Financial Statement Analysis
Added on 2019-12-03
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MANAGING FINANCIALRESOURCES1
Table of ContentsINTRODUCTION ..........................................................................................................................3TASK 1............................................................................................................................................31.1 The sources of finance available to a business......................................................................31.2 Assess the implications of the different sources....................................................................51.3 Evaluate appropriate sources of finance for General Sportswear's business project ofopening two outlets......................................................................................................................6TASK 2............................................................................................................................................72.1 Costs associated with different sources of finance................................................................72.2 Importance of financial planning...........................................................................................82.3 Assessing financial information needs of three main decision makers.................................92.4 Impact of finance on the financial statements......................................................................10TASK 3..........................................................................................................................................113.1 Preparing the cash budget....................................................................................................113.2 Cost computation and selling price decision.......................................................................123.3 Investment appraisal techniques..........................................................................................13TASK 4..........................................................................................................................................154.1 Different financial statements ............................................................................................154.2 Different financial statement formats for different business...............................................164.3 Interpreting financial statements using ratio analysis of Comparator.................................17CONCLUSION..............................................................................................................................19REFERENCES .............................................................................................................................212
INTRODUCTION Accurate financial management is essential for the success, survival and sustainability ofbusiness enterprise. However, this is one aspect that can make huge impact on the decisionmaking process irrespective to the size, sector etc. of the company. It is the responsibility ofsenior financial officials to manage and control the financial position of business in suitable andreliable manner so that desired results and outcomes can be achieved (Ball, Jayaraman andShivakumar, 2012). Furthermore, managing financial resources assist in providing right directionand accountability to the activities or operations of business. In the present report, researcher focuses on enhancing the understanding of where andhow to access sources of finance for a business and the skills required by the people to usefinancial information for making smart and corrective judgements. Present report undertakescases of different organisations such as General sportswear, X Ltd and Axis Ltd for presentingthe practical implications of different financial tools and techniques used in making smartdecisions. The main purpose of conducting current study is to provide learners and readers broadunderstanding of the sources and availability of finance for the selected company. Along withthis, positive and negative implications of modes of funding has been evaluated for makingappropriate judgement regarding selection of the best suitable source of finance. Thereafter,investigator highlights the importance of financial planning and budgeting. Lastly, with the helpof different appraisal techniques, reliability and validity of investment project has been evaluatedas well as financial ratios of the company has been compared with industry standards to analysethe current standing of business enterprise in the target market. TASK 11.1 The sources of finance available to a businessThe sources of finance are divided on the basis of time which are: Short term financing Long term financingShort term financing3
Short term finance is loan which holds for few time period like months or one year. Insportswear, company is using short term finance: Commercial paper- The sportswear company can use commercial paper for short-debtobligations in money market. It has maturity time between 1 to 365 days. It is promise to pay onthe specified date of maturity to issuing bank or financial institution. So it is beneficial to fulfilpresent financial requirement for the mentioned entity (Paramasivan, 2009).Letter of credit- In this type of loan, company receives a document from financialinstitution or slimier party (may be purchaser). Through this document issuer is liable to pay tothe origination against the goods and services which is delivered to the buyer. On fixed date (asper the agreement), purchaser will pay money to the bank or issuer party. Then company savesits time while using letter of credit because it reduces frequency to reach purchaser and collectmoney.Overdraft- Company can use the facility of overdraft for short-debt. In this, business canwithdraw excessive sum of money from its account balance. But there is a limit of maximumamount that can be debited. Banks will charge some interest on the overdraft quantity (Sourcesof finance, 2012).Short term bank loans- In the sportswear company, Bank loans are specifically taken forparticular purposes. It provides help to fulfil the short term urgent requirement. It is easilyavailable by the bank on the basis of goodwill of the company and also bank charge someamount of money as interest on loan. Example like company takes loan on purchase ofmachinery.Long term financingIt is used to fulfil need of long term finance. The sources of long term finance are:Equity financing- Equity financing includes ordinary or equity and preference share asstock. In this, company sales its stock to increase the capital of business. The investors purchaseshares and organization receives money. But company also pay dividends after a time period. Debt financing- In debt financing, company receives loan and gives promise to repay theamount to general public. The nature of loan may be secured and unsecured both. It provideslong term availability of funds to invest in business projects (Drake and Fabozzi, 2012).4
Retained earning: Retained earnings are the profits that have been kept safely with thecompany. This is the sources of finance that is used to invest in the profitable business.However, company has to pay opportunity cost for choosing retained earnings.1.2 Assess the implications of the different sourcesThe section above represents the sources of finance that are available to GeneralSportswear. However , there are certain implications of such sources of finance to the public.The table below represents the legal, duplication of ownership and bankruptcy implications. Table 1: Implications of Sources of finance Sources of funds Legal implications DilutionofOwnership Risks of bankruptcy Issue of debenture The legal implicationof debt financing is thatthe company has to uselot paper work forraising funds frompublic In this kind of source,the ownership ofbusiness will not betransferred to theinvestors. In case the companydeclared bankrupt,the investors will losstheir amount Equity financing For issuing the sharesto the public, thecompany has toregistered it self withIPO norms (Businessfinance. 2011).On the issue of shares, the ownership ofcompany will betransferred to thestakeholders In the situation ofbankruptcy , the caseis not entitled to paydividends toshareholders Retained earningsIn order to use retainedearnings , the companyhas to take the legalpermission from theboard. However theprofits will be usedafter paying divided tothe shareholders This is the sources inwhich only Companycan declare theownership (Marcaland Roberts, 2001)This is not impaled inthe case ofbankruptcy as therewill not any profitswith company Commercial paperFor using commercialpaper, the company hasto follow some normsand regulations In case of using thissources of finance ,the ownership can notbe transferred to anyparty before wholethe process iscompleted. In case the companybecome bankrupt, thecommercial paperscan be canceled buthe authorities(Stolowy and Lebas,2006)Short term bankloan In order to use shortterm bank loan andfunds raised throughThe business willkeep some assets asan security to theThe business willloss the securitieskept with the bank ,5
such sources thecompany has to dolegal formalities. bank due to bankruptcyOverdraft The company has tomaintain thecreditworthiness withbank or the record ofbusiness should beclear.This source does notimpact on theownership ofbusiness In case company willbecome insolvent theamount can be keepback from currentaccountLetter of credit Legal formulates haveto be done as the bankaccount of both theentities are necessary Ownership issuesarise with banks This sources givesassurance of amountentitled repayment tothe party 1.3 Evaluate appropriate sources of finance for General Sportswear's business project of openingtwo outletsAccording to the case scenario, General Sportswear is wishing to expand the business byopening two outlets in London, therefore, it requires sources of finance. There are varioussources of finance through which the financial need of company can be fulfilled. The foremostsources of finance that can be used by the company is “Retained earnings”. The retainedearnings are the profits that have been secured by General Sportswear. It has been witnessed thatthis sources of financial will in be internal and long term source of finance that will availcompany with sufficient amount of capital that can be invested in opening stores. In addition to that, “Equity financing” can also be used an appropriate sources of financefor General Sportswear's businessproject of opening two outlets. The funds can be raised from the public against issuing shares ofthe company. The company can raise sufficient amount of funds from market to open newoutlets however, the company has to pay dividend to the shareholders (Loayza, Levine and Beck,2000). The dividend amount paid to the shareholders can be seen as expense of business. Alongwith this the company has to share the ownership of business with shareholders. This will be the6
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