Introduction to Finance (Pass Criteria) - Desklib

Introduction to finance
Contents

INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1........................................................................................................................................3
a) Calculation of financial ratios............................................................................................3
b) The importance of considering the audience for financial statement analysis...................5
Question 2........................................................................................................................................5
a) Opening statement of financial position.............................................................................5
b ) monthly cash budget for 6 months....................................................................................6
c) Description of additional expenditure................................................................................7
Question 3........................................................................................................................................7
a) Calculation of breakeven point...........................................................................................7
b) Margin of safety ( MOS ) for the year ended 2019 and 2020............................................8
c) Analysis about new strategy formed by Jessica.................................................................9
Question 4........................................................................................................................................9
Calculation of payback period, NPV and ARR......................................................................9
Analysis for the project that should be undertaken..............................................................12
Approaches to investment appraisals and their improvement..............................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Finance is the understanding and discipline of cash, currencies, and assets. It is associated
to, but not identical with, economics, the education of the manufacture, distribution, and
ingesting of cash, capital assets, goods, and services. Since financial activities take place in the
system of finance in numerous sectors, the sectors can be broadly categorised into personal
finance, corporate finance and public finance. Accounting for financial management is the
maintenance frequently related with CFO and finance branch of the organisation. These type of
services mainly encompass looking into the future by converting a plan for business into a
budget or a financial model and assist an organisation to manage its plan (Atrill and Lindley,
2019). This report contains the calculation of numerous ratios and their analysis, preparing cash
budget, and analysis for NPV.
MAIN BODY
Question 1
a) Calculation of financial ratios
Gross profit margin = ( sales - COGS ) * 100 / sales
= ( 3495 – 2182 ) * 100 / 3495
= ( 1313 / 3495 ) * 100
= 37.57 %
Assets usage ratio = total sales / average total assets
= 3495 / [( 3812 + 2503 ) / 2]
= 3495 / 3157.5
= 1.10 times
Current ratio = current assets / current liabilities
= 1687 / 744
= 2.27 times
Acid test ratio = ( Current asset – stock ) / current liability
= ( 1687 – 150 ) / 744
= 1537 / 744

= 2.06 times
Inventory holding period = ( average inventory / cost of goods sold ) * 365
= [( 150 + 102 ) / 2 ] / 2182 * 365
= ( 126 / 2182 ) * 365
= 21.08 days
Debt to equity ratio = total debts / total equity
= 170 / 2898
= 0.058 times
Interpretations:
Gross profit margin: It is generally classified as a profitability measure that compares a
company's total profit to its turnover. Given the question, the total profit is 37.57% which is
38%. This means, as a growing company in the industry, only after deducting the cost of these
commodities.
Assets usage ratio: It is categorized as an efficiency ratio that helps an organization generate
turnover from its holdings in terms of monetary value using net income of average total asset
value. This ratio means that the higher the ratio, the more efficient the organization. The ideal
ratio is 2.5 times or more (Baker, Kumar and Pandey, 2020). Given the question, the
organization's asset utilization is 1.10, which is well below ideal. Business need to improve your
ability to generate income and maximize the use of assets in the right way.
Current ratio: This ratio measures a company's ability to meet its short-term obligations in the
short term. Analyze the company's short-term liquidity. The ideal ratio is 2:1, but the specified
company scored 2.27, which is above ideal. This is the most suitable situation for companies
with more working capital.
Acid test ratio: This endurance-test ratio compares an organization's highly liquid assets to
current liabilities. Ideally once. This question gives 2.06 hours. This means a safer, more rational
ability to meet short-term commitments.