 2120000 0.650 1377854.539
Salvage Value 1000000 0.650 649931.386
Sum of PV of Net Cash
Inflows £8,895,992
NPV £895,992
Recommendations:
It has been clear from the above computations that buying new machine of worth
£40,000,000 will be wise decision for the Rockham PLC. This is demonstrated by the
3 investment appraisal techniques that show:
 For the specified project payback period is around 2 years and approx. 8 months. This
period is less than usable life of Machinery as it is to be used for five years.
Therefore, make it feasible for company.
 The ARR of machine is 26.5 percent. Therefore, this proposal therefore meets the
minimum condition of return on the investment.
 The NPV figure is positive, even when taking into consideration both salvage value and
the original investment.
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The mangers of Rockham PLC is therefore suggested to carry out project analyzed using the
above-mentioned investment evaluation techniques.
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b. Report on key merits and limitations of various investment appraising techniques
INVESTMENT APPRAISAL TECHNIQUES
Through corporation carries out those forms of capital budgeting practices to achieve their
goals of increasing and exploiting opportunities which add values to the company in both
present and future time frames of its operational processes. To this end, an organization's
financial managers may conduct certain forms of investment appraisal techniques that can
justifiably support their key decisions (Maas, Schaltegger and Crutzen, 2016). In this
regard, this study dealt with the main advantages and drawbacks of these techniques:
1. Pay-Back Period: This technique helps company's financial manager to calculate the
exact amount of time it will take for given project to retrieve its initial investments. As a
consequence, payback period is time over which project's net cash-inflows are equal
to amount of initial investment incurred thereon. It is computed as below:
PBP = Initial Outlay/ Net Cash Inflows
Merits:
 Simple indication of possibilities of blockages of capital in project as longer periods will
prolong recovery of initial investments made.
 This method is most appropriate in cases where there has been a great uncertainty about
expected annual cash flows of project or industries/sectors where technological changes
are likely to occur (Renz and Herman, 2016).
Limitations:
 It leads to ignore the time values of monies which is crucial component from the
perspective of the capital budgeting.
 A shortened PBP, too, doesn't really assure project profitability (Schaltegger and Burritt,
2017).
Accounting Rate of Return: This method is called as financial ratio that is commonly used in
the budgeting capital. It is intended to deliver a payback based on net incomes generated
by proposed project. The ARR is determined according to the following:
ARR= Average Net Profit/ Average Investment
Merits:
 Represents the definition of net amount of earnings gained after tax deduction and
depreciation. By giving a good understanding of the feasibility of project.
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 Provides a contrast between one or even more projects depending on the measured
percentage value.
Limitations:
 It overlooks time factor that is important when choosing alternate applications of funds.
 Herein cash inflows that form the basis for the accounting profits are not taken into
consideration.
Net Present Value: Net Present Value method is defined as most fevered investment valuation
technique, as value of all potential net cash-inflows which have been here discounted at specific
rate (Maskell, Baggaley, and Grasso, 2017). It is computed as below:
NPV = Σ(Present Value of all future cash flows) – Initial Investment
Merits:
 It perceives the time-value of the money, and therefore chronological order
prioritizes cash inflows.
 This takes into consideration reinvestment assumption, hence,
following conventionalize.
Limitations:
 It's doesn't pursue the sunken cost effect.
 Using this approach, it's hard to decide the appropriate discounting rate.
c. Report on identification of key merits and demerits of using Budgets as a strategy
planning tool
BUDGETS: A STRATEGIC PLANNING TOOL
An enterprise is accountable for defining, planning, coordinating, maintaining and regulating
resources in order to preserve its competitiveness and competitive market position without
sacrificing quality and consumer services. A corporate organization seeks to develop budgets
for this purpose. A Budget could be described as process of developing a financial schedule that
includes projections of incomes and expenditures to be received within a specified potential
period (Morris, 2018). Different forms of budgets are being evaluated under this study,
primarily on the grounds of their advantages and pitfalls. These are enumerated as follows:1. Activity Based Budgets: Another form of budget involves preparing a financial
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schedule after considering overhead costs, which is primarily intended to assess the
efficacy of organizational activities. Similarly, the budget of the previous year doesn't
form basis for present year.
Merits:
 It causes needless practices and, thus, proves to be effective cost saviour.
 The issue of the bottlenecks is effectively removed because budget is focused on
activities.
Limitations:
 It is much complex process requiring a thorough comprehension
of various business activities.
 Activity Based Budgeting focuses mainly on meeting short-term targets that can
be counterproductive to enterprise in long-run.
Zero Based Budgets: This form of budget involving the creation of financial plan for specific
period is primarily based on expenditure for new period and therefore is conjectured on basis of
actual expenditure expected to have been incurred. Therefore, this budget is being prepared
from scratch using zero as basis for each period (Ramiah, Xu and Moosa, 2015).
Merits:
 The performance and reliability of companies using this budget as strategic
planning technique is enhanced.
 Repetitive tasks are properly identified and efficiently reduced.
Limitations:
 This takes a lot of time, because manager has to begin every new cycle from
zero.
 The method of planning can be costly for administration.
Incremental Budgets: This form of budget, as name implies, includes making changes
to existing finance plan. Accordingly, it was asserted on basis of details and figures from the
last year (Ramirez, 2015).
Merits:
 Implementation is very simple.
 Time as well as cost-effectiveness because there are minor adjustments which
need to be incorporated to existing business budget.
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Limitations:
 Lack of creativity will grow because it often contributes to budgetary gap.
 Excessive spending can become standard practice owing to simpler budget
accessibility.
CONCLUSION
From the aforementioned study-report, it has been concluded that the accounting and
finance serve a critical role in deciding how business' fiscal resources being used to improve a
specific business' productivity and aggregate organizational performance. Using Costing may
allow management to assess the allocation of capital per unit, and also sales. Also it helps them
to recognize the Break-even Levels which insure that allocating resources doesn't really lead to
degradation of current profits on product sold per-unit. Further, investment evaluation tools and
financial planning enable company to synchronize capital budgeting process and strategic
planning operations with other key aspects. That allows the managers to make important
decisions in informed manner.
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REFERENCES
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Webb, J. and Chaffer, C., 2016. The expectation performance gap in accounting education: A
review of generic skills development in UK accounting degrees. Accounting Education.
25(4). pp.349-367.
Alamad, S., 2019. Financial and Accounting Principles in Islamic Finance. Springer.
Brusca, I., Gómez‐villegas, M. and Montesinos, V., 2016. Public financial management reforms:
The role of IPSAS in Latin‐America. Public Administration and Development. 36(1).
pp.51-64.
Kai, C. Y., Loh, U. and Lian, A. N. B., 2017. Accounting education in Singapore. In The
Routledge Handbook of Accounting in Asia (pp. 234-253). Routledge.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production, 136,
pp.237-248.
Renz, D. O. and Herman, R. D. eds., 2016. The Jossey-Bass handbook of nonprofit leadership
and management. John Wiley & Sons.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Maskell, B. H., Baggaley, B. and Grasso, L., 2017. Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Morris, R., 2018. Early Warning Indicators of Corporate Failure: A critical review of previous
research and further empirical evidence. Routledge.
Ramiah, V., Xu, X. and Moosa, I. A., 2015. Neoclassical finance, behavioral finance and noise
traders: A review and assessment of the literature. International Review of Financial
Analysis. 41. pp.89-100.
Ramirez, J., 2015. Accounting for derivatives: Advanced hedging under IFRS 9. John Wiley &
Sons.
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