Importance of Accounting in Organizational Performance

The assignment highlights the significance of accounting in determining an organization's performance and profitability. It covers various aspects such as net present value, accounting rate of return, and different types of budgets. Additionally, it discusses the merits and limitations of cash budgets, including their impact on business decision-making. The study concludes that accounting is crucial for organizations to make informed decisions and improve their performance.

INTRODUCTION TO
ACCOUNTING AND
FINANCE

Table of Contents
INTRODUCTION................................................................................................................................3
PART A- Dexter Plc..............................................................................................................................3
PART B: Philly Ltd..............................................................................................................................7
a...................................................................................................................................................7
b...................................................................................................................................................8
c...................................................................................................................................................9
d...................................................................................................................................................9
e. Assumption of breakeven model...........................................................................................10
PART C: Sankrust Ltd........................................................................................................................11
a. Calculation of net present value, payback period and accounting rate of return..................11
b. Merits and limitation of investment appraisal techniques ....................................................12
c. Budget as a tool for strategic planning .................................................................................13
CONCLUSION .................................................................................................................................16
REFERENCES...................................................................................................................................17

INTRODUCTION
Accounting assist in measuring the financial performance and profitability of the firm on
the basis of which the organisation is able to effective decision. In this assignment, it will include
the information regarding the Dexter Plc which is a new business started trading on 1 January 2018.
also , it will contains Philly ltd on the basis of which the calculation will be made in the in part
2.This study will include the information regarding the net present value , accounting rate of return,
payback period etc. It will prepare the income statement and the statement of financial position on
the basis of the information provided by Dexter Plc.
PART A- Dexter Plc
Income Statement
For the year ended 31 December 2018
Particulars £ £
Revenues:-
Sales(604800+154800) 633000
Other income 0
Total Revenues 633000
Expenses:-
Cost of goods sold or cost of sales 243000
54000 297000
Depreciation 9600
Wages paid 117000
Add Outstanding wages at the end of the year 2175 119175
Electricity Expenses 7725
Van running expenses 33600
Bad debts 1500
Rent paid 112500
Less:- prepaid rent at the end of the year 22500 90000
Total Expenses:- 558600
Net profit before tax 74400
Less:- Tax paid 5775
Net profit after tax 68625

From the above statement of income which has provided information about the income and
expenses which are being incurred by the organisation in that period which help in identifying the
profits earned by the firm during that period. The net profit earned by the firm in that period is
181905 which means the business is profitable and is growing to increase their market share in the
industry.
Balance Sheet
For the year ended 31 December 2018
£ £
Assets
Fixed Assets
Delivery Van 50400
Current Assets
Prepaid Rent 22500
Closing Inventory 228000
Trade Recievables 64500
Prepaid Tax 1125
Cash 90000
Total Assets 456525
LIABILITIES
Shareholder's Equity
Equity share capital 180000
Reserves and surplus 68625
Long Term Liabilities
Current Liabilities
Outstanding Wages 2175
Outstanding Electricity Expenses 2025
Trade Payables 93000
Bank Overdraft 110700

Total Liabilities 456525
On the basis of the above calculation it can be interpreted about the financial position of the
Dexter ltd. It provided the information regarding the assets and liabilities of the firm. The asset and
liabilities help in measuring the financial performance of the firm and also the capability of the
organisation to measure the liquidity position of the organisation on the basis of information.
Working Notes
1Total Sales
credit sales 504000
cash sales 129000
633000
2Depreciation
Purchase Price of Van 60000
scarp value 12000
life in years 5
Depreciation 9600
3Tax Computation
Tax upto 31 march 2018 2400
Add:- Tax from 1 april 2018 to 31 march 2019 4500
Less:- prepaid tax of 3 months
(from 1january 2019 to 31 march 2019) 1125
5775
4Electricity Expenses:-
Expenses paid 5700
Add:- Outstanding expenses at the end of the 2025

year
7725
5Reserves and surplus
Net profit after tax 68625
6Trade Payables
Credit Purchases 486000
Less:- Payment to Trade Payables 393000
93000
7Trade Receivables
Credit Sales 504000
Receipts from Trade Receivables 438000
Closing Trade Receivables 66000
Bad Debts 1500
Net Trade Receivables 64500
8Prepaid Rent of 3 Months
Annual Rent 90000
Rent Per month 7500
Rent For 3 months 22500
9Closing Inventory
Cost of credit sales 243000
Add:- Cost of cash sales 54000
Total Cost of sales 297000
Credit Purchases 486000
Cash Purchases 39000
Total Purchases 525000
Total Purchases 525000

Less:- Total Cost of sales 297000
Closing Inventory 228000
10 Closing Bank balance
Issue of Equity 180000
Receipts from Trade Receivables 438000
Total Receipts 618000
Less:- Rent paid 112500
Tax paid(2880+5400) 6900
Delivery van purchased 60000
Wages paid 117000
Electricity Expenses 5700
Payment to Trade Payables 393000
Van running expenses paid 33600
Total Payments 728700
Bank balance(cr.) 110700
11 Cash Balance
Cash Sales 129000
Less:- Cash Purchases 39000
Cash at 31 December 2018 90000
12 Closing Balance of Delivery Van
Delivery van purchased 60000
Less:- Depreciation 9600
50400
PART B: Philly Ltd
a.
Particulars £
Sales(70000units@13) 910000
Less:- Variable cost(70000 units@10.05) 703500
Contribution 206500
Interpretation- the above table shows that the resulted contribution per unit equates to
206500 which is been evaluated by deducting the variable cost from the sales.

Working Notes
Variable costs per unit for 60000 units
Materials 5.25
Labor 2.95
Variable Overheads 1.85
Variable costs per unit 10.05
Interpretation- The table reflects that the total variable cost per unit after adding up
material, labour and the variable overhead resulted as 10.05.
Working Notes
£
Total Fixed Cost
Fixed production cost 59000
Fixed Selling cost 47600
Total Fixed Cost 106600
b.
Particulars £
Total Fixed Cost 106600
divided by:- PVR 0.226923077
Break Even Point in terms of revenue 469763
Round off 469763
Sales(70000units@40) 910000
Less:- Break Even Point in terms of revenue 469763
Margin of safety in terms of revenue 440237
Units
Break Even Point in terms of units
Total Fixed Cost 106600
divided by:- Contribution per unit 2.95
Break Even Point in terms of units 36135.6
Round off 36136

Margin of safety in terms of units
Sales 70000
Less:- Break Even Point in terms of units 36136
Margin of safety in terms of units 33864
Working Notes
£
1 Total Fixed Cost
Fixed production cost 59000
Fixed Selling cost 47600
Total Fixed Cost 106600
2 PVR(Profit Volume Ratio)
Contribution 206500
divided by:- Sales 910000
PVR 0.237
3 Contribution per unit
Sales per unit 13
Less:- Variable costs per unit 10.05
Contribution per unit 2.95
c.
Particulars £
Sales(48000units@13) 624000
Less:- Variable cost(48000 units@10.05) 482400
Contribution 141600
Less:- Total Fixed Cost 106600
Profit 35000
d.
Particulars £

Sales(63180units@14.17) 895260.6
Less:- Variable cost(63180 units@10.05) 634959
Contribution 260301.6
Less:- Total Fixed Cost 106600
Marketing and advertising expenses 45000
Profit 108701.6
Round off 108702
Working Notes
1 Sales price per unit before 13
Add:- Increase in % 1.17
New sales price per unit 14.17
2 Units before 54000
Add:- Increase in 17% 9180
Total Units 63180
3 Variable cost per unit before 10.05
Add:- Increase in 8% 0.804
New Variable cost per unit 10.854
4 Since the proposal is offering profits so this is
good strategy for the company.
e. Assumption of breakeven model
Break - even analysis helps in determining the stage where the firm have no profit and no
loss. It identifies the relationship between the cost related to fixed and variable with that of sales of
the firm. The assumption of break-even include that total cost is required to be classified into fixed
and variable cost. Also, It does not take into consideration the semi- variable cost. Moreover, the
underlying assumption of breakeven model is that the cost and revenue function remain linear. As
per the assumption made under break even model the price of the product is assumed to be constant.
The break even analysis assist in identifying the sale which is required to be made by the
organisation in order to cover its fixed cost and start earning the profit (Adler and Stringer, 2018).

With the help of its revenue can cost the organisation is able to measure its break even
because when the firm revenue and cost are equal than it is said that the firm is in the position of
break-even where there is no profit and loss. This analysis assist in identifying the cost- volume -
profit relationships. Moreover the assumption of break - even analysis state that unit of selling price
remain constant. break- even analysis is used by various organisation because there are various
benefit of using this analysis as it helps the firm in understanding their level of sales which will
assist in recovering their cost. Moreover, the organisation by using this analysis is able to estimate
the level of profit which is required by the firm for the growth and success of the organisation.
Moreover, it is useful for the firm because it assist in determining the operating risk associated with
the firm. The finance manager with the help of the break - even analysis is able to make planning
for the capital structure of the firm. The assumption of break - even analysis include that the
productivity of per worker is assumed to be unchanged. Company uses the break - even analysis as
it help the firm in determining the level of sales which will be required for covering the cost
(Cortese and Walton, 2018). Moreover, it helps in determining the level of profit which is required
for covering the cost. Break -even analysis is used by different businesses because it provide
assistance to the firm in identifying the level of sales and profit.
PART C: Sankrust Ltd
a. Calculation of net present value, payback period and accounting rate of return
Depreciation
cost of machine 40000000
selling amount 5000000
expected life 5
depreciation amount 7000000
years net cash flow
discounting
factor@7% present value
0 40000000
1 17600000 0.935 16448598.1308411
2 17600000 0.873 15372521.6176085
3 17600000 0.816 14366842.633279
4 17600000 0.763 13426955.7320364
5 17600000 0.713 12548556.7589126

total present value 72163474.8726777
less initial investment 40000000
net present value 32163474.8726777
payback period
Initial investment /
net annual cash
inflows
Pack back period 1.244
Accounting rate of return
average annual
profit/ average
investment
total profit from project 33000000
average annual profit 6600000
average investment 43500000
ARR 0.152
From the above calculation which has provide information regarding the net present value
for the project which will assist in identifying the present value of the future cash flow. It is
identified that the net present value of the machine which is 32163474.8 that shows it is beneficial
for the firm to buy the machine because it will assist in increasing the cash inflow of the
organisation which is beneficial for the growth and success of the firm. Moreover, the calculation
has provided information regarding the payback period for the investment which will be made for
the purchase of machinery (Marriott, 2017). The payback period which is calculated is 1.244 which
means the amount which will be invested by the firm will be recovered in 1.24 period. also, it has
determined the accounting rate of return which assist in determining the the rate of return which
will be generated from the investment which is derived as 15%.So, it is recommended to the
company that it should purchase the machine because the net present value of the machinery is
positive which indicate it will generate more cash flows and also the payback period is lower and
the accounting rate of return is satisfactory and thus the firm should purchase the machine as it will
assist in increasing the profitability of the firm.
b. Merits and limitation of investment appraisal techniques
Investment appraisal techniques assist in identifying the best project which will assist in

increasing the profitability of the firm (Yu, Lin and Tang, 2018). There are different types of
investment appraisal techniques which are used by the firm in order to identify the benefit
associated with the project so that the firm is able to make their investment decision and can invest
in the best profitable project.
The following are the different investment appraisal techniques:
Payback period: It is the time required for recover the initial cost of investment. It helps
the firm in identifying the time in which the firm will recover their investment amount (Schaltegger
and Burritt, 2017). It compare the different project and identify which project will recover the cost
in short period is chosen by the organisation as it will be beneficial for the firm.
Merits
 It is helpful because it provide understanding to the firm regarding the time period in which
the initial investment will be recovered. It is a easy method to calculate.
 It assist in measuring the risk associated with the project.
Demerits
 It consider only the period related to pay back.
 It ignores the annal cash flow.
Net Present value : It is the difference between present value of cash inflows and the present value
of cash outflows over a period of time (Lin, 2017). It assist in analysing the profit associated with
the project on the basis of which the organisation is able to make their investment decision.
Merits
 It gives importance to the time value of money.
 Profitability and risk of the project are given high priority.
 It assist in maximising the value of firm.
Demerits
 The net present value method is difficult to calculate.
 The net present value is not able to give accurate decision if the projects are not equal.
 It is difficult to calculate the appropriate discount rate.
Accounting rate of return : It is the rate of return which is expected to generated by the
investment. The accounting rate of the return is the return expected on an investment (Cleary and
Quinn, 2016). it assist in making the investment decision on the basis of the determining the

expected return associated with the investment.
Merits :
 Accounting rate of return is very easy to calculate and simple to understand.
 It is based on the profit and thus it measures the profit associated with the investment.
 It helps in determining the current performance of the organisation.
Demerits :
 Accounting rate of return ignores the time value of money.
 Also, It ignores the cash low associated with the investment.
 It is not useful to evaluate the project where the investment is made in instalment.
Net present value : It refers to the capital budgeting method that represents the value of all
future cash inflows and outflows over a useful life of investment. It is stated as the difference
present in between the current value of future cash flows from an amount of the investment.
Merits :
 NPV considers the concept of time value of money while evaluating the value of cash
inflows and outflows so that accurate results could be attained.

 It helps the firm in making the comparative analysis among the various projects.
 The higher the value of NPV depicts that the project is more and more profitable.
Demerits :
 NPV method does not takes into account the rate of return that is been expected to earn by
the business.
 While applying this method, an organization faces difficulty in calculating the appropriate
rate of discount.
 It leads to the contradictory and the confusing outcomes at the time of ranking the projects.
Internal rate of return : This means an appraisal tool that is used for estimating
profitability of the potential investments. It is counted as the discount rate which makes NPV of all
the cash flows from a specific project equated to zero.
Merits :
 IRR is mainly concerned as the perfect use of the time value of the money concept.
 Under this method all the cash flows are been given an equal importance for evaluating the
rate of return that would be gained by an entity from the proposal.
 This technique provides for ranking of the project so that the most suitable proposal can be
selected.
Demerits :
 It is considered as the difficult method as it not equalize the present value of the cash inflow
with that of cash outflow.
 This investment appraisal method is not suitable for making the comparison of the 2
mutually exclusive projects.
 Under this method, unrealistic assumptions are been made which leads to inaccurate
computation of percentage rate of return.
c. Budget as a tool for strategic planning
Budget is the way through which the organisation is able to measure it profit on the basis of
comparing the actual income with that of the standards budgeted figures that assist in identifying

the income and expenses and can determine the variance which help in taking the effective decision
for resolving the financial problems in order to increase the profitability by reducing the expenses
(Schaltegger, Burritt and Petersen, 2017). There are different types of budget which are being
prepared by the organisation and help in providing knowledge and understanding about the future
profitability and growth of the firm. It provide the estimate of the income and expenses for the
future which are compared with the actual in order to determine the deviation on the basis of which
the organisation is able to formulate the strategies which assist in reducing those deviation to
increase the profit margin of the firm by reducing the expenses (Lin, Yang and Wang, 2018).
The different types of budget which are used as a planning tool consist of the following :
Operating budget : It is the budget which is prepared regarding the operating income and
expenses for the period. It help in understanding the income and expenses on the basis of which
the organization profitability is being estimated (Abdallah, 2016). It assist in making decision
regarding the operating income and expenses in order to increase the profitability of firm. The
organisation on the basis operating budget is able to reduce the future expenses in order to enhance
the profitability of the company.
Benefits Limitations
 It assist in managing the expenses for the
period which helps in increasing the
profitability of the firm.
 It assist in making effective decision
regarding the future expenses and
income in order to improve their
financial performance and profit margin.
 Operating budget helps in reducing the
debts and in building the financial
reserves so that future uncertainties can
be met by an entity.
 It require long planning for the
preparation of operating budget.
 It is difficult to allocate the expenses.
 Operating budget requires frequent
changes which involves a lot of time and
results in a lengthy process.
Financial budget : It is the budget which assist the firm in managing the cash , assets etc,.
With the help of the financial budget the organisation is able to determine the firm liquidity position
which assist in managing the assets and cash in order to improve the liquidity position of the

company (Fourie and et.al., 2015). It helps in determining the value of the firm and assist in
improving the performance and position of the firm in order to attract more investors towards
organisation.
Benefits Limitations
 It assist in the financial planning of the
firm which helps in improving the
performance and profitability of
organisation.
 It assist in providing financial awareness
of the spending and earning of business.
 It is difficult to estimate the financial
figures for the preparation of financial
budget.
 Preparation of financial budget is a time
consuming process.
Cash budget : It assist in identifying the future requirement of the cash on the basis of
preparation of cash budget organisation is able to estimate the future cash requirement for
performing the different operations of the firm. It estimate the cash inflow and outflow for the
future which are being compared with that of the actual cash inflow and outflow in order to identify
the variation if the firm have the sufficient funds to perform their activities and generate revenue for
the organisation to increase the profitability (Ainsworth and Deines, 2019). The firm having
enough cash is able to maintain their liquidity position which is helpful in paying off their
obligation to retain in the business and perform their activities in the effective and efficient manner.
Benefits Limitation
 It helps in reducing the cost and
maximising the profit of the company.
 It helps in determining the cash
requirement of the firm in order to
perform the activities in the effective and
efficient manner.
 Cash budget helps the company in
making optimum use of cash by keeping
a proper control on the cost or expenses.
 It is expensive to operate the budget
(MERITS AND DEMERITS OF CASH
BUDGET, 2018).
 It is time consuming process as it require
past data for the estimation.
 Cash budget causes distortions where the
cash inflows does not equates to profit
and this leads to inaccuracy in the
results.

It is identified that the budget is the tool which assist the firm in their strategic planning on
the basis of which the organisation is able to make the effective decision. The organisation with the
help of budget are able to make the the right decision which result into the increase profitability and
performance of the company (Maskell, Baggaley and Grasso, 2016). Budget is important because
with out that the firm is not able to make estimate for the future and can determine the future
income and expenses which in turn will affect the performance and profitability of the organisation.
With the help of budgeting the organisation is able to measure the risk associated with the future
and can take steps in order to reduce the impact of risk on the income of the organisation.
CONCLUSION
From the above assignment it can be concluded that the accounting is important for the
organisation in order to determine their performance and profitability associated with that period. it
has provided understanding about the net present value which assist in measuring the present value
of the future cash flow. Also, It has provide information regarding accounting rate of return which is
the expected return from the investment. Moreover, It has assisted in determining the different types
of budget which help in making decision by the management to improve the performance and
profitability of organisation. furthermore, The study has concluded about the merits and limitation
of the budget which involved that it is a time consuming process to prepare the budget as it involve
the estimate based on past records. The advantage of using budget is that it helps in determining the
future performance and profitability and also the risk factors which may hamper the performance
and profitability of organisation.