This report provides an introduction to finance management and covers topics such as economic order quantity, inventory management techniques, payback period, and accounting rate of return. It also includes critical evaluations and advice for inventory management and investment decisions.
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Table of Contents INTRODUCTION...........................................................................................................................3 Question 1........................................................................................................................................3 Economic order quantity for hard plastic....................................................................................3 Annual cost of hard plastic..........................................................................................................3 Critical evaluation of using EOQ as inventory management technique.....................................4 Advice for inventory management in respect to opinion of Grace Rodriquez and Maria Cousins........................................................................................................................................5 Question 2........................................................................................................................................6 Pay back period...........................................................................................................................6 Accounting rate of return............................................................................................................8 Critical evaluation of accounting rate of return method.............................................................9 Advice to senior team..................................................................................................................9 Question 3......................................................................................................................................10 Financial calculations................................................................................................................10 Importance of financial statement analysis...............................................................................11 Question 4......................................................................................................................................12 Organisation role in managing accounting standards...............................................................12 Role of audit committee in corporate governance....................................................................13 CONCLUSION..............................................................................................................................13 REFERENCES..............................................................................................................................14
INTRODUCTION Finance management is defined as managing and controlling financial resources of company (Nagib and et.al., 2016). This report will emphasis over different principles and concepts associated with the finance. Henceforth, this report will emphasis over the calculation of economic order quantity. Calculation in respect to total annual cost of plastic will also project in this report. Critical evaluation will also be conducted in respect to company's approach for utilising EOQ model for managing company's inventory. Total annual cost of plastic will also calculate in this project. Company’s approach to manage its inventory would also be evaluated critically in this report. How effective the EOQ method to manage organization inventory would be analysed critically in this project. Advice will also be given over company’s technique to manage its inventory. Calculation related to payback period will also be analysed in this report. Evaluation related to accounting rate of return will also be a part of this project. Critical analysis of internal rate of return technique would also project in this project. Furthermore, this project will provide details about various ratios like gross profit ratio, asset usage ratio, current ratio, acid test, inventories holding period and debt to equity ratio. Importance of financial statements will also project in this report. Question 1 Economic order quantity for hard plastic Economic Order Quantity (EOQ) =√ 2 * D * S / H D (Demand in Unit) = 27000 Units S (Order cost per purchase order) = $14 H (Holding cost per unit) = $1.75 = √ 2 * 27000 * $14 / $1.75 = 657 Units Annual cost of hard plastic Annual cost of plastic =Cost of material + Annual holding cost + Annual ordering cost Demand in unit (D)=27000 Unit
Volume per order (Q)=657 (It would be estimated as EOQ) Ordering cost per purchase order (S) =$14 Holding cost per unit (H)= $1.75 Annual ordering cost =D /Q * S =27000 / 657 * $14 = $ 575 Annual holding cost =Q/2 * H = 657 / 2 * 1.75 = $ 575 Total cost =$ 24300 + $ 575 + $ 575 = $ 25450 Critical evaluation of using EOQ as inventory management technique Economic order quantity is denoted as the quantity of material that company should order every year to contain the least ordering cost and holding cost. This is the quantity that will allow company to control the cost incurred to produce the final product (Vanauken, Ascigil and Carraher, 2017). It takes time to convert material into finished good. Economic order quantity allow the organisation to control the extra cost needed to convert material into finished good. The time taken to convert the raw material into finished good also takes time which further consumer extra cost of holding the material and equipment. The formula consume to evaluate economic order quantity contain elements like annual consumption, holding cost and ordering cost (Ventura and Samuel, 2016). ON the basis of the annual expected consumption appropriate quantity calculated that consider the least amount of holding and ordering cost. This is the standard quantity company should order in process to keep the ordering and holding cost minimum. If the company order more than the requires amount of inventory than it needs to consume more holding cost to protect such extra inventory company has ordered for future use. IN case the organisation orders less than required inventory than it needs to suffer extra ordering cost as number of order will be more than required which will consume extra ordering cost for company. The concept of economic order quantity protect organisation from suffering such extra
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cost incurred for consuming the inventory in order to convert such into finished good. The cost advantages associated with the economic order quantity drive companies to consume the raw material into the best way possible that will consume the minimum holding and ordering cost incurred in converting raw material into finished. Only the minimum amount of inventory company will be required to protect in the store. The biggest advantages of economic order quantity is in respect to company need to suffer from the minimum ordering and holding cost possible. This further reduces the overall cost of producing the unit or finished good (Di Nardo and et.al., 2020). The use of economic order quantity method is further contain a certain limitation as annual consumption of material are more hypothetical as any organisation do not carry any specific idea about how much the units organization will consume in an year. The hypothetical figure in respect to overall consumption of raw material evaluate the hypothetical information about the quantity of raw material company should order in organisation. Economic order quantity method also usage the past figures of total raw material consumed to evaluate the economic order quantity. This tactic of identifying economic order quanmity does not involve other elements like increased market demand, situation of business environment and many other elements that can project wrong interpretations in respect to the organisation. This method contain several limitations which also create a negative impact in respect to using this method of calculate economic order quantity (Jackson and Orr, 2019). It is not forecast to calculate the exact demand of raw material needed to convert into finished good. This method assume that raw material will be immediately available by suppliers which in practical context not become convenient as many times suppliers also not carry the quantity needed to organisation at the time of order. This method also needed monitoring at continuous level. All these are certain disadvantages or challenges associated with the method of inventory management. Touchdown Sports Inc's decision of utilising the economic order quantity method to manage inventory is the most prominent technique to manage the inventory in organisation. This technique allows the company to control cost and unusual holding of inventory in company's stock (Maxwell, 2016). This method will allow better management of company’s inventory. So the company's decision to use this technique is more beneficial in favour of the organisation.
Advice for inventory management in respect to opinion of Grace Rodriquez and Maria Cousins Inventory management is a critical aspect of business. On the basis of the annual consumption of raw material company conduct its inventory management practices. Grace Rodriquez and Maria Cousins suggested the just in time method of managing inventory in organisation. This method of inventory management guides the company to order inventory only the time when raw material are needed to organisation. The prior order of inventory are not a part of practice if company. This method follows the practice that raw material should be ordered only the time when it is needed in factory. This method is directed towards cost control as keeping material in stock will occur holding cost and ordering cost. Just in time inventory method would directly allow the company to avoid holding cost. Ordering cost will be same in this method of inventory management. Once the stock reached the re order level inventory are ordered in this method so at the time of actual requirement of such stock raw material is available in stock for company (Park, Ramesh and Cao, 2016). Ordering cost can also be more than the EOQ method of inventory management. This method would directly control or restricts the holding cost of inventory but it will generate more ordering cost for company. This method also contains a limitation that it is not necessary that raw material would be immediately available with the supplier. In case due top any abnormal reason supplier could not deliver raw material company will face a trouble in producing the finished good. This method contains extra risk of shortage of inventory in company's stock. Economic order quantity contain both the cost holding cost and ordering cost but in limit (Bolomope and et.al., 2020). Economic order method also ensures the proper availability of company's stock at all the time of production even in abnormal circumstances. All these advantages associated with the economic order quantity make this method more beneficial in respect to the organisation. Use of economic order quantity method is more beneficial for the organisation. This method will allow the organisation to control both cost and time related to the management of inventory. Question 2 Pay back period Pay back period is defined as time taken to recover the original investment amount. Project A Summary of cash flowAmount($000)AccumulatedCashFlow
($000) Inotial investment51000 Scrap value40110 Actualinvetsment(Initial investment – Scrap Value) 10890 Year 132003200 Year 233006500 (3200 + 3300) Year 331009600 (3200 + 3300 + 3100) Year 4300012600 (3200 + 3300 + 3100 + 3000) = 3 Year + 1290 (12600 – 9600) / 3000 * 12 = 3 Year + 5.16 Months = 3 Year, 5.16 Months Project B Summary of cash flowAmount($000)AccumulatedCashFlow ($000) Inotial investment76500 Scrap value60120 Actualinvetsment(Initial investment – Scrap Value) 16380 Year 139003900 Year 236007500 (3900 + 3600)
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Year 3330010800 (3900 + 3600 + 3300) Year 4310013900 ( 3900 + 3600 + 3300 + 3100) Year 5260016500 ( 3900 + 3600 + 3300 + 3100 + 2600) =4 Year + 2480 / 2600 * 12 = 4 Year + 11.44 Month = 4 Year and 11.44 Months On the basis of the Pay Back period method Project A is more beneficial for the company as it contain lesser Payback period as compare to Project B. Accounting rate of return Accounting rate of return is denoted as the comparative analysis between average annual profit and initial investment ARR =Average annual profit / Initial Investment Project A Initial investment =$ 5100000 Average annual profit =$ 15500000(3200000 + 3300000 + 3100000 + 3000000 + 2900000) / 5 = $ 3100000 ARR =$ 3100000 / $ 5100000 = 60.78% Project B Initial investment =$ 76500000 Average annual profit =$ 16500000(3900000 + 3600000 + 3300000 + 3100000 + 2600000) / 5
= $ 3300000 ARR= $ 3300000 / $ 76500000 = 4.31% Critical evaluation of accounting rate of return method Accounting rate of return is a technique that consumes initial level of investment and annual profit. By comparing both this profitability and initial level of investment proficiency of the project is analysed. This is the inflow of cash over the investment company has done in a project over an average basis. This method assumes that income will be generated till the life time of project. On the basis of the expected income earned over a project investment decision is making in this project. The income take in this method are based on the expected outcome (Alkaraan, 2020). There is not any exact method is available to calculate the inflow of organisation against a certain project. The project that contains the maximum accounting rate of return rate will be chosen as an investment beneficial for the organisation. This method have been criticised by many authors as it only contain the expected figure of future cash inflow as actual data can only be generated once the inflow actually occurred (Robinson, 2020). This method also criticized by many intellectual as this method does not consider time value of money in the evaluation process. Accounting rate of return method do not consider the external factors that also influence the profitability of organisation. Time value of money is a key tool that project the exact figures of company’s inflow and not considering time value of money do not justify the correct evaluation of analysing the investment decision of company. Advice to senior team The senior team preferring internal rate of return method to make investment decision. This is another crucial technique to make investment decision. All such investment that obtains the best level of inflow are always the best decision to make in regards to organisation. This method is an effective technique to make investment decision as it also consider the time value of money in making the investment decision. This method is also a simple technique to analysis the investment decision. This denotes a rate organisation will ear over its investment (Lowies, Hall and Cloete, 2016). Time value of money also derives the clear result to management in order to analysis the investment organisation. In this method hurdle rate also not required which also make it more convenient to use as compare to other investment appraisal methods like net
present value and other methods. As compare to accounting rate of return technique this method is more reliable technique to analysis the investment decision of organisation. Accounting rate of return do not involve time value of money which this method also involve so the preference of this method over accounting rate of return method is more reliable. This method further contains some limitations such as it ignores the size of investment completely. It also ignores future cost company need to incur in order to sustain the investment. This technique of investment decision maiking also ignores the reinvestment rate (Hanafi, 2018). Apart from the few mentioned disadvantages this method suggests the most optimum level of results when it comes to making investment decision in regards to the organisation. This method denote the most optimum rate an organisation will derive from its investment which further indicate the bets result in favour to the organisation. The decision of management to analysis investment decision based on internal rate of return method is beneficial in favour of the organisation. As it will allow the company to analysis all areas of the investment decision making. Question 3 Financial calculations Gross profit margin =Gross profit / sales * 100 = 1313000 / 3495000 * 100 = 37.57% Assets Usage ratio =Revenue / Average total asset = 618000 / 3873500 = .16 Current ratio =Current asset / Current liability =1687000 / 744000 = 2.27 Acid test ratio =Current asset – Inventory / current liability = 1687000 – 150000 / 744000 = 2.07
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Inventories holding period =Avg Inventory / cost of good sold * 365 = 126000 (150000 + 102000 / 2) / 3495000 * 12 = .43 days Debt to equity ratio =Total liabilities / Total shareholder equity = 914000 / 2210000 = .41 Importance of financial statement analysis Financial statements are the financial records of company’s performance in a respective financial year. All affairs entertained by organisation in a respective year are recorded in the financial statement of company. Financial statement contains the significant information in respect to organisation financial health and wealth. They are the exact knowledge about how company has performed in a respective financial year so that further decisions can be taken in respect to business operations. It involve sales of company in a respective financial year that can also be analysedwith previousyear recordstounderstand weatherthe organisationhas performed more effectively this year or not. Growth rate of company also evaluated with the support of turnover of organisation (Ogunlusi and Obademi, 2019). Balance sheet guides the management to understand the business performance and drive towards making the best decision for business operations. Balance sheet project the exact detail where the organisation stated today in respect to its assets, profitability, liabilities, ownership, funds and many such relative information which further guides to company towards the right direction when it comes to making decisions in business. Income statements project how much the sales company has entertained, incomes associated with the organisation and expenses related to the respective financial year and other such information. All this information further involved in evaluating ration for assessing business presence in the market. Ratio such as liquidity ratio, current ratio, asset to turnover ratio and all other respective ratios are also calculated based on the information represent in financial records of organisation. Financialstatementsalsoplayanimportantroleforalldifferentstakeholdersof organisation. Stakeholders make decisions based on the information represent in the financial records of organisation. They make investment decision in organisation on the basis of the
information projected in the financial records of organisation. How much profitability company generate, growth rate and various other information are all evaluated and identified on the basis of the financial records of organisation. Financial statements such as balance sheet also reflect the reserve company has contained for its future investment plains. This information is related to the company’s share holders who are also claimed as the owner of the organisation (Xu and et.al., 2019). All these aspects of the financial statements of organisation like income statement, balance sheet guide the management to make the best decision in respect to the business operations of organisation. Cash flow statement is another crucial financial record which company prepare. This statement is helpful only for management. This statement reflects information about the liquidity position of organisation. Company also need to analyse the liquidity so that no extra blockage in company’s operations can create. Question 4 Organisation role in managing accounting standards Roles of different organisations in managing different accounting reforms and standards can be projected in the following manner. IFRS Foundation IFRS denoted as international financial reporting standards are the professional code of conducts to manage the financial reporting in the accounting books. This play role in managing financial requirements of the companies. They frame policies and framework that can provide ease in financial framework of the organisation. IFRS also play significant role in managing financial transactions in the best way possible. IFRS Advisory Council IFRSAdvisoryCouncilplayasignificantroleinadvisingeffectivepracticesfor conducting financial regulations. This council provide necessary recommendations to the IFRS Foundation in order to ensure the best level of practices that can provide better practices to organisations to manage their financial transactions. This council give advices in order to implement different amendments to project financial affairs of organisation in more effective and presentable manner. International Accounting Standard Board International Accounting Standard play role in implementing various accounting code of conducts that can improve accounting feasibility of companies. This organisation play role in
advancing the code of conducts to report accounting transactions in the books of accounts and also to implement new codes that can improve the accounting practices. IFRS Interpretations Committee IFRS Interpretation Committee play role in interpreting all the modern needs and requirements of the accounting practices. On the basis of the critical assessment of the existing practices and codes of conducts use in accounting this committee play role in guiding fair modifications that can sup[port better and effective projection of company’s financial and accounting transactions. Role of audit committee in corporate governance Audit committee assess that a specific organisation has followed all the regulatory requirementsofaccounting.Thisorganisationensuresthatorganisationhasreportedthe transaction on the basis of the code of conducts and principles and policies of accounts. Audit committee play significant role in dealing effectively against the corporate governance. The governance is about to cope up with all the necessary requirements associated with the accounting code of conducts. Audit is also to ensure that organisation could deal with all the accounting practices and policies comprises with code of conducts. Audit can give assurance to the stakeholders that company’s financial reporting is fair and they can make all the decisions on the basis of the company’s accounting books. CONCLUSION Economic order quantity is a key technique to manage company’s inventory. This technique involve annual consumption of company’s inventory, holding cost and ordering cost in valuation of inventory of company (Luypaert, Van Caneghem and Van Uytbergen, 2016). This is the quantity of inventory which contains the same holding cost and ordering cost. This method of managing inventory also allows the company to control overall cost in managing inventory of organisation. Accounting rate of return method is a key technique of analysing company’s investment decision. This method involves investment decision based on the average annual returns and initial level of investment. This method does not consider time value of money in respect to analysing investment decision of organisation. Internal rate of return technique is an effective technique to make the investment decision. This technique involves time value of money in making the investment decision for the organisation. Financial statements and records provide the clear information in respect to company’s performance in the respective financial
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year. All decisions related to business company and stakeholders take are based on the financial records of organisation. REFERENCES Books and Journals Alkaraan, F., 2020. Strategic investment decision-making practices in large manufacturing companies.Meditari Accountancy Research. Bolomope, M. and et.al., 2020. Property investment decision-making behaviour amidst market disruptions: an institutional perspective.Property Management. Di Nardo, M. and et.al., 2020. An Economic Order Quantity Stochastic Dynamic Optimization Model in a Logistic 4.0 Environment.Sustainability.12(10). p.4075. Hanafi, T., 2018. The testing of belief-adjustment model and framing effect on non-professional investor’s investment decision-making.The Indonesian Accounting Review.7(1). pp.1- 14. Jackson,C.andOrr,A.,2019.Investmentdecision-makingundereconomicpolicy uncertainty.Journal of Property Research.36(2). pp.153-185. Lowies, G. A., Hall, J. H. and Cloete, C. E., 2016. Heuristic-driven bias in property investment decision-making in South Africa.Journal of Property Investment & Finance. Luypaert, M., Van Caneghem, T. and Van Uytbergen, S., 2016. Financial statement filing lags: An empirical analysis among small firms.International Small Business Journal.34(4). pp.506-531. Maxwell, A., 2016. Investment decision-making by business angels. InHandbook of Research on Business Angels. Edward Elgar Publishing. Nagib, A. N. M and et.al., 2016, November. The Role of Hybrid Make-to-Stock (MTS)-Make- to-Order (MTO) and Economic Order Quantity (EOQ) Inventory Control Models in Food and Beverage Processing Industry. InIOP Conference Series: Materials Science and Engineering(Vol. 160, No. 1, p. 012003). IOP Publishing. Ogunlusi, O. E. and Obademi, O., 2019. The Impact of Behavioural Finance on Investment Decision-making: A Study of Selected Investment Banks in Nigeria.Global Business Review. p.0972150919851388.
Park, E. H., Ramesh, B. and Cao, L., 2016. Emotion in IT investment decision making with a realoptionsperspective:Theintertwiningofcognitionandregret.Journalof Management Information Systems.33(3). pp.652-683. Robinson, T. R., 2020.International financial statement analysis. John Wiley & Sons. Vanauken, H. E., Ascigil, S. and Carraher, S., 2017. Turkish SMEs' use of financial statements for decision making.The Journal of Entrepreneurial Finance (JEF).19(1). Ventura, R. and Samuel, S., 2016. Optimization of fuel injection in GDI engine using economic order quantity and Lambert W function.Applied Thermal Engineering.101. pp.112- 120. Xu, L. and et.al., 2019. To be or not to be? Big data business investment decision-making in the supply chain.Sustainability.11(8). p.2298. Online: Financial ratios, 2020 [Online]. Available Through: <https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-ratios/>.