Introduction to Finance: Corporate Governance, Financial Statements, Investment Appraisal, CVP Technique, and Limitations

This report covers topics such as corporate governance, financial statements, investment appraisal, cost-volume-profit technique, and their limitations in the context of finance. It includes a discussion on the characteristics of the approach used to file financial statements, calculation of payback period and ARR, and decision-making regarding dropping a product or service and special contracts.

B68019
INTRODUCTION TO
FINANCE

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Question 1........................................................................................................................................1
a) Discussing model of governance.........................................................................................1
b)Identify the characteristics of the approach that is used to the filing of financial statements
...................................................................................................................................................1
Question 2........................................................................................................................................2
Calculating pay back period ....................................................................................................2
b) Calculating Accounting Rate of Return (ARR)....................................................................3
c)Evaluating payback technique ..............................................................................................4
d) Explaining characteristics of investment appraisal decisions and the advantages and
disadvantages of the IRR..........................................................................................................4
QUESTION 3...................................................................................................................................5
A) Concept of contribution and its importance in CVP technique:..........................................5
B) describing decision regarding dropping a product or service and special contract and its
decision in CVP technique:.......................................................................................................5
C) Explaining cost-Volume Profit and its limitations:.............................................................6
QUESTION 4...................................................................................................................................6
a)Opening statement of financial position at the start of July 20X5.........................................6
b) Cash flow forecast................................................................................................................7
c)...............................................................................................................................................8
CONCLUSION...............................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Finance is broad concept that includes varied kinds of activities like banking, debt,
credit, raining funds, investment, etc. In the current era, it is essential to maintain proper
functioning of financial activities so that accomplishing business objectives can become
possible. The current report will give emphasis on discussing corporate governance &
characteristics of approach used to file financial statement. Preset study will pay attention on
calculation of payback period and ARR along with evaluating and benefits & characteristic of
IRR. Concept of contribution, significance, limitations & usefulness of CVP technique in
decision making. Cash flow forecast and opening financial position will be comprise in current
study.
MAIN BODY
QUESTION 1
a)
Corporate Governance (CG) is concerned with rules, regulations, practice, etc that
helps in understanding and monitoring processes of organization. In the current era, competition
has increased that require an organization pay attention on developing polices, strategies that
can help in complying with industrial rules & regulation so that objectives of company can be
accomplished in effective manner. Corporate governance comprise 4 Ps which includes
people, purpose, process and performance. Guidance is achieved by these model so that
effective application of process can become successful. CG is carried out through two different
modes which aids in simplifying process of compliance (Principle of corporate governance,
2021)e. There are different kinds of model that can be used by firm to accomplish business
objectives of properly adhering rules & legislation. This is essential to adhere as stakeholder
and shareholder interest can be protected. Important model of CG includes Canadian, UK &
America, German, Italian , France, etc. On the basis of this, it can be identified that organization
need to comply with its corporate governance model. Complying with CG which can help in
appropriately conducting business practices. It is important for the organization to give
emphasis on having significant application of corporate governance in organization for ensuring
appropriate accomplishment of roles and responsibilities. On the basis of this, it can be
specified that organization must adhere to corporate governance In its allocating, analyzing and
monitoring resources for successful operating.
1

b)
b)Identify the characteristics of the approach that is used to the filing of financial statements
It become essential for the organization to pay attention on developing effectual financial
statement that are accurate & reliable so that significant information can be provided to users.
There are different types of users of financial statement that require details of company’s
performance so that appropriate decision can be formulated. Company listed in UK require to
file their account with both companies house & LSE so that appropriate information regarding
financial & non monetary data can be provided. There is requirement that company listed on
LSE to a give reliable, relevant, timeliness, etc information in turn ability to take strategic
decision can become possible. It is essential to apply qualitative characteristics so that
significant & material data can be provided in form of financial statement.
To integrate and communicate all the crucial & relevant information through publishing
financial statements like income, cash flow, etc so that internal as well external users can
make decision (Qualitative characteristics of financial statement, 2021). The characteristics
that are essential to implement includes reliability, timeliness, comparability, understand
ability, relevance, verify ability, etc so that fundamental information can be given to users. It
is legal responsibility of enterprise to ensure that financial statement are non immaterial so that
irrelevant legal obligations can be avoided. There is higher requirement to ensure that how
they influence usefulness of financial statements so that adequate & meaning full decisions
can be made by stakeholders. The organization is must comply with GAAP and IFRS rules
based principles for ensuring filing of financial statements by plc’s that are incorporated in the
UK
QUESTION 2
A)
Particulars Edinburgh Newcastle
Franchisee
fee 8700 7950
New buses 4120 3890
Initial
Investment 12820 11840
2

Years
Cash flows
of
Edinburgh
Cumulative
cash flow
Cash flow
of
Newcastle
Cumulative
cash flow
1 3780 3780 3500 3500
2 4150 7930 3850 7350
3 4550 12480 4200 11550
4 5120 17600 5150 16700
5 5010 22610 5045 21745
Payback
period
3 + (12820
– 12480) /
5120
3 + (11840
– 11550) /
5150
= 3.06
years
3.05 years
From the above table it can be interpreted that organization is will become able to
recover its initial investment invested in Edinburgh and Newcastle by 3.06 and 3.05 years
respectively. On the basis of this, it can be interpreted that flyers Plc should choose that option
that will allow it to get invested fund recovered in less duration. From the comparison of two
contracts it can be interpreted that Flyers Plc should select second option of contract related
with Newcastle.
b) Calculating Accounting Rate of Return (ARR)
Years
Cash flows of
Edinburgh
Cash flow of
Newcastle
1 3780 3500
2 4150 3850
3 4550 4200
4 5120 5150
5 5010 5045
Estimated 4 5
3

life
Initial
Investment 12820 11840
Scrap
value 110 95
Average
annual net
earnings 4522 4349
Average
investment 6410 5920
ARR 71% 73%
c)
Pay back period is concerned with evaluating how effectively an organization is
recovering its initial investment so that an organization can become possible to obtain liquidity.
In the other words, it can be specified that pay back period refers to the duration within which
firm can recover initial invested capital. There is larger emphasis should be provided on such
activity that can permit firm to meet its overall objective of gaining smooth functioning. It is
one of the widely used technique of capital appraisal so that effectual decision making can
become possible. To become successful in industry it is important for the firm to pay attention
on considering all relevant factors that can allow to formulate decision. In addition to this, there
are various characteristics that are offered this technique of capital appraisal so that
accomplishing gaol of implementing effective decision so that higher productivity &
profitability can be derived (Ayodele, 2019). This presents outcome in simply and easy manner
so that interpreting and taking decision in appropriate pattern can be exerted in useful way.
d) Explaining characteristics of investment appraisal decisions and the advantages and
disadvantages of the IRR
There are different are different kinds of features which are obtained by users through taking
capital appraisal technique into consideration. There are benefits that can be achieve by
company through implementing capital appraisal technique (Soka, 2020). It allows the
organization to highlight and assess level of expected return earned from amount of expenses
4

made by firm. In addition to this, it will become possible to estimate future cost & associated
benefits from the project selected. The main features of investment appraisal involves
assessment level of expected return for level of expenditure h made. In addition to this,
estimating future cost and benefits over the project life. Other characteristics of good
investment apparsial technique which comprises clear appraisal objective, accurate, valid data,
well performance criteria, m post appraisal benefits, continuing feedback ,etc.
Internal Rate of Return is one of the easy way to compare similar kinds of projects.
Each technique has few advantages & limitations that need to be specified while taking decision
so that appropriate progress can be derived (Magni, and Marchioni, 2020). Advantages
includes finding the time value of money which can be useful in taking significant consideration
that how effectively an organization will get net value. Hurdle rate of return is not required for
computing IRR (Siziba and Hall, 2019). This is simple & easy to understand which aids in
taking decision for organization.
On the other side, firm should pay attention on identifying what are lacking areas that
can create barriers in decision making process. It involves ignoring size and future cost of
project, unrealistic assumptions, not helpful in comparing two mutual investment. These are
few drawbacks of IRR that need to be taken into practice while taking investment related
decisions. Having deeper information can allow the firm to pay attention on all these aspects
that play role of success influencing factors in turn higher strategic decision can be made.
QUESTION 3
A) Concept of contribution and its importance in CVP technique:
Contribution is define as the difference between sales and the marginal cost. This is
done to recover its fixed cost. Any excess recovered after recovering of fixed cost is termed as
profit for the company(Armean and Ardeleanu, 2017). It is calculated as gross or per unit basis.
It helps the company to know the portion of sales that will help to cover the fixed cost.
Cost-volume-profit analysis helps to manage the contribution margin of the product.
Contribution margin is calculated by subtracting total sales from total variable cost. It helps the
company to determine the break-even point. This technique also helps the company to determine
there profits of their services and products. CVP technique can be useful in contribution for
determining the perfect profitable combination of fixed cost, selling price, variable cost and
volume of sales.
5

Importance of CVP technique: This technique is very important in the management of
the company and used to determine the output which adds to the profitability of the business. It
makes the company to decide the most profitable combination of cost and the volume.
B) describing decision regarding dropping a product or service and special contract and its
decision in CVP technique:
Dropping a product or service means making a decision regarding continue or not to
continue a product or service or to add-on the new product in respect of dropped product. Cost-
volume analysis helps the company in decision-making by dropping or adding product or service
by stating that advantages and drawback of that product or services (Lulaj and Iseni, 2018). As
CVP analysis helps the company to determine the break-even point or profit of the company so
by this the company can consider that to drop or add on the product or services.
Special contract are the contracts made for the specific period in order to achieve the
targeted profit of the company. The company can make special contract if it is profitable. As
CVP technique helps the company to determine the targeted sales and profits so by this company
can decide to make special contract or not.
Decision rule for dropping or special contracts- In order to decide whether accept or
reject the special contract, the management of the company must consider the factors like the
capacity which is required to mange and fulfill the special contract, whether the price decided
and offered will cover the cost of the product and fixed cost is received by the company.
C) Explaining cost-Volume Profit and its limitations of its use in context of both the different
interpretations offered by the economist's model of CVP
Cost volume profit technique is used to analyse the effect on volume of sales and cost of
the product for operating the profitability of the company. It helps the company to determine the
differences between fixed and variable cost which affect the profit of the company (Okpala and
Osanebi, 2020). By using this technique the company can recognize its break even point to
determine the minimum profit. CVP technique has many assumptions like sales price, variable
cost and fixed cost remain constant. The important part of CVP is that when the total revenue is
same as total cost incurred including both fixed and variable cost.
As per the Economist's model of the CVP there are certain limitations which are as
follows:
6

1. Some economist thinks that the CVP analysis may come into the conflict
especially when the assumptions of linearity and the consistency of the selling
price and per unit variable cost.
2. Economist argues that the decrease in the selling price will make the increase in
the sales which increases the variable cost of the product.
Limitations of CVP technique:
 It is assumed in CVP analysis that variable cost per unit is always constant but is not true
as variable cost differs and may not be constant always.
 It is also assumed that the fixed price remains constant in CVP analysis but fixed cost
may change as volume increases by increasing the productivity.
 If the company wants to sell products at high volume than company may give sales
discount. So the sales prices is constant assumption is also a limitation for this technique.
 Time value of money is not considered and changes in prices will affect the cost volume
profit.
QUESTION 4
Assets Amount £
Tangible non current assets 150000
bank account 50000
Total assets 200000
Liabilities
Capital 200000
Total liabilities and equities 200000
7

Cash flow forecast
Particulars July August
Septemb
er October
Novembe
r
Decembe
r
opening balance 50000 200000 85000 40000 55000 120000
Income
Sales 150000 120000 150000 210000 260000 285000
Total income 200000 320000 235000 250000 315000 405000
expenditure
for material 120000 100000 60000 60000 60000 60000
other expenses 55000 55000 55000 55000 55000 55000
tangible non current assets
Labour expenses 80000 80000 80000 80000 80000 80000
Tax 20000
total expenses 255000 235000 195000 195000 195000 195000
closing cash balance 200000 85000 40000 55000 120000 210000
On the basis of above table, it can be interpreted that specified enterprise is having
psotive closing balance which is in fluctuating trend. In addition to this, there is requirement to
pay attention on negative balance that can negatively influence smooth functioning of firm. It
is favorable indicator of inefficiency which can not allow mentioned firm to concentrate on
8

these components that can largely impact process of organization. In each month from June to
December, the mentioned enterprise is unable to generate positive balance at the end of month
as it is resulting in outcome such as 200000, 85000, 40000,55000,120000 and 210000
respectively. Case flow forecast contribute in getting ability to increase cash flow by looking at
prevailing situation so that unforeseen circumstances can be derived. It aids in identifying,
allocation, managing and monitoring resources in turn higher progress with optimum
utilization of resources can be done (Plaskova and et.al., 2020). Inability of all these is
resulting in over draft facility utilization which is inappropriate & play role as barrier in
achieving success.
c)
There are various expenses incurred by firm to meet its overall objective of attaining business
objectives. There are several cost that that firm required to pay attention on for successful
operating so that significant & smooth functioning can be derived. The expenses incurred by
firm includes purchasing of material, tangible assets, labour expenses, tax and other cost that
need to be highlighted for deriving significant components. In order to decline its expenditure
company can install software in order to manage work in efficient and effective pattern by
reducing wastage and inclining optimum utilization of resources (Townsley and
DeColfmacker, 2021). The specified organization is having sales as only way of
generating revenue so much efforts should be exerted to increase income & decrease expenses.
In the given case there is higher cost than income which is forcing firm to take overdraft
facility so that accomplishing objective can become possible. The extra expenses associated
with overdraft facility involves paying interest for borrowing money.
CONCLUSION
From the above report it can be concluded that there should be proper management of
organization finances in turn higher productivity can be gained. In addition to this, current report
has involved corporate governance and its model. Present study has presented characteristics
like reliability, relevance, timeliness, comparability in turn effectual and appropriate financial
statements can be filed. This provides assistance in getting ability to give crucial information so
that strategic decision making. Present case study has involved capital appraisal techniques likes
pay back period & ARR as well advantages and disadvantages of IRR has been involved.
CVP is one of the crucial technique that contribute in decision making but has few limitations
9

like issue in identifying variable & fixed cost, constant selling price, etc. Cash flow forecast and
reason fro overdraft has been mentioned in current report.
10

REFERENCES
Books and Journals
Armean, D. and Ardeleanu, M. L., 2017. Performance management by CVP analysis. Business
Excellence and Management. 7(2). pp.72-93.
Ayodele, T. O., 2019. Factors influencing the adoption of real option analysis in RED appraisal:
an emergent market perspective. International Journal of Construction Management.
pp.1-11.
Lulaj, E. and Iseni, E., 2018. Role of analysis CVP (Cost-Volume-Profit) as important indicator
for planning and making decisions in the business environment. European Journal of
Economics and Business Studies. 4(2). pp.99-114.
Magni, C. A. and Marchioni, A., 2020. Average rates of return, working capital, and NPV-
consistency in project appraisal: A sensitivity analysis approach. International Journal
of Production Economics, 229, p.107769.
Okpala, K. E. and Osanebi, C. O., 2020. Cost Volume Profit Analysis And Profit Planning In
Manufacturing SMEs In Nigeria. Asia-Pacific Management Accounting Journal. 15(2).
pp.207-240.
Plaskova, N. S and et.al., 2020. Controlling in cash flow management of the company. EurAsian
Journal of BioSciences.14(2). pp.3507-3512
Siziba, S. and Hall, J. H., 2019. The evolution of the application of capital budgeting techniques
in enterprises. Global Finance Journal. p.100504.
Soka, I. ., 2020. Impact of Appraisal Techniques on Investment Returns A Survey of Institutional
Investors(Doctoral dissertation, The Open University of Tanzania).
Townsley, M. and DeColfmacker, R., 2021. CASH DEFINES SURVIVAL: CASH IS KING!.
Gatekeeper Press.
Online
Principle of corporate governance. 2021. [Online]. Available through:
<https://www.investopedia.com/terms/c/corporategovernance.asp>.
Qualitative characteristics of financial statement. 2021. [Online]. Available through:
<https://www.accountingtools.com/articles/what-are-the-qualitative-characteristics-of-
financial-statem.html>
11