Introduction to Accounting and Finance

This document provides an introduction to accounting and finance, covering topics such as financial statements, profit and loss accounts, balance sheets, and investment appraisal techniques. It includes case studies and calculations for better understanding. The content is suitable for students studying accounting and finance courses in college or university.

INTRODUCTION TO
ACCOUNTING AND
FINANCE

Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
Part A – Terry Joe Plc..............................................................................................................................3
Statement of Income...............................................................................................................................3
Statement of Financial Position...............................................................................................................5
Part B – Kokolet Limited.........................................................................................................................6
(a) Contribution towards covering fixed costs...................................................................................6
(b) Break-even point and margin of safety..............................................................................................7
(c) Profit the company:............................................................................................................................8
(d) Marketing and advertising..................................................................................................................8
(e) Explain the underpinning assumptions attached to the break-even model.........................................9
Part C – Smith Howe Limited...................................................................................................................10
(a) Payback Period, Accounting Rate of Return and Net Present Value of the machine........................10
(b) Explains and analyses the key merits and limitations of the differing investment appraisal
techniques..............................................................................................................................................14
Key benefits and limitations of using various budgets for strategic planning........................................15
CONCLUSION.........................................................................................................................................17
REFERENCES..........................................................................................................................................18

INTRODUCTION
Accounting is a tool of assessing business activities, converting information into reports
and delivering results to decision makers (Shah, 2013). Indeed, the financial statements are the
main documents that communicate with the full perspectives on the financial performance of the
corporation. The primary role of accounting in businesses is also linked to the identification of
fragile business sectors. Business executives must describe business objectives, track progress
and take appropriate measures if the expected action to take is not favorable. Some decisions,
such as purchasing supplies, managing stocks, investing, etc., include financial reporting details.
It helps managers to make better policies enhance the overall company future performance.
The report consist information about analysis of financial position and revenue is
included in this document on the basis of given data in brief. As well as BEP analysis is also
calculated and in further part of project report, payback period, accounting rate of return and net
present value is applied on given value of assets.
MAIN BODY
Part A – Terry Joe Plc
Profit and loss account- A profit and loss statement shows the profits and expenditures of a
corporation over a specified period of time, generally one quarter or a calculated period of a year
(Chiang, Nouri and Samanta, 2014). Those statistics show that the business has made a profit or a
loss over that amount of time.
Statement of Income
Income statement for the year 31st December 2018
Sales revenues (604800+154800) £7,59,600.00
Less: cost of sale (291600 + 64800) -£3,56,400.00
£4,03,200.00
Less operating expenses
Rent paid £1,35,000.00

taxation £8,280.00
Depreciation on delivery Van £11,000.00
Wages (140400+2610) £1,43,010.00
Electricity bills (6840+2430) £9,270.00
van running expenses £40,320.00
Bed debt expenses £1,800.00 -£3,48,680.00
Profit/loss £54,520.00
Cash a/c
To cash from equity £2,16,000.00 By rent paid £1,35,000.00
Cash sales £1,54,800.00 Tax £8,280.00
Received form debtors £5,25,600.00 wages £1,40,400.00
Electricity £6,840.00
Inventory £46,800.00
Payment to trade payables £4,71,600.00
Van running expenses £40,320.00
closing cash balance £47,160.00
£8,96,400.00 £8,96,400.00
Balance sheet- In corporate finance, a balance sheet or a statement of financial situation or a
conclusion of financial situation is an overview of the financial scales of an entity or an
institution, whether this is a sole sole trader, a partnership, a company, a private limited company
or another organization, such as a government body or a non-profit corporation (Power, 2012).

Statement of Financial Position
Financial position statement
Liabilities
Equity £2,16,000.00
Profit £54,520.00
Current liabilities
Outstanding wages £2,610.00
Outstanding bills £2,430.00
Trade payables £1,11,600.00
Total liabilities £3,87,160.00
Assets
Noncurrent assets
Delivery van £61,000.00
Current Assets
Cash at bank £47,160.00
Prepaid rent £27,000.00
Advance tax £1,350.00
Trade receivables £77,400.00
Closing inventory £1,73,250.00
Total liabilities £3,87,160.00

Part B – Kokolet Limited
(a) Contribution towards covering fixed costs
Contribution- Contribution is the amount of profit left after all total costs have been
deducted from income. Contribution must be computed on the premise of the
accumulation basis of bookkeeping, so that all revenue-related costs are acknowledged in
same timeframe as profits.
Selling price £40.00
Less: variable cost
Material £15.75
Labor £8.85
Variable overhead £5.55 -£30.15
Contribution per unit £9.85
Sales £24,00,000.00
Less: variable cost
Material £9,45,000.00
Labor £5,31,000.00
Variable overhead £3,33,000.00 -£18,09,000.00
Contribution per unit £5,91,000.00

(b) Break-even point and margin of safety
BEP- For accounting, the break-even point equation is calculated by calculated by dividing
operating expenses connected with output by sales per unit excluding the operating expenses per
unit.
MOS- The safety margin (safety margin) is the distinction between both the value of the stock
and its current market value (Leauby and Wentzel, 2012). In a break-even analysis of the
bookkeeping practice, the safety factor how much output or sales level can drop before the next
company enters its break-even point.
BEP in units and Revenues
BEP in units Fixed cost
Contribution per unit
BEP in units
Prod. Expense + Selling
exp. £32,467.01
£9.85
BEP in revenues Fixed cost
Profit volume ratio
PV ratio £0.25
BEP in revenues (177000+142800) £12,79,200.00

£0.25
(c) Profit the company:
Profit calculation at 54000 units of sales
Sales £21,60,000.00
Less: variable cost
Material £8,50,500.00
Labor £4,77,900.00
Variable overhead £2,99,700.00 -£16,28,100.00
Contribution per unit £5,31,900.00
Less: Fixed expenses
Production expenses £1,77,000.00
Selling expenses £1,42,000.00 -£3,19,000.00
Profit/loss £2,12,900.00
(d) Marketing and advertising
Selling price @ (40+ (40*8%)) £43.20
Less: variable cost
Material £15.75

Labor £8.85
Variable overhead £5.55 -£30.15
Contribution per unit £13.05
Sales (54000+ (54000*15%)) £26,82,720.00
Less: variable cost
Material £8,50,500.00
Labor £4,77,900.00
Variable overhead £2,99,700.00 -£16,28,100.00
Contribution per unit £10,54,620.00
Less: Fixed expenses
Production expenses £1,77,000.00
Selling expenses £1,42,000.00
Marketing and advertising £1,35,000.00 -£4,54,000.00
Profit/loss £10,54,620.00
(e) Explain the underpinning assumptions attached to the break-even model.
Break-even estimation is of vital importance when determining the usefulness of value variables
(Fischer-Pauzenberger and Schwaiger, 2017). It relies on several factors, namely quantity of output,
cost and profit. It is intended to explain the complicated relationship between total yearly
spending and productivity. There have been a variety of considerations for the break-even
analysis mentioned below:

 Fixed and variable costs can be classified as whole, and all semi-variable consequences
are ignored.
 There is still a linear price and profit function and it is believed that the production costs
remain constant.
Part C – Smith Howe Limited
(a) Payback Period, Accounting Rate of Return and Net Present Value of the machine.
Discount rate- 9 %
Payback period

Undiscounted Payback Period Analysis

(b) Explains and analyses the key merits and limitations of the differing investment appraisal
techniques.
Numerous investment evaluation approaches have been used to help shape the
performance of the new venture in the client framework. Some of them have been covered
below:
Payback Period: The payback period is known as one of the simplest metrics for calculating
assets (Gao, 2013). The payback technique shows how far it takes to generate enough income to
compensate for the actual project expenditures of the project.
Advantage: The advantage of the payback that users can measure and document it quite simply.
As a representative of the organization does not have financial skills and this technique benefits
in the recovery of the project with the help of this process can be better understood.
Disadvantage: The main drawback of the payback period is that it removes the quality time of
cash and anything that happens during the payback point.
Accounting Rate of Return: The average rate of return (ARR) or the return on the method of
calculation of the project assessment computes the annual sales of the plan as a share of the total
worth of capital, that is not pure revenue. This is an average return predictor and is shown in

well-known fraction manner. The results are closely related to the profits from alternative
resource needs and the regular bank rate of interest. This technique is quite simplistic.
Advantage:
 This method is primarily used to assess the aggregate profits of the project.
 It is also helpful for businesses to examine the rate of returns in the sense of other
programs.
Disadvantage:
 The pattern of cash flow is ignored-when it happens. It is unlikely that ensuing cash
flows will be correct because of deep-term projections.
 Essentially, it ignores the planning and returns on equity requirements of cash flows.
Net Present Value: This is the most common methodology of financial assessment. Net present
value is the sum of the proposal's deep-term decreased capital inflows and outflows (Wilson,
2012). In general, the WACC is the underrating portion of the cash flow net present value
method. This strategy basically calculates the overall decreased investment cash flow by either
the minimum required return rate and deducts the original investment from the net current value
of the investment.
Advantages: The main advantage of the NPV model is that financial risk and costs are taken into
consideration when making financial forecasts.
Disadvantages: The biggest disadvantage is that several times the director has to make
judgments about the return that contribute to incorrect future outcomes.
Key benefits and limitations of using various budgets for strategic planning
Budgeting is a process of comparing real results with goals and adjusting output as needed
to achieve financial and value objectives. The corporation is helpful for budgets in the sense of
the financial planning and control system to find better options by cost control. There are a few
significant budgetary advantages and disadvantages that are addressed below:
Benefits
• Budgeting is based mainly on the management of department-wide activities, that
translates into motion strategic objectives.
• Recognize the resources, revenues and activities necessary to implement next year's
development strategy program.

• Budgets maximize the allocation of resources, since all criteria are easy and rational.
Drawbacks
 When there is no staff involvement in the budgeting department, they may be
demotivated from their respective positions. If budgets are arbitrarily increased,
employees do not recognize and do not follow the rationale for the expenditure.
 A strict budget structure removes low-level enthusiasm and innovation, making funding
for new plans impossible for administrators to transfer to other alternatives that increase
the overall costs.
One of the most widely used plans that help client management plans to achieve the desired
outcomes in a timely manner. These are discussed below:
Rolling Budget- A rotating budgeting strategy is a monetary management method that promotes
cost modification to the industry environment in order to accomplish the targets (Aiken and Ji,
2013). The concept of roll-out is often to provide a, realistic 12-month period for expenditure and
earnings. It also enables executives to stay focused on business objectives in a quickly-changing
business atmosphere.
Benefits
The dynamic recruitment process allows managers to make the adjustments as necessary
to meet the current needs of the company. Changes in rotating plans may be acknowledged in
specific variants.
Drawbacks
This is also a time-consuming financial management technique, requiring specific
experience and knowledge that will contribute to more effective budget reforms.
Zero based budget:
This type of budget start from zero for each cycle and will determine the particular
element of each expenditure.
Benefits
Expenditures remain organized and balanced to maintain the technique of financial
application over a long time by help of this budget. As well as it helps in achieving the strategic
goals in the lack of circumstances for the corporation.
Drawbacks

The process of making zero based projects is quite difficult and time consuming as well
as expensive (Hyndman et.aI., 2018). And, when introducing the ZBB, it needs the sharp focus of
the director that is not possible for all kinds of companies.
CONCLUSION
The report clearly outlined the definition and importance of financial reporting in the
organizational sense. All three parts are able to define priorities and clarification about
practicable financial accounting activities within the corporate context. Financial results are
efficiently compelled by implementing financial accounting standards and concepts. The Income
Statement and the Statement of Financial condition shall be produced in compliance with
specifically applicable rules and laws. The second section clearly describes the use of a break-
even model and gives an idea of achieving the necessary level of productivity with revenue. The
use of portfolio analysis methods specifically directs judgment-making with a clear goal.

REFERENCES
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Chiang, B., Nouri, H. and Samanta, S., 2014. The effects of different teaching approaches in introductory
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Power, M., 2012. Accounting and finance. In The Oxford Handbook of the Sociology of Finance.
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Perceptions. Strategic Finance. 93(11).
Fischer-Pauzenberger, C. and Schwaiger, W .S., 2017, November. The OntoREA© Accounting and
Finance model: ontological conceptualization of the accounting and finance domain.
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