Introduction to Accounting and Finance - Assignment

Introduction
to Accounting and
Finance Assessment

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Part A – Yarnshaw Limited:.......................................................................................................3
Statement of Income of Yarnshaw Limited:...............................................................................3
Statement of Financial Position of Yarnshaw Limited:..............................................................4
Part B – Reckturk Plc:.................................................................................................................6
A. Calculation of contribution per wardrobe makes towards covering fixed costs if selling
price is £40:.................................................................................................................................6
B. Computation of break-even point and margin of safety in terms of both units of wardrobe
and revenue if selling price is £40:.............................................................................................7
C. Computation of the profit of company if production and selling units are 54,000 wardrobe
and selling price is £40 per wardrobe:........................................................................................8
D..................................................................................................................................................8
E. Break-even Model:.................................................................................................................9
Part C – Roseville Plc:..............................................................................................................10
A. Calculation of Payback Period, Net Present Value and Accounting Rate of Return of the
machine and recommendation:.................................................................................................10
B. Explanation and analyses of differing investment appraisal technique's major merits and
limitations:.................................................................................................................................12
C. Key benefits and limitations of using budgets as a tool for strategic planning:...................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Finance and Accounting are two different aspects but closely interlinked. Accounting
covers initial recording of fiscal events and transactions whereas finance covers management of
organisation's fiscal resources. Accounting process begin with entering fiscal data, summarising
such data and generation of information which exhibits organisation's actual financial position.
Finance relates to field which is directly related with investing and assigning financial resources
for a specific time frame with aim to get monetary return while considering any risk conditions
and uncertainty associated (Rainer and et.al., 2013). It can be simply defined as art concerned
with effective money management. This study covers preparation of financial statements i.e.
revenue statement and statement of financial position, break-even analysis and margin of safety.
Study report also includes practical aspects of net present value, accounting rate of return,
payback period and other variables help in determining viability of any project or investment.
TASK
Part A – Yarnshaw Limited:
Statement of Income of Yarnshaw Limited:
Statement of Income of Yarnshaw Limited for the year ended 31st December 2018
Particular Amount Particular Amount
To Opening Inventory - By Sales
To Purchase Credit: 604800
Credit: 583200 Cash: 154800 759600
Cash: 46800 630000 By Closing Inventory 273600
To Wages 140400
Add: Outstanding
Expenses 2610 143010
To Gross Profit 260190
Total 1033200 Total 1033200
To Electricity Bill 6840 By Gross Profit 260190
Add: Outstanding
Expenses 2430 9270

To Van Running
Expenses 40320
To Bad-debts 1800
To Rent Expenses 135000
Less: Prepaid Rent 27000 108000
To Rates 8280
Less: Prepaid Rent 1350 6930
To Depreciation on Van 11000
To Net Profit 82870
Total 260190 Total 260190
Statement of Financial Position of Yarnshaw Limited:
Statement of Financial Position of Yarnshaw Limited as on 31th December 2018
Amount
Assets
Current Assets
Prepaid Rent 27000
Prepaid Rates 1350
Debtors 77400
Inventories 273600
Total Current Assets 379350
Non Current Assets
Van 72000
Less: Depreciation 11000 61000
Total Assets 440350
Less: Liabilities
Current Liabilities
Outstanding Wages 2610
Outstanding Electricity Expenses 2430

Creditors 111600
Bank Overdraft 24840 141480
Total Liabilities 141480
Net Assets 298870
Owners Equity
Capital 216000
Add: Net Income earned During the year 82870 298870
Working Notes:
Cash/Bank Account
Particular Amounts Particular Amounts
To Capital Account 216000 By Purchase 46800
To Cash Collected From
Debtors 525600 By Cash paid to Suppliers 471600
To Sales Account 154800 By Van running Expenses 40320
To Balance C/d 24840 By Wages paid 140400
By Electricity Bill Paid 6840
By Rates 8280
By Rent 135000
By Van Purchased 72000
Total 921240 Total 921240
Calculation of Closing Inventory value:
Particular Amount £
Credit Purchase 583200
Cash Purchase 46800 630000
Less: Cost of sales
Cash 64800

Credit 291600 356400
Closing Inventory 273600
Calculation of Debtors balance at year end:
Particular Amount £
Credit Sales 604800 604800
Less:
Cash collected from Debtors 525600
Bad debt 1800 527400
Debtors Balance at year end 77400
Calculation of Creditors balance at year end:
Particular Amount £
Credit Purchase 583200
Less:
Cash paid from Suppliers 471600
Closing Creditors 111600
Calculation of Depreciation:
SLM Method: (Value of Assets – Salvage Value)/Number of years
Computation of depreciation on Van purchased on 1 January 2018:
= £(72000 – 6000)/6
= £11000
Part B – Reckturk Plc:
Given Information
Selling price 40.00

Current Production (Units) 78000.00
Budgeted production for next year 60000.00
Costs
Variable Costs (per unit) 15.75
Labour 8.85
Variable Overheads 5.55
Fixed Costs
Production 177000.00
Selling etc. 142800.00
A. Calculation of contribution per wardrobe makes towards covering fixed costs if selling price
is £40:
Rate per Unit Actual Budgeted
Units 78000 60000
Total Revenues 40.00 3120000.00 2400000.00
Material 15.75 1228500.00 945000.00
Labour 8.85 690300.00 531000.00
Variable Overhead 5.55 432900.00 333000.00
Total Variable Costs 2351700.00 1809000.00
Contribution 768300.00 591000.00
Contribution per unit 9.85 9.85

B. Computation of break-even point and margin of safety in terms of both units of wardrobe and
revenue if selling price is £40:
Break-even point (Units of Wardrobe):
Fixed Costs: Amount Amount
Production 177000.00 177000.00
Selling 142800.00 142800.00
Total Fixed Costs 319800.00 319800.00
Contribution per unit 9.85 9.85
Break Even Point
= Fixed Cost / Contribution
per unit 32467.01 32467.01
Break-even point (Revenue):
Sales per Unit 40.00 40.00
Contribution per unit 9.85 9.85
Contribution Margin
(Contribution per unit/ Sales
per unit)*100 24.63% 24.63%
Total Fixed Costs 319800.00 319800.00
Break Even Point
Total Fixed
Costs/Contribution Margin 1298680.20 1298680.20
Margin of Safety (Units of Wardrobe):
Actual Budgeted
Sales Units 78000.00 60000.00
Break Even Point (units) 32467.01 32467.01
Margin of Safety 45532.99 27532.99
Margin of Safety (Revenue):
Actual Budgeted

Sales Units 3120000.00 2400000.00
Break Even Point (units) 1298680.20 1298680.20
Margin of Safety 1821319.80 1101319.80
C. Computation of the profit of company if production and selling units are 54,000 wardrobe and
selling price is £40 per wardrobe:
Rate per Unit Actual
Units 54000
Total Revenues 40.00 3120000.00
Material 15.75 850500.00
Labour 8.85 477900.00
Variable Overhead 5.55 299700.00
Total Variable Costs 1628100.00
Contribution 1491900.00
Fixed Costs:
Production 177000.00
Selling 142800.00
Profit 1172100.00
D.
Reckturk Plc: New Proposal
 Marketing and Advertising Expenses: £135000
 Selling price: Increase by 8%
 Sales level (in units of wardrobe): Increase by 15%

Rate per
Unit Actual
Units 62100
Total Revenues
40 + 8%
increase 43.20 3369600.00
Material 15.75 978075.00
Labour 8.85 549585.00
Variable Overhead 5.55 344655.00
Total Variable Costs 1872315.00
Contribution 1497285.00
Fixed Costs:
Production 177000.00
Selling 142800.00
Marketing and Advertising Expenses
As Given 135000.00
Profit 1042485.00
E. Break-even Model:
Break Even Analysis in business and economic term it pertains to a level at which overall
cost as well as total income are equitable. A break even point assessment is being used to
measure the number of units or amount of revenue sufficient to cover entire costs of incurred by
a business entity including all fixed and variable expenses. This analysis is focused on
classification of cost of manufacturing between "variable" expenses (expenses that alter when
manufacturing output shifts) and "fixed" expenses (expenses not immediately changed or
unaffected with change in manufacturing quantity). Total variable and all the fixed costs are
compared systematically to sales or entire revenue in order to calculate figures of sales quantity,

sales price or outputs level at which enterprise does not make any profit or any loss (Maskell,
Baggaley and Grasso, 2012). It also facilitates determining what quantity is required to sold,
annually or monthly, to recover cost incurred in making such sales. Break even point can be
presented in number of units and amount of revenue. Formulas which help in assessing a break
even point is discussed as follows:
Break even units = Fixed costs / (Sales price per unit – Variable cost per unit)
Break-even point ( Revenue) = Fixed costs / Contribution Margin
Where:
Fixed costs are expenses which do not fluctuate with changes in output.
Sales price p.u. Implies to selling price of each single unit.
Variable cost p.u. is variable expenses associated with manufacturing of single unit.
Contribution Margin = Contribution per unit x 100
Sales per unit
Contribution per unit = Sales price per unit less Variable cost per unit
Break even model can be applied by all form of business entities. It is simple method
which provides appropriate result irrespective of nature of business. Further it act as base for
calculating margin of safety. Because executives understand that fixed and variable costs
influence company profit margins, with the aid of break-even analysis, they could see the impact
of cost adjustments. It enables them to determine the level to which change in costs or cost
adjustments influence profit margins and break-even (Di Pietra, McLeay and Ronen, 2013). The
break-even point could be affected by any shift in sales price. For illustration, the number of
units required to be sold to break-even will be decreased if the sale price is expanded. Similarly,
a company requires to buy more to break-even if the sale price is decreased.
As in given case of Reckturk Plc, from calculation of break even point it has been
analysed that at production and sales level of 78000 units company's break-even sales in units is
32467.01 or 32467 units approx and break-even sales is pound 1298680.20. Which implies that
company is required to maintain their sales and production level at 32467 at least to avoid any
loss. Also revenue benchmark of 1298680.20 is necessary to avoid net loss figures.

Part C – Roseville Plc:
A. Calculation of Payback Period, Net Present Value and Accounting Rate of Return of the
machine and recommendation:
Given
Information £
Purchase Cost of
New Machine 8000000
Expected annual
Cash inflow 3400000
Annual Cash
Outflow 1280000
Useful life of
machine (in years) 5
Salvage Value 1000000
Depreciation using
Straight-line
method
Cost of Capital 9.00%
Payback Period
Initial Investment 8000000
Net Annual Cash
inflow 2120000
Payback Period
3.773584905
7
Accounting Rate of Return
Purchase Cost of
New Machine 8000000
Expected annual 3400000

Cash inflow
Depreciation 1400000
Accounting Rate
of Return 9%
Net Present Value
Year Cash Inflow
Cash
Outflow
Net Cash
Inflows
Discounting
Factor
Present Value
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
Total Present
Value of Net
Cash Inflows 8895992
NPV
895992
Recommendation: As per above calculations it has been recommended to Roseville Plc should
buy machine, since NPV is positive. Also payback period is showing that company will recover
their cost within approx 3 year and 9 months. Here ARR is 9% which implies that machine
would provide 9% average annual accounting profit during its effective useful life on the basis of
average cost incurred. ARR should be compared with targeted investment return (Mintz, 2016).
So from overall analysis it is advised to company that machine should be purchased.
B. Explanation and analyses of differing investment appraisal technique's major merits and
limitations:
Investment Appraisal Technique: These are methods which defines effectiveness of
any investment proposals and selecting appropriate investment proposal. These also help in

appraising efficiencies of any project. Significant investment appraisal techniques are payback
period, accounting rate of return and net present value (Watty, Jackling and Wilson, 2014).
Following is discussion on merits and limitations of such different techniques of investment
appraisal, as follows:
Payback Period: One of the easiest methods of investment evaluation is the payback
phase. Payback method indicates how lengthy it takes for the proposal to produce enough cash
flow to offset the project's initial original cost (Collis, Holt and Hussey, 2017). Following are
limitations and key merits of pay back period technique, as follows:
Merits:
 Pay-back period approach is assessment wise easier method and easily understandable.
So mostly preferred by managers for taking momentous decisions.
 It is an universal approach so widely accepted by business entity across the world.
 Pay-back period emphasis on liquidity variables for taking decisions regarding
investment proposals.
 It mainly focus on risk as investment proposal with lowest period reflects less risk rather
than investment proposal with higher payback period (Ainsworth and Deines, 2019).
Limitations:
 Money's time-value is not considered in computing payback period.
 It only focuses on liquidity and ignores profitability variables.
 Cash flow post PBP is ignored and only cash flow before PBP is mainly considered.
Accounting Rate of Return Method: Accounting rate of return implies to specific accounting
method which to assess return anticipated from a particular investment. It reflects figure of net
accounting income or profit to be earned through investment as certain percentage of amount of
investment. It also considered as return on capital or return on investment (Brief and Peasnell,
2013). Here are merits and demerits of accounting rate of return method:
Merits:
 ARR is basically computed on the basis of accounting information so there is no need of
any particular reports for assessment of ARR.
 ARR approach is simple and easy method which does not require any professional
knowledge.

 ARR emphasises on use of accounting profit so it act as more appropriate measure for
determining investment profitability (Gitman, Juchau and Flanagan, 2015).
Limitations:
 ARR approach of investment evaluation clearly ignores concept of time value of money
which sometimes seems unrealistic.
 This approach leads to avoidance of cash-inflows from any project or investment.
 ARR also ignores any amount of terminal value of investment or project.
Net Present Value: It is widely applied method of for evaluation of investment. Amount
of Net present value is simply an aggregated amount of discounted future cash-inflow & outflow
with respect to a specific project. A figure of positive NPV shows that anticipated incomes
obtained through a investment or project is in excess of expected costs to be incurred (Atrill,
McLaney and Harvey, 2014). A positive NPV is generally regarded as favourable investment
and a negative one is considered as loss making investment. Following is a discussion on merits
and limitations of NPV method, as follows:
Merits:
 This approach emphasises on concept of time value of money in evaluation of investment
technique.
 In assessment of NPV, cash flow after as well as before the effective life of any project is
considered.
 Risks variables and profitability are taken on priority basis in NPV calculations which
provide effective results.
 It contribute in maximization of worth of project or value of entity.
Limitations:
 NPV does not provide accuracy in process of decision making if value of investment
made in two or more mutually-exclusive proposals are not equally divided (Weil,
Schipper and Francis, 2013).
 Discount rate used in this method is difficult to calculate.
 In case of projects with different life, NPV can not provide accuracy in decisions.
C. Key benefits and limitations of using budgets as a tool for strategic planning:
Budgets: Budgets involves organised planning, monitoring and tracking of usage of
various fiscal resources of business entity with aim to attain predetermined goals. Budgets are

planning tools which assist managing officials in making plans for future by applying past
experience and data. Budget process pertain much more than observing existing resources and
classification of resources. An effective budget involves thinking process for developing a
financial plan and supporting overall goals (Schaltegger and Burritt, 2017). Different budgets
supports organisation's different activities and key functions. Budgets provides framework for
planning, directing, formulation and implementation of organisational policies. Budgets enables
managerial personnels to decentralise different organisational obligations without misplacing
business control. Following is a discussion on crucial budgets along with their key benefits and
limitations, as follows:
Incremental Budget: It's a traditional budget in which current period’s budgeted figures are
taken as benchmark along with increasing amounts are merged with new period budget.
Merits:
 This is simple budget and no technical analysis required thus widely used in strategic
planning.
 An incremental budget ensures that there are no large variations has been reported in
budget from one year to another year because it step by step provides modification in
budget.
Limitations:
 It mostly emphasises on increments rather than other determining variables in budget.
 For strategic planning it sometime seems to be unrealistic to consider only incremental
figures.
Zero Based Budget: In a ZBB, all figures in a budget is taken at zero and a new budgeted
figures are entered. Any previous figures and data are not considered while preparing a zero
based budget.
Merits:
 In this budget resources of business entity are assigned on the basis of terms of cost
benefit thus provides effective resource utilization.
 It enables finance officers to get a true position of extent of funds and finance accessible
and consequences leads to raising more finance.
Limitations

 Non consideration of previous results and figures some time leads to ambiguousness in
strategic planning.
 Main motive of budgets is comparative results which is ignored in zero based budgets.
Base Budgets: In BB, the budget is formed to understand how much expense there
would be for organisation's survival only (Bamber and Parry, 2014.). Any incremental
expenditure over and beyond that level or point, though, will be warranted on the price of
benefiting from the same.
Merits:
 It provides a more clear picture about company's solvency and liquidity position as on a
particular date for taking strategic decisions.
 It ensures company's survival with changing business requirement which ensures
effective strategic planning.
Limitations:
 This is limited budget by nature not exhibits complete picture about company's
performance.
 It is difficult and time-taking task to prepare a base budget, and also require
professionalism.
Activity Based Budgeting: In ABB, the budget was prepared with aim of identifying the
activities that produce company costs and how those costs can be lowered from the present
stage. In a mature enterprise, this type of budget is used mostly.
Merits:
 Activity-based budget help to evaluate each of the cost driver and steps concerned with
any organisational activity which ultimately help in strategic planning.
 It assist in recognising and eliminating any unproductive activity within entity and leads
to cost-effectiveness.
Limitations:
 This is short term budget by nature and clearly ignores long run objective of business
entity.
 This budget require a complete knowledge of organisation's operations, in case budget
managers are unable to comprehend and analyze organisational functions, then this would
result in incorrect preparation of ABB.