Introduction to Finance

INTRODUCTION TO
FINANCE

TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................2
QUESTION 1..................................................................................................................................1
a) Calculate economic order quantity for the hard plastic...........................................................1
b) Total annual cost of the hard plastic........................................................................................1
c) Critical evaluation of the decision of using EOQ model as part approach to management of
the inventories..............................................................................................................................2
d) Advise on cost of handling inventories cost of failing to manage the inventories adequately
and practical implication of inventory management...................................................................3
QUESTION 2..................................................................................................................................3
a) Calculation of payback for Option A and Option B................................................................3
b) Accounting rate of return for option A and option B..............................................................4
c) Critical evaluation of the accounting rate of return.................................................................5
d) Explanations of characteristics of the investment appraisal decisions and advantage and
disadvantages of internal rate of return.......................................................................................6
QUESTION 3..................................................................................................................................6
Calculation of ratios.....................................................................................................................6
Importance of considering audience for financial statement analysis.........................................9
QUESTION 4................................................................................................................................10
Role of different organization in international regulatory framework for accounting..............10
Role of audit committees in corporate governance...................................................................10
REFERENCES..............................................................................................................................12

QUESTION 1
a) Calculate economic order quantity for the hard plastic
EOQ
A = 27000 Annual demand of product
O = 14 Ordering cost per order
C = 1.75 Carrying cost per annum per item
EOQ = √2AO/C
√ 2*27000*14 / 1.75
√432000
657.267
The EOQ of Touchdown sports is 657.26 kilograms of hard plastic.
b) Total annual cost of the hard plastic
Annual cost
Cost of Purchase A*average cost of the hard plastic
27000*0.90
a 24300
Cost of Ordering A/EOQ *O
(27000/657)*14
b 575.34
Cost of Holding EOQ/2 * C
(657.26/2)*1.75
c 575.11
Total annual cost = a+b+c
24300+575.34+575.11
25450.45
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For calculating the total annual cost of hard plastic first cost of purchase, cost of ordering
and cost of handling are to be calculated. Thereafter, all the costs are added for getting the total
cost of hard plastic per year. Total cost of hard plastic is $25434.
c) Critical evaluation of the decision of using EOQ model as part approach to management of the
inventories
Economic order quantity or EOQ is ideal order quantity company should purchase for
minimising cost of inventory like holding costs, order costs and shortage costs. It is used as the
part of continuous review system where inventory levels are monitored all times and fixed
quantities are ordered every time inventory reaches reorder point (Jiraruttrakul and et.al., 2017).
It provides model for identifying optimum reorder level that ensures instantaneous replenishment
of the inventory without any shortages. It is considered as valuable tool by the organisations and
business that makes decision on inventory level to be kept, how much quantity to order and how
much reorder for incurring lowest possible cost.
The method assumes demand to be constant and also inventory gets depleted at the fix
rate till it reaches zero. As it assumes instantaneous replenishment, there is no shortage of the
inventory or associated cost. Cost of the inventory under EOQ model includes trade-off between
the inventory holding costs and the order cost. Ordering large amount will increase the holding
cost of business at one time but making frequent orders in fewer quantity will be reducing
holding cost but at the same time increasing the order cost (Farhan and Susanto, 2019). EOQ
helps management in identifying quantity which will lower the sum of costs.
The EOQ model for inventory management by Touchdown sport could be effective as it
is having constant demand for the quantity of materials excepts in July and August. This will not
make a major difference. It could use the method for the business as it is having fixed ordering
and carrying cost. It could manage the inventory effectively using the EOQ model for inventory
management. However along with using this approach touchdown sports is required to take
account for other changes in the cost that could affect the inventory order.
d) Advise on cost of handling inventories cost of failing to manage the inventories adequately
and practical implication of inventory management.
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