Introduction to Accounting and Finance

This document provides an introduction to accounting and finance. It covers topics such as income statement, balance sheet, break-even analysis, and more. It is a comprehensive guide for students studying finance and accounting. The document also includes solved assignments and study material. Perfect for students looking for study resources on Desklib.

Introduction to Accounting and
Finance

Table of Contents
Part A – Collins Colman Limited...............................................................................................3
Part B – Parksmead Limited......................................................................................................7
a. Determining the contribution of each microwave in regard to covering the fixed cost.....7
b. Computation of BEP and the margin of safety if microwave is sold at the price of £40...7
c. Computation of profit that Parks mead Ltd would make by selling 60000 units of
microwaves at the price of £40..............................................................................................9
d. Determining and analysing the new strategy of Parksmead Ltd........................................9
e. Underpinning assumptions attached to the BEP model...................................................10
Part C – Skipsey Clifford Plc...................................................................................................11
a. Computing payback, ARR, and NPV of the firm.............................................................11
REFERENCES.........................................................................................................................14

Part A – Collins Colman Limited
Income Statement
For the year ended 31 December 2019
Particulars £ £
Revenue:
Sales(604800+154800) 759600
Other income 0
Total Revenues 759600
Expenses:
COGS or cost of sales 291600
64800 356400
Depreciation 11000
Wages paid 140400
Add Outstanding wages at the end of the year 2610 143010
Electricity Expenses 9270
Van running expenses 40320
Bad debts 1800
Rent paid 135000
Less: - prepaid rent at the end of the year 27000 108000
Total Expenses: - 669800
Net profit before tax(PBT) 89800
Less: - Tax paid 6930
Net profit after tax(PAT) 82870
Balance Sheet
For the year ended 31 December 2019
LIABILITIES ASSETS

£ £ £ £
Shareholder's Equity Fixed Assets
Equity share capital 216000 Delivery Van 61000
Reserves and surplus 82870
Long Term Liabilities
Current Liabilities Current Assets
Outstanding Wages 2610 Prepaid Rent 27000
Outstanding Electricity
Expenses 2430 Closing Inventory 273600
Trade Payables 111600 Trade Receivables 77400
Bank Overdraft 132840 Prepaid Tax 1350
Cash 108000
Total Liabilities 548350 Total Assets 548350
Working:
Note 1 Total Sales
credit sales 604800
cash sales 154800
759600
Note 2 Depreciation
Purchase Price of Van 72000
scarp value 6000
life in years 6

Depreciation 11000
Note 3 Tax Computation
Tax up to 31 march 2019 2880
Add: - Tax from 1 April 2019 to 31 march 2020 5400
Less: - Prepaid tax of 3 months(from 1january 2020 to 31 march
2020) 1350
6930
Note 4 Electricity Expenses:
Expenses paid 6840
Add: - Outstanding expenses at the end of the year 2430
9270
Workings:
Note 5 Reserves and surplus
Net profit after tax 82870
Note 6 Trade Payables
Credit Purchases 583200
Less: - Payment to Trade Payables 471600
111600
Note 7 Trade Receivables
Credit Sales 604800
Receipts from Trade Receivables 525600
Closing Trade Receivables 79200
Bad Debts 1800
Net Trade Receivables 77400

Note 8 Prepaid Rent of 3 Months
Annual Rent 108000
Rent Per month 9000
Rent For 3 months 27000
Note 9 Closing Inventory
Cost of credit sales 291600
Add: - Cost of cash sales 64800
Total Cost of sales 356400
Credit Purchases 583200
Cash Purchases 46800
Total Purchases 630000
Total Purchases 630000
Less: - Total Cost of sales 356400
Closing Inventory 273600
Note 10 Closing Bank balance
Issue of Equity 216000
Receipts from Trade Receivables 525600
Total Receipts 741600
Less: - Rent paid 135000
Tax paid(2880+5400) 8280
Delivery van purchased 72000
Wages paid 140400
Electricity Expenses 6840
Payment to Trade Payables 471600
Van running expenses paid 40320
Total Payments 874440

Bank balance(cr.) 132840
Note 11 Cash Balance
Cash Sales 154800
Less: - Cash Purchases 46800
Cash at 31 December 2019 108000
Note 12 Closing Balance of Delivery Van
Delivery van purchased 72000
Less: - Depreciation 11000
61000
Part B – Parksmead Limited
a. Determining the contribution of each microwave in regard to covering the fixed cost
Selling Price (SP) 40
Variable Costs
Materials 15.75
Labor 8.85
Variable overhead 5.55
Total variable cost 30.15
Contribution 9.85
Contribution % 25%
b. Computation of BEP and the margin of safety if microwave is sold at the price of £40
Break-even point:The break-even point refers to the production level at which the
production cost and the revenue related to it is equivalent. In terms of investment, it accounts
for achieving the point at which the market price of the asset is equal to its actual cost
(Arfianti, and Reswanda, 2020). This approach is mainly utilized by the businesses or the
management accountants with the objective of identifying the level at which it will attain the
situation of no profit and no loss. This procedure might be little complex as it requires
identification of the variable and fixed costs.

Margin of safety:This is used for the purpose of determining the safety level after
which the company will start incurring the actual lose. It is derived by the subtracting break-
even sales from the actual sales. This is considered important as it assists in determining the
how safe the business on account of the production of the goods (Donnell and et.al., 2016).
Along with that, it helps in evaluating the risk level which can be further utilized for
undertaking meaningful decision pertaining to the inventory level.
Break Even Fixed Cost / Selling Price - Variable
Fixed Cost
Production 177000
Selling 142800
Total Fixed cost 319800
Break even units 319800/40 - 30.15
32467.01
Break even revenues Fixed cost / Contribution margin
319800/25%
1279200
Margin of Safety units Current sales units - Break even points
60000 - 32467
27532.99
Margin of safety in units Current sales - Break even sales
Current sales 2400000
Break even sales 1279200
Margin of safety 1120800
Interpretation:
It can be stated from the above that when the selling price of the product is £40, the
amount of fixed cost will be £319800 making the business attaining the BEP at 32467 units

which approximately amounted to the £1279200. Apart from this, the amount f margin of
safety is computed to be £1120800 with the units of 275333. This indicates that if the revenue
drops below this level then will cause the situation of incurring loss. Thus, margin of safety is
considered as an important tool for a business entity as it helps in identifying the situation of
risk so that actions can be taken on time.
c. Computation of profit that Parks mead Ltd would make by selling 60000 units of
microwaves at the price of £40
Calculation of Profits
Units 60000
Sales 40 2400000
Variable Cost
Materials 15.75 945000
Labor 8.85 531000
Variable overhead 5.55 333000
Contribution 591000
Fixed Cost
Production 177000
Selling cost etc. 142800
Profit 271200
Interpretation:
It can be seen that by producing and selling the entire 60000 units of the product at
the selling price of £40, this is result into the profits of £271200 which includes the amount of
contribution be to £591000.
d. Determining and analysing the new strategy of Parksmead Ltd
Details provided:
Selling price rises by 8%
Selling units rises by 15%
New Strategy Existing New

Increase in sales price 8% 40 43.20
Increase in sales unit 15% 60000 69000
Computation of Profits
Units 69000
Sales 40 2760000
Variable Cost
Materials 15.75 1086750
Labor 8.85 610650
Variable overhead 5.55 382950
Contribution 679650
Advertising 135000
Fixed Cost
Production 177000
Selling cost etc. 142800
Profit 224850
Interpretation:
It can be inferred from the above that the company should not implement the new
strategy as this has resulted into decline in the profits of the company. Therefore, it is highly
preferable for the firm to not proceed with this strategy which has impacted its profitability.
On the flip side, it will help building brand image in long term.
e. Underpinning assumptions attached to the BEP model
The break-even analysis is of essential significance to the business association in
regard to deciding the pertinence of its cost capacities in the actual business practices. It
assists in determining the dynamic qualities along with the current expense and the business’s
sales volume. This investigation depends on specific suspicions which are expressed
underneath.
 It depends on the fixed and the variable expense and doesn't contemplate the semi-
variable expense.
 Both the expense and the business stay straight.

 It is accepted that the cost of the item will stay consistent under any degree of
production.
 Also, the volume of the itemsproduced and the deals will be equivalent.
 The fixed cost will stay consistent under the specific degree or to the certain limit of
production.
 It is additionally expected that the technological change and any improvement in the
proficiency of the labour will be consistent.
 The cost of the product is expected to stay steady.
 In the circumstance of the different item, the product mixwill be considered as
constant.
The BEP analysisis mainly used by manufacturing organizations. It will help the
business association regardless of nature, occupation, field or size in deciding where it will
accomplish the circumstance of no benefit no loss (Batkovskiy and et.al., 2017). It
additionally bolsters the organizations in deciding the offering price of the item to accomplish
greatest benefit. It must be utilized if the association is having cost bifurcated into fixed and
variable as these are significant in for determining the contribution and afterward the BEP
also. Along these lines, this is helpful in each kind of business association which helps in
taking significant business choices to achieve the objectives all the more viably.
Part C – Skipsey Clifford Plc
a. Computing payback, ARR, and NPV of the firm
Years
Annual
cash
inflow (in
£)
Annual
cash
outflow
(in £)
less:
Deprecia
tion (in
£)
Total
annual
cash
inflow
(in £)
Add:
Depreciati
on (in £)
Cash
inflows
after
deprecia
tion (in
£)
Add:
Scrap
value (in
£)
Net cash
inflow
(in £)
1 3400000 1280000 1400000 720000 1400000 2120000 2120000
2 3400000 1280000 1400000 720000 1400000 2120000 2120000
3 3400000 1280000 1400000 720000 1400000 2120000 2120000
4 3400000 1280000 1400000 720000 1400000 2120000 2120000
5 3400000 1280000 1400000 720000 1400000 2120000 1000000 3120000
Payback period

Years Net cash inflow (in £) Cumulative cash inflows
(in £)
1 2120000 2120000
2 2120000 4240000
3 2120000 6360000
4 2120000 8480000
5 3120000 11600000
Payback period (PBP) 3
0.8
[(8000000-6360000)/21200
00]
PBP 3.8 years
Interpretation:
It can be concluded from the above that the shortest period in which the company will
recover the amount invested initially is 3.8 years which results into making the project
economically feasible for making an investment (Zis and et.al., 2016). Thus, the company
must go with the investment.
Average rate of return
Years Earnings after taxes
1 2120000
2 2120000
3 2120000
4 2120000
5 3120000
Average earnings 2320000
Average investment 4050000
ARR 57.28%
Interpretation:
The ARR derived from the above is 57.28% which is the return that the company
would be earning from this project (Magni, 2016). This rate is much more than the cost of

capital, there, the company make an investment into this project which will result into
increasing profits.
Years
Net cash
inflow (in
£)
Discounted
value
@9%
Net
present
value
(PV)cash
inflows
1 2120000 0.9174 1944954
2 2120000 0.8417 1784362
3 2120000 0.7722 1637029
4 2120000 0.7084 1501861
5 3120000 0.6499 2027786
Total
discounted
cash
inflow
8895992
Initial
cash
outflow
8000000
NPV
(PV of
cash
inflows –
PV of cash
outflow)
895992
Interpretation:
From the above, it can be said that the NPV is positive amounting to £895992 which
means that the project is acceptable for the Skipsey Clifford Plc (Andrianov and et.al., 2020).
This method determines the present value of the future cash inflow that will be generated by
investing into this project.
b) Key merits and demerits of the different investment appraisal techniques
Investment appraisal refers to the way in which business or managers assess
attractiveness of the possible or proposed projects or investments based over findings of the
several financing and capital budgeting techniques. It is fundamental analysis for the business
who are planning to make new investments. The different investment appraisal techniques
used by the organisation are internal rate of the return, payback period, accounting rate of
return and the net present value. These techniques are meant primarily for appraising
performance of the new project (Milenković and et.al.,., 2016). It is essential for the business
to identify whether the propose project will be profitable or not.
Accounting Rate of Return

It is used for assessing the profits that business expects to make from the investments
or the project it is planning to adopt. It is computed as average profits expected from the
investment over its life compared with average capital invested.
Advantages
This method represents accounting profits that arise from investments as percentage
of the capital investments. The method is simple and easier as compared with other
investment appraisal techniques. This method also does not make use of time value of money
concept in calculating the return on the investment. It enables manager to identify whether
the return from the project is enough or not.
Disadvantages
This technique of investment appraisal only considers accounting profits and not other
cash inflows. As the method do not make use of time value concept actual return from the
project could not be identified (Ndanyenbah and Zakaria, 2019). The method do not allow
comparison of two projects having different useful life.
Payback period
The method is used for assessing the investment by length of time project or
investment will take for repaying them. This technique is mostly used by the organisation
focusing over the cash flows.
Advantages
The tool is used by the managers to identify whether the company will be able to
cover the cost of its initial investment within the useful life of the project or not. Projects
having shorter payback are accepted as they allow company to earn more profits. They also
provide break even point to the decision makers of project.
Disadvantages
The drawbacks of this technique are that it also do not account concept of TVM in its
calculation. The actual payback could not be identifies as the value of money changes with
passage of time. Payback without TVM would not provide the accurate results.
Net Present Value
The technique is used by the organisation to assess the value of investment at present.
It enables the managers to assess whether the proposed project or investment will be
profitable or not for the organisation. It assesses whether the present value of future of cash is
higher or less than cost of project.
Advantages

It is the most commonly used technique by the organisations that allow them to
identify the profitability of the project. They could identify the present value of future cash
flows that will be generated during lifetime of the project (Нугуманова, 2016). Managers
accept the project if their NPV is positive and they are yielding adequate returns for the
business.
Disadvantages
Though the technique provides more reliable results as compared with the other
techniques it is very difficult to identify the adequate discounting rate. If the company is not
able to compute the discounting rate properly all the calculations would prove to be wrong. It
is a complex technique and method.
c) Key benefits and limitation of using the budgets as tool for strategic planning
Budgets refer to the planning tool used by the managers and organisations for
planning for future and learning from their past. The process is more than simply looking at
the available funds and allocating the resources for operating the business within limits.
Effective budgeting includes carefully thinking about the goals and objectives that company
wants to accomplish. It also involves developing financial plan for supporting the overall
goals. Strategic budgeting is process of making long range budgets for a year. It involves
development of the new markets, research and developments needed for introducing the new
product lines converting to technology platforms and restructuring the organisation. The
budgets are very essential for the business for enabling the organisation to achieve its goals
and objectives.
There are different benefits and limitations of the budgets as a strategic planning tool.
Benefits of Budget
Budgets provide the organisation and its workforce the performance standards for the
different period of times. It enables the organisation to achieve the goals and objectives wthin
the prescribed time limits. The standards ensure that quality of work is not spoiled for
achieving the budgeted targets
Budgets facilitate planning in organisation. They are very important planning tool that
enables the managers and senior executives to plan the future activities and operations
effectively. Managers assess the previous performance of the organisation, identify the
current trends and other requirements that are to be covered while planning the budget.
Budgets enable the business to identify in advance whether they will be able to achiev
the targeted objectives with the given resources or not. Budget such as cash budget enable the
management to identify whether they will be having enough cash to manage the activities of

business or not (Morlidge, 2017). Based on this they could make arrangements in advance for
the resources so that the activities or operations are not affected in between.
It allows coordination between the different departments of the organisation. Different
managers of the organisation coordinate and cooperate the activities at various levels to use
the resources of organisation.
Budgets enable the organisation to keep its costs and expenditures within the control.
They could ensure that the departments are carrying out their activities within the given
budget. It is achieved through effective allocation of resources in the organisation for making
optimum utilisation of the resources.
Limitations
Sometimes the limits scheduled by the budget are very rigid that complying them can
affect the quality of the products and services delivered by the organisation. It is also
assumed if budgeted amount is not spent within stipulated time future allocation would be
affected and reduced. It results in overspending and departments do not control the costs even
when there are possibilities.
Budgets are prepared for specifying the resources that will be available for carrying out
that activity or operation. It could be evaluated that managers most of the times are not
allowed to make changes in the budget for the different items (Chowdhury and Shil, 2018).
Depriving the managers from necessity of spending divert the attention from the
organisational goals to specific budgets.
As the budgets are budgets are mainly based on the estimates and projections carried out
by the analysts and experts of the organisation there may be discrepancies. It is not possible
for anyone to estimate or to predict the future demand or requirements accurately. But these
discrepancies could affect the budgets significantly.
If the budgets are made very rigid and inflexible the changes occurring between the
process becomes very difficult for the managers to handle. This could lead to overspendings
and extra costs.
Budget is a useful planning tool but if not handled carefully could lead to various issues
affecting the organisational performance and resource management in company.

REFERENCES
Books and Journals
Andrianov, A.A. and et.al., 2020. Comparative analysis of the investment attractiveness of
nuclear power plant concepts based on small and medium sized reactor modules and
a large nuclear reactor. Nuclear Energy and Technology. 6. p.167.
Arfianti, U. and Reswanda, R., 2020. Break Even Point Analysis As A Basic of Profit
Planning In HandalInsan Sentosa Batik Business. Quantitative Economics and
Management Studies. 1(3). pp.187-193.
Batkovskiy, A.M. and et.al., 2017. Statistical simulation of the break-even point in the margin
analysis of the company. Journal of Applied Economic Sciences, Romania:
European Research Centre of Managerial Studies in Business Administration. 12(2).
p.558.
Donnell, E. and et.al., 2016. Use of side friction in horizontal curve design: a margin of safety
assessment. Transportation Research Record. 2588(1). pp.61-70.
Magni, C.A., 2016. Capital depreciation and the underdetermination of rate of return: A
unifying perspective. Journal of Mathematical Economics. 67. pp.54-79.
Zis, T. and et.al., 2016. Payback period for emissions abatement alternatives: role of
regulation and fuel prices. Transportation Research Record. 2549(1). pp.37-44.
Milenković, M., and et.al.,., 2016. Railway Investment Appraisal Techniques. In Handbook
of Research on Emerging Innovations in Rail Transportation Engineering (pp. 67-
99). IGI Global.
Ndanyenbah, T.Y. and Zakaria, A., 2019. Application of Investment Appraisal Techniques by
Small and Medium Enterprises (SMEs) Operators in the Tamale Metropolis, Ghana.
Нугуманова, Г.А., 2016. COMPARISON OF INVESTMENT APPRAISAL
TECHNIQUES. In НАЧАЛО В НАУКЕ (pp. 134-137).
Morlidge, S., 2017. The little book of beyond budgeting: A new operating system for
organisations: What it is and why it works. Matador.
Chowdhury, A. and Shil, N.C., 2018. Contextualizing planning and budgeting system: public
sector experience. Asia-Pacific Management Accounting Journal (APMAJ). 13(2).
pp.27-53.