Introduction to Finance (Distinction Criteria) - Desklib

To Finance
(Distinction Criteria)

Table of Contents
INTRODUCTION ..........................................................................................................................3
Question 1 .......................................................................................................................................3
a) Calculation and interpretation of financial ratios....................................................................3
b) Critically evaluation of financial statement............................................................................5
Question 2........................................................................................................................................6
a) opening statement of financial position..................................................................................6
b) cash budget of Sassy clothing for 6 month ............................................................................7
c) Critical analyse of additional expenditures.............................................................................7
Question 3........................................................................................................................................8
a) Analysis of Break even point..................................................................................................8
b) 2019 and 2020 Margin of safety ( MOS ) ..............................................................................9
c) New strategy that has been developed by Jessica.................................................................10
Question 4......................................................................................................................................11
(a) calculation of pay back period, Net present value and average rate of return.....................11
b) Discuss the best method of appraisal technique...................................................................14
c) Investment appraisal techniques...........................................................................................14
CONCLUSION .............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Finance means the manages of fund and considers different types of activities like
lending, saving and borrowing. It includes personal, public and corporate finance. It also
includes the raising on money for any kind of expenditure. Customers, enterprises and company
are not have enough money to pay the expenses, make payment of debtors. They also issue
equity share and debts to arrange the fund to conduct the daily operations. Financial ratios are
also very important component because it describes the financial position of the company and
determines the company have sufficient money to pay its debtors (Berrou and et.al, 2019). This
report includes, income statement and financial position of Liverton Company through which
analyse the liquidity position of the company. It also includes the preparation of opening
statement of financial position of Sassy clothing that sells their product by online and mail order.
Further this report includes the various investment appraisal techniques to select the project.
Question 1
a) Calculation and interpretation of financial ratios
There are various types of ratios that evaluates the liquidity position of the company such
as profitability, efficiency, turnover based and solvency ratios.
Gross profit ratio- It is the type of profitability ratio. The gross profit ratios tells the profit of
the company that is earned by selling of goods and services. It describes the relationship between
GP and sales revenue.
Formula= GP = ( revenue – cost of sales) * 100 / sales revenue\
=(3495 – 2182) *100 / 3495
=37.57 %
Interpretation- The GP ratio describes the true profit of the company. In year 2019 shows the
high GP margin it means the cost of products are low. But company should adopt special
technique that reduces the cost of the products and company can earn more GP in future.
Assets usage ratio- It is type of efficiency ratio. It describes the efficiency of the company with
that company utilises its total assets (Bharti, 2018).
Assets usage ratio = Total revenue / average fixed assets + average current assets
= 3495 / 3157.5
=1.10 times

Interpretation- In year 2019 the total assets turnover ratio shows 1.10times which are relatively
low. It means the company are not efficiency to used of assets in generation of sales. The ideal
ratio is 2.5 or more times. So that company must to improve their efficiency to earned more
revenue and proper utilisation of fixed assets and current assets (Boissay and et.al, 2021).
Current ratio – Liquidity ratio can be divided into the two types such as current ratio and acid
test ratio. Current ratio measures the relationship between current assets and current liabilities.
Current assets means those assets that are easily converted into the assets and current liabilities
means those assets that are payable within 12 months.
Year 2019
CR = current assets / current liabilities
= 1687 / 744
=2.27:1
Year 2018
CR = 418 / 502
0.83:1
Interpretation- It evaluates the capacity of the company to pay its short term liabilities. Ideal ratio
of the current assets is 2:1. But in the given question the current ratio of year 2019 is better than
as compare to year 2018. Because in 2019 the current ratio is also better than ideal ratio, it means
the liquidity of the company was better. But in 2018 company should increase the liquidity
position that they can pay its liabilities (Elie and et.al, 2021).
Acid test ratio – It shows the true liquidity position of the company. It evaluates the liquidity of
the short period. It evaluates the relationship among current assets after deduct stock divided by
current liabilities.
2019
= ( CA – stock) / current liabilities
= ( 1687 – 150) / 744
=2.06:1
2018
=(418 – 102) / 502
=316 / 502
=0.62:1