Introduction to Finance Contents

Introduction to Finance Contents INTRODUCTION .3 MAIN BODY 3 Question 1 .3 Question 2 .4 Question 3.10 Question 4.12 CONCLUSION .14 REFERENCES 3200 15 INTRODUCTION Finance is an investment mechanism between borrowers and creditors and investors. EOQ: 2*Annual demand* Inventory cost/carrying cost = 2*27000*14/1.75 = 76000/1.75 = 432000 = 657 (b) Calculate

Introduction to Finance

Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................4
Question 3.................................................................................................................................................10
Question 4.................................................................................................................................................12
CONCLUSION.........................................................................................................................................14
REFERENCES..........................................................................................................................................15

INTRODUCTION
Finance is an investment mechanism between borrowers and creditors and investors. It works
from corporations internationally and nationwide at different stages. Therefore, the economy,
organizations and so on are embroiled in many complications. Finance is undoubtedly one of a
company's main facets (Yan, 2018). The above route needs to be managed and regulated with
enormous money, regular cash flow and ongoing transaction. In reality, financial management is
important in decision-making. In the aspect of above project report there are four questions in
which distinct information is included like question one is based on calculation of EOQ and
many more. In the further question, investment appraisal techniques are applied in order to
choose one project between two. In question three, ratio calculation is done as per given
information. In the end of report, different kinds of financial regulations are mentioned.
MAIN BODY
Question 1
(a) Calculate the economic order quantity (EOQ) for hard plastic.
EOQ: √2*Annual demand*ordering cost/carrying cost
= √2*27000*14/1.75
= √76000/1.75
= √432000
= 657
(b) Calculate the total annual cost of hard plastic.
Ordering cost = 27,000 / 657 = 41 x 14 = 574
Carrying cost = 657 / 2 = 328.5 x 1.75 = 575
Total cost = 1,149

(c) Critically evaluate Touchdown Sports Inc’s decision to use the EOQ model as part of its
approach to the management of inventories.
Economic order quantity is the optimal quantity to buy a business in order to reduce product
expenditures, such as cost of storing, shortages and costs of ordering. Ford W. Harris enhanced
and applied this output scheduling model in 1913 (Dutta, Pape and Petry, 2020). The equation
implies that the expense of application, order and keeping is unchanged. Identification of the
optimum number of products to be ordered is the aim of the EOQ formulation. If achieved, an
organization will reduce its purchase, distribution and storage costs to a minimum. The EOQ
format may be adjusted to decide various output volumes or cycles and companies using an
application in their systems to decide EOQ of broad production processes and large total costs.
The organization can help to calculate order size, which minimizes the net product expense,
using the EOQ model for inventory control. In deciding the inventory levels, the EOQ discusses
various inventory levels. The EOQ model finds orders and transportation costs to be the
acceptable inventory costs.
(d) Advise Touchdown Sports Inc’s senior executive team
The JIT method is not conducive to businesses that have high customer requirements. One of the
disadvantages of JIT is, that a lack of suppliers will lead to a loss of revenue in the event of a
significant growth for the commodity (Wijburg, 2019). The cost of buying stocks is greater for
just-in-time inventory management because with the regular orders but because it comes at a
fixed cost, it can be unfavorable in cost accounting. The EOQ model, on the other side, is more
suitable for this business because it defines the average inventory levels for the stock, to ensure
that the management does not cause scarcity and inventory surpluses. The minimum efficient
scale of any order size of stockpiles is therefore determined in this model.
Question 2
a) Payback period
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: In accordance of above done payback period calculation this can be stated that
value of both project is different from each other. In the context of option, A this can be stated
that cost of investment will be covered in 3 years and 5 months.
b) ARR
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
Net cash flow

of assets)
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: In accordance of above produced table this can be stated that value of accounting
rate of return option A can produce return at a rate of 8.47%. As well as value under option B
can produce accounting rate of return is of 0.15%. This shows that option A is better than B.
Hence option A is far better and above company needs to go with option A. If they will do so
than it will be easier to gain higher return in an effective manner.
(c) Analysis of ARR
The Accounting Rate of Return (ARR), also known as the average rate of return, measures the
expected performance of any proposal (Hanley, 2018). ARR employs simple estimates to
demonstrate the viability of investments, which aids in the evaluation of infrastructure upgrades.
The net income from an expenditure is divided by the gross amount invested on buying the ARR
using this calculation. Investors may use ARR to determine the effectiveness and viability of
construction schemes to be taken out. It also helps investors to measure transaction risk and
decide if the project can generate enough revenue to justify the level of risk (Antony, 2020). This
is a standard financial ratio that comes in handy when vast assignments need to be assessed and
selected, usually during the choice process. The ARR forecast, on the other hand, would not
allow for interest, taxes, unemployment, and other factors, making it an ineffective method for
large-scale, long-term capital investments.

The Gulfstream G650ER (option A) and the Boeing BBJ Max 7 (option B) have been identified
as two speculation alternative investments. With the help of ARR estimate, business is likely to
have better options, and Option A is the larger investment system that provides a 28.46 percent
return on this investment. There are a number of other enhancements to this acquisition
calculation instrument, including the fact that calculating the rest time is simple and
straightforward. The economic value or storage systems can be taken into account into the
calculation for the whole entire life of an investment.
This approach is embraced by the definition of net sales, which is income after taxes and
depreciation. This is a major issue when evaluating the investment policy (Luo, Peng and Fan,
2018). This technique enables one to equate the current initiative to the cost-cutting program's or
other programs' winning mindset. This strategy paints a clear picture of the contractor's
capabilities. This methodology's importance is recognized by the accounting principle of benefit
for the rate of return prediction.
d) Merits and demerits of IRR.
Based on the findings of the report, investment choice A is chosen because it has a shorter rest
period and a stronger ARR. Furthermore, Touchdown Trips Inc.'s operators will make informed
choices using investment assessment processes. Effective assessment methods have some
features that makes more sense and it is as mentioned below:
 Calculation of the amount of expected benefit produced in relation to the amount of
capital invested.
 Acknowledges the project's potential impacts and profits during its lifecycle.
 When determining the eventual cash balance, the firm's risks and success can be
measured over the whole estimated duration of the project.
 Possibly, this is also the expected utility of a long-term resource to be built over several
months.
 This ensures that the capacity analyses of advantages and pitfalls allow for long-term
planning.
Apart from that, the rate of return strategy has certain advantages and disadvantages. This will be
as kind of as following:

The advantages and pitfalls of the required rate of return must be analyzed before this approach
is applied to specific programs (Taghizadeh-Hesary and Yoshino, 2019). Most projects must
undergo a systematic analysis and definition using the excellently methodology of identifying
and selecting capital expenditures. This methodology has certain pitfalls when analyzing such
unusual forms of programs as similarly contradictory projects, an uncommon set of cash flows,
separate project lives, and so on.
Disadvantage
1. This method assumed that the gains from the building's full lifespan were recouped at the
necessary rate of return. If the average rate of return earned by the organization does not match
the expected rate of return, the venture's viability is questionable (Enriques and Troeger, 2018).
2. This approach only considers profitability, so it ignores the earliest capital spending recovery.
The reason for this is that the Internal Rate of Return strategy often benefits a project with a
much larger recovery scope for capital expenditure. Maximum investment will of peak
investment will of minimum capital expenditure will of minimum capital expenditure will of
max capital expenditure will of max capital investment instead of maximum wealth creation.
Advantage:
1. Cash equivalent prices showed attraction and therefore should be better, notwithstanding the
fact that we are losing resources at this moment (Franzoni and Ait Allali, 2018). The IRR isn't
anything more than the high-interest rates we expect from our investment. Enough so that we can
conclude that IRR is the ideal application of cash theory is true time value.
2. It's a sound capital budgeting method in which certain cash flows are prioritized equally,
rather than eventually. It just needs to understand where the current value of cash inflow equals
the value of the cash inflow to determine its connections with various prices.
Question 3
(a). Ratios

Financial ratio analysis may offer reliable data on a financial success to its leadership and outside
investors (Boubaker, Cumming and Nguyen, 2018). Measuring the ratios is relatively simple;
understanding and analyzing what they say for a company's financial situation takes a bit more
time. Ratios are a mathematical analytical tool used to analyze liquidity, earnings, leverage, and
asset management, which are also important aspects of financial statement. In the absence of
detailed analysis of ratio this can become difficult for companies to sustain in competitive
environment. In addition to this, ratio analysis is not limited to a particular aspect because ratio
analysis can be done of various kinds of elements including profitability, liquidity and many
more.
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) Importance of financial statement analysis
Financial statement analysis is seen as a way of assessing and analyzing a firm's earnings reports
in order to make critical economic choices (Tseng, Lim and Wu, 2019). In a nutshell, the
approach is developed by creating a strategic relationship with the working capital elements, the

cash balance statement, and a variety of other accounting records to assess a company's monetary
assets and weaknesses. The descriptor 'analysis' denotes the productive simplification of practical
information by methodical extraction of the knowledge found in financial reports, while the
adjective 'characterization' denotes the explanation of the intent and context of the simplified
knowledge. As a result, they'd be related and some would be equal. The board of directors is
enthralled by the business performance. Financial forecasting allows them to assess investment
plans in order to analyze the region's benefit policy. The calculation and estimation of disability,
as well as the risk of missed income, can only be achieved with the help of the financial report.
Financial analysis aided in deciding whether or not financial firms, financing companies, and
developers would be willing to provide credit to the firm. It allows them to determine the
systemic risk, set the parameters of the compensation structure, and calculate inflation if they are
allowed. Viewers are an important part of the financial statement analysis because they are the
key employers, clients, and even some sponsors, and their decisions affect the project's viability
(Du, Chen, Yang and Ma, 2020). Several established audiences must be understood when
reviewing financial statements, as discussed below:
• Creditors / Trade-payable: The following is the value of the financial statement analysis:
• Assess the company's capacity to complete its short-term financial commitments.
• Addressing the feasibility of the organization's success and willingness to fulfill all of its
contractual commitments in upcoming seasons.
• The company's willingness to meet stakeholder requirements in a relatively shortened time
period.
Question 4
(a) Explain the role of each of the following organizations
IFRS Foundation:
 Main role of this organization is to prepare and develop IFRS standards on the basis of
which it is easy to bring out the accountability, efficiency etc. With the help of this role it
is easy to manage and maintain the appropriate type of techniques and processes
(Beerbaum, Piechocki and Mindlin, 2019).

 Another role is to deliver and bring up the higher consistency level, accounting language,
practices and statements. With consideration of this role, it is easy to take decisions in
effective manner.
IFRS Advisory Council
This organization is also to be known as forum of IASB to with aim of consulting a wide
range of interested parties which are impacted by IASB's work. The role of this firm is discussed
as follows-
 Main role of this committee is that it aims at fulfilling the stakeholders needs as well as
demands. This committee is also an official autonomous independent authority for IASB
and IFRS.
 Further role is to manage and maintain the analysis like financial reporting participants,
financial analysis, other customers etc. By considering of this role, authority of
organization can nominate the members of Advisory council.
Analyzing the role of audit committees in corporate governance
Audit committees are crucial as they help overview of all the financial reporting process
and procedures, selection of independent auditor in both internal as well as external. Corporate
governance is set of rules of and regulations that helps in guiding of process and procedures
within business sector. There are two types of auditors which are external and internal. With
Audi committees, their main aim is to analyses and examine the e internal controls sand make
assure that firm is following all the rules and regulations in proper manner.
It is critically important to focus on these roles on the basis of which it is easy to access to goals
and objectives in proper manner (Morales-Díaz and Zamora-Ramírez, 2018). Furthermore, role
of council member is to determine and examine how consumer accounts are being internally
received. Moreover, it is analyzed that through proper use of fulfilling of these role, it is easy to
ensure about the how to achieve organizational goals and objectives. Each members of the audit
committee will also be up-to - date on significant policy and organizational changing trends in
the area of accounting.

From the above matter, it is analyzed that all roles are needed to be carried out in correct way so
that all duties are allotted to everyone in proper manner. This has been analyzed that a wide
range of research is to be done so that it is easy to achieve a goals within time period.
CONCLUSION
According to the aforementioned report, financing or money management is defined by a
company's ability to run a corporation before it declares bankruptcy while collecting long-term
investment funds. With the help of expenditure appraisal tools, businesses can calculate the
feasibility of their company using financial ratios, and managers can select the right budget
choices that are both beneficial and effective.

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