Managing Financial Resources: Types of Financial Statements and Ratio Analysis

This article discusses the types of financial statements and ratio analysis to measure the performance of the business. It also evaluates different financial information needs of different stakeholders. The second part of the article focuses on the most profitable level of output of the product and the problems associated with using cost plus pricing method.

Managing financial
resources

Contents
Contents...........................................................................................................................................2
Assignment 1...................................................................................................................................1
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Question 1: Identification of types of financial statements along with ratio analysis to measure
the performance of the business:.................................................................................................1
Compute the financial ratios and provide its interpretation.........................................................3
Evaluate different financial information needs of different stakeholders...................................5
CONCLUSION................................................................................................................................6
Assignment 2...................................................................................................................................7
INTRODUCTION...........................................................................................................................7
MAIN BODY..................................................................................................................................7
Question 1: What is the most profitable level of output of the product......................................7
Question 2: Explain Cost plus pricing method and the problems associated with using this
approach.......................................................................................................................................8
Question 3: Compute the following ratios for Fortune Trading..................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

Assignment 1
INTRODUCTION
Monitoring finance assets implies that the administration of every commercial enterprise is
likely to contributing the company's monetary assets (Ankunda, 2018). The firm's fiscal
executives are capable of communicating via this, allowing monetary data to be collected and
effectively controlled. The forms of fiscal statements that would aid in evaluating the firm's
material success are stated in the accompanying study. Different metrics are generated for the
business Fortune Trading Ltd from the financial statement, and the proportions are then assessed
for the operating value. Furthermore, the review would include financial data that is required by
many parties.
MAIN BODY
Question 1: Identification of types of financial statements along with ratio analysis to measure
the performance of the business:
Types of financial statements that has been prepared by the entity are mentioned below:
 Balance Sheet:
The balance reflects the position of assets and liabilities of the organisation as on data
that is 31st march or 31st December depending upon the period for which the books are
being prepared by the organisation. The major heading while preparing balance sheet are
being. Current assets, non-current assets, equity, non-current liability and current
liability. The balance reflects the positioning of the company in the market and on such
basis the investor rely on them and invest their funds in the company. Therefore, it plays
the very important role in the success and failure of the business as it shows their true
picture to its connected stakeholders (Bakari, Hunjra, and Niazi, 2017).
 Profit and loss statement:
It is also known as statement of financial performance and it shows the performance of
the organisation throughout the year in the form of Net profits. The higher profits indicate
that entity is utilising their resources effectively and in efficient manner. Net profits or
loss is arrived by deducting the operating expenses of the organisation from the revenue
they earned by selling of goods and services. This statement is very essential for the
organisation in calculation of various ratios that helps the business entity in interpreting

the results thereof. Normally profit and loss statement are being prepared for the period
of 12 months staring from April to march or January to December. The working of the
entity has been evaluated on the basis of their profit generating capacity and if they don’t
generate profits then it assumes that they are not utilising their assets properly.
 Cash flow statement:
The cash flow statement is the financial statement that provides the organisation the
complete data regarding the cash flows that is received by the company through its
ongoing operations and external investment sources. The cash flow statements show the
investor the liquidity position of the business and if cash flows are positive then it will be
regarded that performance of the business is sound enough. Further these cash flows are
divided into different category such as cash flow from operating activity, cash flow from
finance activity and cash flow from investing activity (Bowers, Hall and Srinivasan,
2017). All the cash flows regarding day to day operations of the organisations are
covered in operating activity such as sales made, payment of salary’s to employees,
payment of office rent, other business expenses etc. Financing activity of the business
includes loan taking from the bank or financial institutions, payment of interest to bank,
funds raised from debenture holders etc.
The accompanying is a ratio assessment which aids in the translating of financial
illustrations: Accounting ratios aids in the study of many aspects of financial reporting in order
to assess a company's overall performance, affectability, and solvency possibilities and
capability.
 Solvency Ratios determine whether or not a company is financially viable in the longer
run. This ratio analysis aids in the comparison of an organization's commitment degree to
its assets, worth, and annual income. Liability to equity percentage, responsibility ratio,
income incorporation ratio, and valuation ratio are all examples of such percentages.
Governments, institutions, purchasers, and shareholders are the primary customers of
these kinds of ratios.
 Profitability Ratios are a financial measurement which calculates a company's ability to
generate profits in relation to its expenses. If the efficiency ratio computed is greater than
the corresponding with the previous term, it indicates that the organization is making
progress in considerations of money. It's definitely slightly higher compared to it when it

comes to determining the ability of the company in relation to its competitors. Returns on
asset ratio, return on capital, netted total sales, and so forth are examples of all these.
 Liquidity Ratios are a financial term which measures an association is able to satisfy its
commitments and tasks while employing current assets. This aspect of the proportions are
divided into 3 categories (Chiaramonte, 2018). The current percentage, the quick ratio,
and the cash ratio are all examples of current proportions. Where the current ratio
evaluates the company's capacity to repay its current obligations with current resources.
In addition, the liquid ratio determines the percentage upon which organization pays its
commitments in phases sans relinquishing its current obligations.
Compute the financial ratios and provide its interpretation.
Gross Profitability margin: This is a monetary indicator which an organisation employs
to calculate the gain generated in terms of the total sales that has been done by the company over
a period of the normal financial activities and the normal fiscal year.
= (Gross Profit / Net sales) * 100
= (200000 / 500000) * 100
= 40%
For the time being, it can be observed that the organisation has a gross margin which
shows an earnings of 40%. About 50% and seventy percent of gross total earnings is deemed
optimum and thus it can be taken as a standard so that the company can gain an upper hand in the
market. It implies that the organisation is unable to create sufficient additions in order to cover
the expenses of goods offered.
Expenses Ratio: Also known as organisation expenditure magnitude, this metric
measures how much more of a company's resources are allocated to operational and
administrative expenditures.
= Total Expenses / Revenue
= 129000 / 500000
= 0.258
The amount of money managed is very little, implying that the organisation could keep
its costs under control. If it is less than 1, it is considered exceptional. It implies that the
company would have to provide a magnificent image to external shareholders.

Operating Ratio: It aids in the evaluation of a company's competence. The sufficiency is
determined by comparing the operational costs for the total contracts (Donker and Van Loenen,
2016).
= Operating Expense / Revenue
= 113000 / 500000
= 0.226
It demonstrates that the relations of the operating costs are low, and that it could operate
efficiently and effectively.
Net Profit Ratio: This metric aids in the verification of comprehensive income after
deducting interests and taxation. By allocating the total benefit from the netting structures and
multiplying it by 100, it is not fully fixed as it can change as per the circumstances and the stance
of the company as a whole.
= (Net Profit / Net Sales) * 100
= (84000 / 500000) * 100
= 16.8 %
The relationship between operational profit and total sales can be expressed as a
percentage. Gross profits are subtracted from operating expenses and income taxes to arrive at
aggregate income. The above table's Net Earnings Ratio is 16.8%, showing that the company
was far more effective and profitable. This ratio helps in the assessment of overall effectiveness,
and the business may adopt further steps to boost profitability and output. The company has a
substantial net income margin owing to its capability to successfully stay profitable.
Operating Profit Ratio:
= (Operating Profit / Net Sales) * 100
= (87000 / 500000) * 100
= 17.4 %
The term "operation income" refers to the money gained each dollar of sales
revenues that is used to evaluate operating efficiency. The company's share is 17.4 percent,
indicating that its financial status is strengthening. It indicates that the company's financial
situation is sound, and it comes with a slew of benefits and restrictions. Investors can use it to
evaluate a team's growth. As a result, the company's operating efficiency is higher, and it
outperforms its competition.

Stock Turnover Ratio:
= (Cost of Goods Sold / Average Inventory)
= 293000 / 87375
= 3.35 times
Inventory turnover ratio is a means of evaluating cost, efficiency, marketing, and purchasing
decisions (Ghobakhloo and Fathi, 2019). It illustrates how profitable a company's stock is. The
company's ratio is 3.4, which is much less than the acceptable ratio for the sector. As a result, a
higher proportion indicates that the company is providing quick service, whereas a lower ratio
indicates there is a shortage of demand for goods. As a consequence, the company's share of the
market decreases, suggesting administrative inefficiency.
Working note:
Cost of Goods Sold = Opening Stock + Purchases – Closing Stock
= 76250 + 315250 – 98500 = 293000
Operating Expenses = Selling and Distribution Expenses + Administration Expenses
= 101000 + 12000 = 113000
Operating Profit = Gross Profit - Operating Expenses
= 200000 – 113000 = 87000
Evaluate different financial information needs of different stakeholders
 People that invest in a company in the aim of getting additional profits in the form of
dividends are known as stockholders. They'll devote more heed to financial indicators
like the operating income ratio and investment payout %, and also the income reports
which reflect the company's financial success.
 Finance institutions are persons who are enthusiastic regarding a company and want to
verify that its debts and other obligations are met. It helps in the assessment of a
company's effectiveness by looking at the fiscal operations of the company and
calculating the acid test ratio to see if they can meet their responsibilities.
 Competitors looked especially interested in company financial efficiency that they
contrasted to their company to evaluate whether they are improving or deteriorating.
They must do so by monitoring and controlling expenditure and earnings, as well as
reviewing the fiscal accounts, capital requirements, and cash balance in order to assess

future viability and draw similarities with the other companies (Harnby, 2016)(Labaronne
and Tröndle, 2021).
 Customers are worried regarding the company's long-term viability as a reliable source,
and also increased marketing costs. They would need to look at the financial statements
and market price to assess the business future.
 Creditors are interested in the organisation because they want to know about its
availability and security such that shareholders may perform timely activities and keep
track of the company's fiscal status.
 As per the company's board, top managers examine the business's operations and make
decisions about financial results. In considerations of judging the firm's sustainability and
efficacy, they would expect a stronger and far more accurate accounting record.
CONCLUSION
The above-mentioned analysis aids in the conclusion and assertion of appropriate financial
facts necessary by shareholders, as well as the computation of different ratio that aid in
determining the revenue made and earnings received by the company throughout business's
normal duration and how it may be employed in numerous areas.

Assignment 2
INTRODUCTION
This article examines the corporation's productivity, as well as the importance of
understanding cost-in-addition-to-selling criteria, the difficulty of implementing this approach in
the organisation, and the benefits of doing so. Apart from that, using these metrics to evaluate
proper functioning and affectability will assist customers in generating better informed
judgments (Musoma, Kilobe and Mnyawi, 2016). In addition, the amount of production that
would assist in getting to the greatest revenue would be discovered.
MAIN BODY
Question 1: What is the most profitable level of output of the product
Price Quantity
sold
Revenue Variable Costs (£ 20
per unit)
Fixed Cost Profit
100 0 0 0 2500 -2500
95 10 950 200 2500 -1750
90 20 1800 400 2500 -1100
85 30 2550 600 2500 -550
80 40 3200 800 2500 -100
75 50 3750 1000 2500 250
70 60 4200 1200 2500 500
65 70 4500 1400 2500 600
60 80 4800 1600 2500 700
55 90 4950 1800 2500 650
50 100 5000 2000 2500 500
By measuring the numbers supplied at every cost in the list above, a total of 100 pieces
can be supplied per week. The income, adjustable, and overhead expenses for each pricing and
the volume which would be delivered per week have been calculated in the figure above. The
revenue was calculated based on this for all of the volumes supplied each week. As shown in
this, and based on the above-mentioned chart, the business UK Tools is making the most money

at £ 60 per week by supplying 80 lots. The revenue earned each week is £ 700. This is the
highest amount of production which the company UK tools can deliver at a revenue.
Question 2: Explain Cost plus pricing method and the problems associated with using this
approach
Cost-includes-marketing is a method in which a company evaluates the price of a product to
the company and then adds a margin to the price to determine the company price to the customer
(Nigri and Del Baldo, 2018). An extension is added to the entire value in order to calculate the
company costs and advantages. This data is critical for putting out accurate price forecasts,
especially for programs and single-purchaser items that were originally generated for specific
customers. Because it ignores competing expenses, this method is unsuitable for determining the
value of a product that will be shown in a competitive marketplace framework. The below are
some of the issues which could arise whilst also using this strategic plan:
 Calculating fragmentation is compelled by necessity, and the capacity to provide an
inducement for distinct commercial groupings is severely limited. Setting fees based on
how a customer requires items could assist business in gaining customer footing. As a
consequence, growth is constrained, and things like originality and uniqueness suffer the
effects.
 The most serious flaw is that it overlooks commercial methodology. It also failed to
consider the viability of the firm. It is frequently decided whether or not a particular
customer will regard the merchandise to be a fantastic investment just currently (Ongan
and Fortuna, 2021).
Question 3: Compute the following ratios for Fortune Trading.
Current ratio- Current Assets / Current liabilities
Current asset 40000
Current liability 28000
Current ratio 1.428571
= 1.43: 1
In terms of fortune trading, a constant ratio of 1.4 is what has been happening on in
relation to financial management concerns. A higher current ratio is preferable to a lower current
ratio because it shows that the company can meet its continuing receiving obligations with ease.

As a consequence, the firm's current ratio essentially increased, indicating that it can satisfy its
much more restricted in terms of its respective obligations.
Quick ratio- (Current Assets – stock) / Current Liabilities)
Current asset 40000
Inventory 12000
Current liability 28000
Quick ratio 1
= 1: 1
Fortune Trading's magnitude is 1, which is a favourable indicator for the company. This
implies that the company would not be required to trade longer-term resources in order to fulfil
its existing obligations.
Debt equity ratio- Debt / equity
Total liabilities 60000
Shareholder
equity 60000
Debt equity ratio 1
= 1:1
Fortune Trading's magnitude is 1, which is clearly not a good indicator of the company's
performance. Therefore indicates that perhaps the company is repaying its obligation with its
personal resources, and it contributes to heightened volatility (Psychogios and Prouska, 2019).
Whenever the size of an organisation is fewer than one, it is significantly lowering
its instability than when it is more than 1.
Proprietary ratio- Shareholders fund / Total Assets
Shareholder
equity 60000
Total asset 120000
Proprietary ratio 0.5
= 50 %
Fortune Trading does have a commitment to asset advantage of 0.5, which is also not
optimal considering the firm's reliance on acquisitions because of its operations. As a result, a

higher rate means that the system is much more stable and that money changers are adequately
supported (Wishanti, 2020).
CONCLUSION
According to the report, in order for a company to thrive in its activities, its complete
resources must be handled successfully in a sequential manner. The company is discussing the
advantages of cost plus advertising as well as the obstacles it poses in the industry. The concept
of calculating proportions like the current ratio, acid test ratio, proprietary ratio, and debt equity
ratio has also been discussed so as to give an upper hand to the company in the market which is
highly competitive and dynamic in nature so that it can take appropriate decisions and that too
within a limited time frame and thus can stand well above its rivals that are also working in the
similar industry.

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