Introduction to Finance

This document provides an introduction to finance, covering topics such as financial planning, savings, budgeting, and investment. It also includes multiple choice questions and calculations related to economic order quantity, payback period, and accounting rate of return. The document explores the role of finance in organizations and the importance of financial statement analysis. It concludes with a discussion on investment appraisal decisions and the advantages and disadvantages of the internal rate of return technique.

Introduction to Finance

Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................3
QUSTION 1...................................................................................................................................................3
(a). Calculate the economic order quantity (EOQ)...................................................................................3
(b). Calculate the total annual cost of hard plastic...................................................................................4
(c). Critically evaluate Touchdown Sports Inc’s decision to use the EOQ mode.....................................4
(d). Advise Touchdown Sports Inc’s senior executive team and it also should include an explanation of
the costs of holding inventories...............................................................................................................4
QUESTION 2.................................................................................................................................................5
(a) Calculate the payback period of both options.....................................................................................5
(b) Calculate the accounting rate of return (ARR) for both options.........................................................6
(c) Critically evaluate the accounting rate of return technique.................................................................7
(d) Characteristics of investment appraisal decisions and the advantages and disadvantages of the IRR
technique.................................................................................................................................................8
Question 3.................................................................................................................................................10
(a). Calculate the following ratios..........................................................................................................10
(b) Critically explain the importance of considering the audience for financial statement analysis.......12
Question 4.................................................................................................................................................12
(a) Explain the role of each of the following organisations...................................................................12
(b) Critically discuss the role of audit committees in corporate governance..........................................13
CONCLUSION.............................................................................................................................................14

INTRODUCTION
Finance is characterized as financial planning and encompasses practices such as savings,
leasing, lending, budgeting, saving, and predicting. Finance is a concept that generally describes
the analysis of capital, savings, and other investment funds and the process. Three different
groups can be largely divided: public finance, investment banking, and financial planning. The
financial activity is conducted by every business in order to know actual financial performance
(Accominotti and Ugolini, 2019). The task of finance in an organisation is also to guarantee that
adequate resources are available to operate and also that the money is expended and invested by
the business. This test is focused on four multiple choice questions relating to sources of capital,
estimating ratios for the analysis of the company ’s performance, and also how investment
appraisal methods are used to determine the viability of various possibilities. Furthermore, the
role of many relevant international system organizations is clarified and the position of the
supervisory board is addressed.
MAIN BODY
QUSTION 1
(a). Calculate the economic order quantity (EOQ)
Measurement of EOQ-
Given Information:
Annual Usage = 27,000
Holding Cost = $1.75 per KG per Year
Ordering Cost = $ 14
Cost of Hard plastic = $0.90 per KG
Maximum price = $ 1.90 per KG
Minimum price = $0.75 per KG
Formula:
EOQ = Square root of { (2 X Annual Consumption X Ordering cost) / Holding cost }
= Square root of { (2 X 27,000 X 14) / 1.75 }
= Square root of (756,000 / 1.75)

= Square root of (432,000)
= 657.267
= 657 approx.
(b). Calculate the total annual cost of hard plastic
Calculation of annual cost-
Buying cost: 27000Kg @ 1.325
= $35775
Ordering cost: (27000 + 14/657)
= $575
Holding cost: (1.75 * 657/2)
= $575
Hence, Annual cost: $35775 + $575 + $575
= $36925
(c). Critically evaluate Touchdown Sports Inc’s decision to use the EOQ mode
Executives use the EOQ model to define the optimal inventory levels in reference to
Touchdown Sports Inc, that helps mitigate the total cost or satisfy consumer demand. The total
quantity supplied should be about 657 to minimize the expense or help increase the profitability
of Touchdown Sports Inc. Organizations make the decision for using this method because it
helps to reduce the cost of storing or keeping and determines the amounts that need to be stored
or re-ordered by the other amount. In order to reap the benefits of reduced bulk sales and reduce
inventory costs, this model can also suggest buying a higher volume for fewer orders. Such as, if
they are high and the purchasing volumes are typically low, they will point to more and more
orders for fewer items to decrease maintenance costs (Baker, Kumar and Pandey, 2019).
(d). Advise Touchdown Sports Inc’s senior executive team and it also should include an
explanation of the costs of holding inventories
The implementation of inventory controls was recommended to the senior management of
Touchdown Sports to minimize / optimize the overall cost of stock transport and processing and
also and, with the aid of the EOQ technique model, management are effective to lessen it by

optimizing orders or retaining expenses which decrease the cost of products that meet consumer
demand or s Holding leverage of costs management of inventory that are not available. These
expenses are also part of the total cost of the object, along with the purchase price and the
expense of disruptions. The cost of owning a business includes the cost of missing or damaged
goods, as well as storage areas, personnel and benefits. It is also understood that Just-In-Time is
more reasonable when consumer spending is small, but EOQ is far more appropriate in the sense
of Touchdown Sports business. The leading manufacturer of increased demands for sports
security apparels is Touchdown Sports. In contrast to minimizing the total expenses and then
determining the optimum volume level required to order in the situation of restricted inventory
and keeping place, it is very useful to integrate the EOQ model efficiently for the company
(Bigger and Millington, 2020).
QUESTION 2
(a) Calculate the payback period of both options
Formula: Year before recovery + amount to be recover/next years’ cash flow
Investment: Cost - Scrap value
Option A:
= 51000 - 40110
Initial investment = 10890
Year Cash flow Cumulative cash flow
1 3200 3200
2 3300 6500
3 3100 9600
4 3000 12600
5 2900 15500
Year before recovery = 3rd year
Amount to recover = 10890 - 9600
= 1290
Next years’ cash flow: 3000

PBP: 3 + 1290 / 3000
= 3.43 Years or 3 years and 5 months
Option B:
= 76500 - 60120
Initial investment = 16380
Year Cash flow Cumulative cash flow
1 3900 3900
2 3600 7500
3 3300 10800
4 3100 13900
5 2600 16500
Year before recovery = 4th year
Amount to recover = 16380 - 13900
= 2480
Next years’ cash flow: 2600
PBP: 4 + 2480 / 2600
= 4.95 Years or 4 years and 11 months
Interpretation: From either the overall assessment of the payback period of both options, it has
been decided that approach A is more attractive than option B. When they spend 3.43 years on
Option A, and if they participate in Option B, the expenses will be recovered in around 5 years.
(b) Calculate the accounting rate of return (ARR) for both options
Option A-
Year Cash flow Depreciation (Actual
cost-Scrap value/life
of assets)
Net cash flow
1 3200 2178 1022
2 3300 2178 1122

3 3100 2178 922
4 3000 2178 822
5 2900 2178 722
Total net cash flow 4610
Formula: (Average annual profit / Initial investment) * 100
Average annual profit: 4610/5
= 922
= 922/10890*100
= 8.47%
Option B:
Year Cash flow Depreciation (Actual
cost-Scrap value/life
of assets)
Net cash flow
1 3900 3276 624
2 3600 3276 324
3 3300 3276 24
4 3100 3276 -176
5 2600 3276 -676
Total net cash flow 120
Average annual profit: 120/5
= 24
ARR: 24/16380*100
= 0.15%

Interpretation: From the above calculation, it was assessed that the ARR of alternate A for
Touchdown Trips Inc. is 8.47 percent and 0.15 percent for Option B. Comparatively, because of
the stronger accounting rate of return, it can be claimed that option A appears stronger.
(c) Critically evaluate the accounting rate of return technique
The Accounting Rate of Return (ARR), also popularly referred to it as the average rate of
return, calculates any financial investment's anticipated performance. ARR uses basic
calculations to show the feasibility of investments, which helps in assessing infrastructure
improvements. This formula separates by the total amount spent in purchasing the ARR the net
gain from an investment. Using ARR, investors are allowed to settle on the feasibility and
feasibility of the development projects to be carried out. It also allows investors to assess the risk
inherent in transactions and determine whether the project would yield sufficient income to
support the degree of risk. This is one of the financial ratios commonly used and is useful
whenever large tasks have to be evaluated and chosen mostly during decision-making process.
The ARR estimate does not, however, take account of interest accrued, taxation, unemployment,
etc., rendering it an inadequate tool for massive and long-term capital expenditures (Capolupo,
2018).
Two speculative investment alternatives, such as the Gulfstream G650ER (option A) and
the Boeing BBJ Max 7 (option B), have been described. Business is likely to find better choices
with the aid of ARR calculation, and Option A is the bigger investment service that combines a
28.46 percent return on this investment. There are several other improvements to this acquisition
measurement tool, including certain ascertaining and determining the rest period is quite clear
and convenient. The economic profit or storage systems over the entire life of the investment will
be factored into the equation. The meaning of total revenues, i.e. revenue after taxing and
depreciation, embraces this strategy. In the assessment of the investment strategy, this is a key
concern. This strategy allows us to compare the new project with the winning mentality of the
cost-reduction program or other projects. This strategy provides a simple picture of the
contractor's competency. The accounting concept of gain for the value of this methodology
acknowledges for the predication of the rate of return.

(d) Characteristics of investment appraisal decisions and the advantages and disadvantages of the
IRR technique
Investment option A is identified on the basis of the above study, since it has a smaller rest time
and a higher ARR. Moreover, Touchdown Trips Inc. operators can undertake efficient decisions
with the aid of investment evaluation methods. Appropriate valuation processes have some
functionality which have a better sense because these are as described in the following:
• Assessment of the volume of potential profit generated in proportion to the degree of
capital expenditure.
 Recognizes the possible consequences and earnings over the lifecycle of the project.
 The firm's costs and progress should be determined over all the approximate period of the
project whenever deciding the prospective cash flow.
 Probably, this is the anticipated usefulness of a long - term asset to be developed over
many months here too (Cerutti, Dagher and Dell'Ariccia, 2017).
 This means that the power assessments of benefits and drawbacks provide for long-term
forecasting.
 Besides this, the internal rate of return technique has some positives and negatives.
This will be as kind of as following:
Until implementing this methodology to particular projects, the benefits and drawbacks of the
internal rate of return are critical to analyze. A formal study and description of most ventures
through that very well-known technique of identification and selection of capital investments
must be carried out. In evaluating such unique types of systems, such as equally incompatible
initiatives, an unusual collection of cash flows, separate project lives, etc., this approach has
certain drawbacks.
Disadvantage
1. This approach presumed that the profits for the entire lifecycle of the building were invested
back at the required rate of return. The sustainability of the venture is not reasonable if the
overall rate of return received by the organisation is not similar to the internal rate of return.
2. Tedious equations are involved.

3. This strategy only gives meaning to profitability, but does not recognize the earliest recovery
of capital expenditure. The explanation is that the Internal Rate of Return approach often favors a
project that takes a considerably bigger range for the recovery of capital investment. Within
probable conditions of risk and uncertainty, maximum capital investment will often not be
recovered if the Internal Rate of Return is implemented.
4. Once the investments undergoing review vary in their scale, lifespan and duration of capital
employed the consequences of the Net Present Value process and the Internal Rate of Return
approach which vary (Chakuu, Masi and Godsell, 2019).
Advantage:
1. Cash equivalent values indicated attraction and it should be higher although for a
particular time we are sacrificing money. The IRR is little more than the high - interest
rates we assume from our expenditure. Enough that, IRR, we can say, is the perfect use of
money theory's time value.
2. It is a reasonable capital budgeting strategy in which those cash flows are given equal
priority, not probably eventually. It only establishes its relationship with various rates and
needs to know where the present value of cash inflow is equal to the value of cash inflow.
Question 3
(a). Calculate the following ratios
Financial ratio analysis may provide the management of a company and some outside
shareholders with accurate details on company results. It's reasonably simple to measure the
ratios; it requires a little more effort to understand and analyze what they mean about either the
financial position of a business. Ratios act as a quantitative analytical technique for liquidity,
profitability, debt, and wealth management, both of which are valuable fields of analysis of
financial statements, among many other classes (Chin and Gallagher, 2019).
Gross profit margin:
Gross profit margin = Gross profit / Revenue * 100
= 1313 / 3495 * 100
= 37.56%

Assets turnover ratio:
Assets turnover ratio = Net Sales / Total assets
= 3495 / 2898
= 1.20 times
Current ratio:
Current ratio = Current assets / Current liabilities
= 1687 / 744
= 2.26 times
Acid test ratio:
Acid test ratio = Quick assets / Current liabilities
= 1537 / 744
= 2.06 times
Working Notes:
Quick assets = Current assets – Inventory
= 1687 – 150
= 1537
Inventories turnover period:
Inventories turnover period = Cost of Goods Sold (COGS) / Average Inventory
= 2182 / 126
= 17.31
Working Notes:

Average inventory = (Opening stock + Closing stock) / 2
= (102 + 150) / 2
= 252 / 2
= 126
Debt to Equity ratio:
Debt to Equity ratio = Total liabilities / Total shareholder’s equity
= 914 / 2898
= 0.31
(b) Critically explain the importance of considering the audience for financial statement analysis
Understanding of financial statements viewed as a means of determining and reviewing the
financial results of the company in order to make important financial decisions. In simplified
way, the method was used to determine an organization’s financial assets and vulnerabilities is
created by forming a strategic partnership between the capital structure components, the cash
flow statement, and many other accounting documents. The adjective 'analysis' demonstrates
efficient simplification of functional knowledge by methodical retrieval of the knowledge
contained in financial statements,' interpretation' implies,' explaining the purpose and meaning of
the knowledge so condensed. These would be, therefore, interlinked and also some comparable.
The board members are fascinated about either the performance of the company. In order to
evaluate the benefit strategy of the country, financial analysis enables them to determine the
investment strategies. Only with encouragement of the financial statement, the measurement and
estimate of impairment and the probability of lost revenue may be obtained. Financial Statement
research helped in determining whether financial institutions, lending agencies & developers can
give credit to the company or not. It enables them, if authorized, to ascertain the systematic risk,
to establish the terms of the settlement structure, inflation rate, expiration date, etc. Viewers is a
crucial component of financial statements review as they are main workers who are consumers
and even some advertisers as their choosing involves the profitability of the project (Choudhury,
2018). In finance-statement review, as addressed below, several defined audiences should be
known:

• Trade-payable / Creditors: Value of the financial statements study, as follows:
• Evaluate the ability of the company to meet its shorter-term financial obligations
• Discussing the likelihood of the growth of the organization determination in the future
seasons to meet all its financial obligations.
• The company's ability to address the expectations of stakeholders inside a comparatively
shorter time frame.
Question 4
(a) Explain the role of each of the following organisations
IFRS Foundation:
1. The creation, through its industry standards institution, the IASB, of an universal set of
high-quality, available, contractually enforceable and international consensus
International Financial Reporting Standards ( IFRSs).
2. Incentivise the use of certain requirements and their rigorous enforcement.
3. Pay attention to the needs of emerging economies and small and medium-sized
enterprises ( SMEs) in the annual report (Harms and Stefanovits, 2019).
IFRS Advisory Council:
1. The IFRS advisory committee is the official autonomous independent authority for the
IASB and the IFRS Foundation Members. This involves a wide range of stakeholders
from the related communities that are active in the development of the IASB.
2. This involved financial reporting participants, financial analysts and other customers, and
also some auditors, academics, consultants, supervisors, consulting research institutes and
basic-setters. The authority shall nominate the members of the Advisory Council.
(b) Critically discuss the role of audit committees in corporate governance
As least one other person on the panel who has been considered to be a relationship analyst
is now on the external auditors. It is not necessary for all members of the board to be technical
specialists, but they would be individuals who are concerned with the economic challenges or
who have a clear understanding of business principles, audit and audit terms and frameworks. In
the financial reporting process, upper executives and various agencies (monitoring and analysis)

play a major role. It will be the responsibility of the manager to review financial results and to
grow safety process in financial reports.
Organization also tries to set processes and procedures to ensure that the model of enterprise
assessment is reliable and consistent. It is the objective of the independent third party to offer
opinions on the performance of the firm’s financial statements, like that of the firm ’s financial
position in consideration of financial performance and financial position, as well as to contribute
in establishing that certain concerns cooperate with universally understood financial accounting
policies.
The council members will also have to determine how and why the institution receives and
performs on internally consumer accounts first before independent auditor begins his work.
Analysis of internal documents provides the opportunity of audit committee members to pose
concerns about the completeness, accuracy and professionalism of time frame and with available.
Establishing a detailed explanation of the inspection reports indicates that the members of the
board are concerned about the potential implications of the quarterly statements. Each members
of the audit committee will also be up-to - date on significant policy and organizational changing
trends in the area of accounting.
CONCLUSION
It has been discovered according to the above article that funding or money management lies
in its willingness to manage a business running until declaring bankruptcy while somehow
receiving long-term investment funds. Financial ratios allow companies to determine the
viability of the business, and administrators may choose the best spending decisions that are
more advantageous as well as efficient with the aid of investment assessment methods.

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