Understanding Financial Statements for Construction

The provided content includes articles and resources related to financial management, accounting fundamentals, investment appraisal techniques, personal finance, and financial statement analysis. The materials cover topics such as budgeting, financial ratio analysis, working capital structure, liquidity analysis, personal debt, suicidal ideation, long-term interest rates, bank loan supply, and more. Additionally, there are online resources available through links provided.

MANAGING
FINANCIAL
RESOURCES AND
DECISIONS
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Table of Contents
INTRODUCTION................................................................................................................................4
TASK 1.................................................................................................................................................4
AC 1.1 Types of finance sources available to the business ............................................................4
AC 1.2 Implication of above identified finance sources.................................................................5
AC 1.3 Most appropriate finance source.........................................................................................6
TASK 2.................................................................................................................................................7
AC 2.1 Importance of financial planning........................................................................................7
AC 2.2 Cost of financial sources.....................................................................................................7
AC 2.3 Information needs of users..................................................................................................7
AC 2.4 Impact of finance on financial statements...........................................................................8
TASK 3.................................................................................................................................................9
AC 3.1 Projected cash, sales and purchase budget and analyse it for the decision-making............9
AC 3.2 Calculation of unit cost and set selling price.....................................................................11
AC 3.3 Project evaluation techniques NPV, IRR, ARR and IRR..................................................12
TASK 4...............................................................................................................................................13
AC 4.1 Financial statement, content, purpose and users...............................................................13
AC 4.2 Describing and comparing financial statement of sole trader, partnership and company.13
AC 4.3 Sainsbury's financial performance analysis.......................................................................14
CONCLUSION..................................................................................................................................15
REFERENCES...................................................................................................................................17
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INTRODUCTION
In the present age of globalization, large number of companies are operating at global level.
It lead to arise fierce competition between different organization who are operating in same
industry. For the success of the business, it becomes necessary for the managers to take quicker and
efficient decisions. Financial decisions are one of the most important decisions which makes an
significant contribution to business success or failure as well. Present project report is designed to
determine ways that how small and medium sized businesses can collect funds from variety of
internal as well as external sources. The report is based on financial management through better
financial planning so that companies will not face any financial difficulties in future. Moreover, the
report will describe methods available to determine products selling prices to generate sales
revenues. It will be helpful to eliminate short-term financial requirement in a great extent. Along
with this, variety of budgets such as purchase, sales and cash budget will be prepared to assure
effective administration of funds. At the end, report will explain the content, structure and purpose
of different financial statement of various type of businesses.
TASK 1
Brief description
A medium sized bakery shop has been selected for this assignment. It will be a counter
service bakery business who will have a small commercial space to establish their counter and sell
bakery products such as pastry, breads, cakes and other baked foods over the counter.
AC 1.1 Types of finance sources available to the business
Bakery entrepreneur can collect funds from following sources;
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 Personal savings: it is one of the most finest and easily available source to meet short and
medium term financial need because no legal and regulatory requirement need to be
satisfied (Tatuev and Bahturazova, 2014). Bakery entrepreneur can invest his or her personal
savings in the business and satisfy financial need as large as possible. Hire purchase: This is a better way to purchase equipments without buying it immediately.
By making payment of only the initial charges and balance in equal instalment, bakery
owner can use assets in the operations and get benefited through it. Financial support from relatives: Another source is financial help from the family members,
friends and other relatives (Deindl and Brandt, 2011). Its benefit is they provide funds
without demanding any security and available comparatively at cheaper rate from the bank
loan. Bakery owner can satisfy their medium-term requirement from financial help.
 Debt source: Bakery owner can generate funds from the bank loan. It will helps to satisfy
long term funds requirement at fixed or fluctuating interest rate.
AC 1.2 Implication of above identified finance sources
Source Financial Legal Dilution of
control
Bankruptc
y
Owner's
savings
No financial
implication.
No legal
implication.
Higher the owner
contribution will
transfer higher
the control rights
to the entity.
No
bankruptcy.
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Debt from bank Fixed or variable
interest charges on
borrowed funds
(Ono and et.al.,
2016).
Bakery entity has to
make periodically
interest payment,
otherwise, penalties
can be charged.
Moreover, owner is
obliged to secure
debts with any third
person guarantee
and collateral
security.
No dilute rights to
lenders.
If bakery
owner
becomes
insolvent
than it has
to use
business
assets to
discharge
their loan
obligations.
Financial
support
Some interest
charges.
If contract is made
between both the
parties than it will
be legal implication
to pay timely
interest and
repayment of
principal amount as
well (Deindl and
Brandt, 2011.
No dilution. No
bankruptcy.
Hire purchase Instalment includes
some amount of
interest as finance
cost. Thus, total
payment will
exceed from the
assets purchase
price.
Ownership will be
transfer at the end of
final payment. In
case of any default,
vendor has right to
get back its assets
without the need of
paying previously
deposited
instalments (Jalil,
2013).
No dilution exist. Bakery
owner has
to pay to
the vendors
through
sale of
business
assets.
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AC 1.3 Most appropriate finance source
Bank loan is the most appropriate source due to the following reasons:
 Helpful to eliminate short, medium and long run financial need. Thus, bakery owner can use
this source to buy capital assets such as commercial space for the establishing counter in
UK.
 Does not diversify controlling rights to the banks (Plumlee and et.al., 2015).
 Fixed as well as fluctuate interest payment are deductible expenses which results in
declining tax obligations.
 Instalment can be paid by generating revenues from the sales operations hence, it will be
more suitable and feasible.
Hire purchase will be good source to buy appliances such as ovens and fridges because
entity has to pay some charges as down payment and balance in instalment which will be paid at
fixed interval of time.
TASK 2
AC 2.1 Importance of financial planning
Advance or prior business plan to ensure adequate fund availability at every point of time is
called financial planning. Its main objective is to mitigate potential financial threats or problems
that can be arise due to competitive and changing environment.
 It helps bakery owner to determine their start-up costs and satisfy it by most appropriate
sources at least cost.
 It helps to ensure effective utilization of all the monetary sources so that business will not
face any difficulties due to lack of funds (Lewis, 2012).
 It helps to determine shortfall or surplus availability of funds. Thus, in case of deficit,
bakery management can design policies and take decisions to overcome from such shortfall.
 Bakery owner will need to purchase equipments and appliances such as ovens and
refrigerators. Effective financial plan will helps to acquire required funds timely so that
business can run without any hazards.
 It will helps to take financial decisions by optimum utilization of funds according to set
priorities. So that, owner can manage their costs and earn high profitability as well.
Thus, it can be said that financial planning is the insurance of bakery business's financial security
results in hazard free functioning.
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AC 2.2 Cost of financial sources
Finance source Costs
Savings Opportunity costs exists in personal savings. It refers to the loss of return
which owner can earn by investing his or her savings in alternative
opportunity (Tam and Dholakia, 2011).
Debt through bank As already said, fixed or variable interest payment is the costs of borrowed
funds through banks (Yen and et.al., 2015).
Hire purchase Periodical instalment involve some amount of interest as the cost of hire
purchase system.
Financial support Relatives, friends and family members provide funds at less interest charges
compare to the market rate which is known as its costs.
AC 2.3 Information needs of users
There are varied range of users who have any kind of direct and indirect relationship in the
business performance. Lenders require information about business capital risk, profit margin and
cash flow capacity so that they can secure their funds. Shareholders need information about profit
performance, dividend growth and potential earnings so that they can fulfil their investment
objective of high return. Creditors desires to know liquidity status so that they can analysis that firm
has enough resources or not to pay off them timely (Meltzer and et.al., 2011). While, employees are
interested to earn high salary and other benefits such as appraisal awards, So that, they require
information about profitability performance because only high profit earnings organizations can pay
more to their employees.
Another, managers are responsible to manage core business functioning therefore, they need
information about each and every aspects which assist in performance analysis. They will need to
know profit, liquidity, solvency, efficiency and cash generating ability. So that, they can make
effective and strategic decisions and frame policies which will aid to future performance. Further,
government desires to know profit and determine tax liabilities (Needs of users of financial
information, 2009). Moreover, they examine that all the business functioning are conducting
ethically and legally or not. They make policies to business as well a industrial growth which makes
an significant contribution to the economic development in form of GDP. Public are more interested
that business will fulfilling their environmental responsibility and give respect to all the culture.
Customer desires to purchase different type of products at different prices and quality as well.
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AC 2.4 Impact of finance on financial statements
Owner's capital employed: It will be disclose in the liability side of balance sheet and
enhance cash availability in the assets side (Tatuev and Bahturazova, 2014).
Borrowed funds: It will be disclose in the liabilities side of B/S under the head non-current
liabilities and will be added in cash balance of current assets.
Hire purchase: Initial payment will be subtracted from the cash balance and shows as
revenue expenditures in the profitability statement. On contrary, assets will be shows as fixed assets
in the B/S.
Instalment payment: Instalment of hire purchase and bank loan will be reported as
expenditures in the profitability statement. However, in B/S, it will be deducted from the closing
cash balance. Moreover, loan instalment will be subtracted from the borrowed funds under the non-
current liabilities head.
Principal payment: It will be deducted from the respective debt funds and necessarily
deducted from the cash position in B/S.
In addition to this, Bakery's operating functions will drive funds in the business and helps to
mitigate short-term financing. For instance, sales will contribute to increase revenue and will be
reported as income in profit and loss a/c while, collection of money will be included in cash balance
of the business. On contrary to this, expenditures will results in decline cash funds hence, will be
recognised as spendings in profit and loss a/c and deducted from the cash balance as well.
TASK 3
AC 3.1 Projected cash, sales and purchase budget and analyse it for the decision-making
Cash budget: It is the projection of all the cash incomes and expenditures helps to determine
net cash flow and closing cash balance (Just and Wansink, 2010).
Particulars April May June July August September
Cash income
Cash sales 6836 7921 9506 12083 17136 23761
Accounts for sale 4215 4885 5862 7451 10567
Total cash income 6836 12137 14390 17945 24587 34328
Cash application
Direct material
purchase 3630 4752 5508 6780 9360 12450
Direct labour 1815 2376 2754 3390 4680 6225
Manufacturing
overhead 1210 1584 1836 2260 3120 4150
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Selling, administration
and distribution 300 680 800 900 1000 1200
Total cash expenses 6955 9392 10898 13330 18160 24025
Net cash position -120 2745 3492 4615 6427 10303
Opening cash 800 681 3425 6918 11532 17959
Ending cash balance 681 3425 6918 11532 17959 28262
Sales budget: It helps to assess potential amount and number of units which will be sale in
future.
Particulars April May June July August
Septembe
r
Forecasted units 700 780 900 1100 1500 2000
Selling price 17.5 18.2 18.928 19.68512
20.472524
8
21.291425
792
Total forecasted sales 12250 14196 17035.2
21653.63
2
30708.787
2
42582.851
584
-Sales discounts and
allowance @7% 857.5 993.72 1192.464
1515.754
24
2149.6151
04
2980.7996
1088
Forecasted net sales 11392.5 13202.28 15842.736
20137.87
776
28559.172
096
39602.051
97312
Purchase budget: It helps to determine total units required to be purchase from the outsiders
to satisfy customer demand effectively and timely (Just and Wansink, 2010).
April May June July August
Septembe
r
Forecasted units sales 700 780 900 1100 1500 2000
Add: Closing
inventory @ 15% 105 117 135 165 225 300
Total production
required 805 897 1035 1265 1725 2300
Less: Begining stock 200 105 117 135 165 225
Units to be
manufactured 605 792 918 1130 1560 2075
Interpretation: On the basis of prepared budget, it can be seen that bakery shop will
generate increased revenue over the period. In April, total sales unit is 700 and turnover is £11392.5
get increased to 2000 and £39602.05 in September. While, selling price will be increase at 4%
inflation rate and discount rate will be 7%. On contrary, closing inventory will be retain at 15% of
forecasted sales unit. As per purchase budget, total required units will be increase from 605 to 2075
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at the end of September.
Cash budget presents that Bakery shop will make 60% sales in cash and 40% on credit in
which 3% will be irrecoverable. Credit sales will be for one month hence, bakery shop will receive
it in next month. Whereas, material buying rate is £6, labour rate is £3 and manufacturing overhead
will incur at £2 per unit. On the other hand, selling, office and distribution expenses will be increase
from £300 to £1200. This in turn, total cash uses will be improve from £6955 to £24025. However,
ending cash balance will be increase from £681 to £28262 respectively.
Suggestion:
 Bakery owner has to find out some supplier who will provide material at cheaper rate.
 Food makers will be efficient in their work so that tasty and delicious baked food can be
prepared helps to enlarge turnover and profitability as well (Lawrence, 2008).
 Control expenses through cut off unnecessary costs such as switching off lights and
recycling and reuse scrap such as oil.
AC 3.2 Calculation of unit cost and set selling price
Unit cost refers to the cost per unit which can be identified through using following formula:
Unit cost = Total costs/total number of units manufactured
Variable costs: All the expenditures which are variable in nature according to changes in
business production, is known as variable costs. For instance, material purchase, labour who make
food in bakery and other direct overheads as well. Henceforth, Bakery shop can compute their total
variable costs as under:
Variable costs = Material+labour+overhead
Fixed costs: Business spendings who are static and rigid and does not change with the
changes in volume of business production is called fixed costs (Benhabib, Bisin and Schotter,
2010).
Total costs: It is the total of all fixed as well as variable expenses can be computed through
using following formula:
Total costs = Variable costs + fixed costs
Particulars Per unit Amount
Material 6 £120000
Labour 3 £60000
Overheads 2 £40000
Fixed costs £30000
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Total costs £250000
Units produced £20000
Unit costs (£250000/20000 units) £12.5
Pricing decision: Target return pricing is an effective method to set prices for the bakery
items (Bonini and et.al., 2010). For instance, at the target return of 40%, bakery owner can set
prices as under:
Price = Unit costs + target return
= £12.5 + (40% of £12.5)
= £12.5+5 = £17.5
At this price, bakery shop can achieve its break even point at below mentioned level:
BEP (In units) = £30000/(£17.5-11)
£30000/£6.5
= 4615(Approx)
BEP ( In £) = 4615*£17.5 = £80762.5
AC 3.3 Project evaluation techniques NPV, IRR, ARR and IRR
Two invest projects are available to bakery shop to purchase equipment costing worth
£125000 and £130000 respectively. Suitable projects can be determined through using investment
appraisal techniques tool.
Undiscounted investment appraisal techniques
Table 1: Calculation of pay back period and Accounting rate of return
Project X
Cumulative
cash flow Project Y
Cumulative
cash flow
Initial investment -125000 -130000
1 42000 -83000 39000 -91000
2 59000 -24000 62000 -29000
3 67000 43000 78000 49000
4 78000 121000 85000 134000
Total 246000 2.3582089552 264000 2.3717948718
Payback period
Project X = 2 + (£24000/£67000) = 2.36 year
Project Y = 2 + (£29000/£78000) = 2.37 year
Interpretation: PP reflects the time to recover initial cash outlay of both the projects (Hunjra
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and et.al., 2012). In both the projects, PP indicates very little difference as it is 2.36 and 2.37
respectively. But still, less time by 0.01 year indicates that project X will reearn its project costs in
earlier period.
Accounting rate of return:
Project X = (£246000/4)/£125000*100 = £49.2%
Project Y = (£264000/4)/(£130000)*100 = £50.77%
Interpretation: ARR reflects the return or profit percentage from the investment projects. In
Project X, it is 49.2% while in project Y, it is 50.77%. High profit percentage by 1.57% entails that
bakery owner should invest in project Y.
Discounted investment appraisal techniques
Table 2: Calculation of Net present value and internal rate of return
Project X Pv @12% Present value Project Y
Present
value
Initial investment -125000 1 -125000 -130000 -130000
1 42000 0.893 37500 39000 34821
2 59000 0.797 47034 62000 49426
3 67000 0.712 47689 78000 55519
4 78000 0.636 49570 85000 54019
IRR/NPV 30.01% 56794 30.78% 63785
Interpretation: NPV use discounted cash flows to predict future return on the projects while
IRR indicates the discounting rate at which project will not have any profit or loss (Al-Ajmi, Saleh
and Hussain, 2011). NPV of both the projects are £56794 and £63785. High NPV by £6991 entails
that Project Y will provide high return to the shop owner. Further, IRR of this project is higher by
0.77% as it is 30.78% which indicates that project Y is more viable as compare to project X.
Decision: All the methods except only PP exhibited that project Y is more suitable hence,
funds should be invested in it. Moreover, PP of this project is also a very little bit high to 2.37 years
which does not create a major impact to the business.
TASK 4
AC 4.1 Financial statement, content, purpose and users
Type Content Purpose Users
Profit and loss
account
Expenditures and income of
revenue nature.
To know profit or loss
situation.
Employees, manager,
owner, fund providers,
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government, competitor
and others.
Balance sheet Fixed and current assets and
short-term as well as long-
term liabilities plus owner's
equity.
To know financial
position of the business
(Halpin and Senior
2009).
Managers, competitor,
investors, lenders,
suppliers and others.
Statment of cash
flow
Cash inflow and outflow
resulted from operational,
financing and investing
activities (Halpin and Senior
2009).
To know the reasons for
cash changes between
two FY.
Investors, lenders and
managers.
AC 4.2 Describing and comparing financial statement of sole trader, partnership and company
Sole trader: No legal obligation to construct all the financial statement and publish it in the
front of public. But still, trader wants to assess their performance so that it prepare profit and loss
account (Damodara, n.d.). Moreover, entrepreneur records all the transactions by making books
such as purchase book, sales book, cash book and others.
Partnership: It is the association of 2 or more individuals who run business by contributing
capital and get controlling rights. Fixed or fluctuating two methods are available to determine the
contribution of each capital contributors. While, profit and loss appropriation a/c is prepare to
determine profit share of each partner.
Company: It is legal body which came into existence by following the company act
legislation. As per the provision, it is mandatory for all the corporations to draft all the financial
statement by accountants and then audit it to test accuracy and reliability of the information
recorded in it (Baker and Powell, 2009). Auditing is the assurance of truth and fairness of the
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Partnership
Fixed capital method
Partner's capital a/c
Partner's current a/c
Fluctuating capital method
Partner's capital a/c

statement. It publish its audited financial statement so that authentic and prominent information can
be acquired by the users. It prepare following statements:
 Statement of comprehensive income (SOCI).
 Statement of financial position (SOFP).
 Statement of cash flow (SOCF).
 Statement of changes in equity.
 Statement of retained earnings.
 Statement of fund flow.
AC 4.3 Sainsbury's financial performance analysis
Presented table reflects reduction in Sainsbury's operational performance due to decline in
GM and NM from 5.79% and 2.99% to 5.08% and -0.70% respectively. Inefficient services,
unskilled labour services, high price and ineffective business control on direct and indirect expenses
are the reasons for declined business performance.
Another, liquidity is a measurement of business ability to discharge Sainsbury's liabilities
who will be require to pay within 1 year (Manjhi and Kulkarni, 2012). CR remains unchanged to
0.64 and QR has been fluctuated by only 0.01 and reduced to 0.48 in 2015. Henceforth, it can be
said that Sainsbury do not improved its liquidity status and will not be able to meet their current
liabilities timely.
Efficiency ratio states that the ability to use business assets. Declined assets and inventory
turnover ratio to 1.44 times and 22.54 times are not good sign. It is because it indicate that
Sainsbury is not using its firm assets and stock more efficiently.
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Gearing ratio is a sign of solvency position which reflects Sainsbury's ability to meet non-
current liabilities (Kumbirai and Webb, 2013). D/E ratio improved to 0.45 which is a sign of high
capital risk but still it is nearest to the standard ratio which is 0.5:1. Hence, it is good change and
indicates that Sainsbury management tried to manage business capital so that long term debts can be
meet out timely.
CONCLUSION
Present project report concluded that small scale counter bakery business has to collect
funds by the debt collection and hire purchase sources. On the other hand, financial planning tool
will assist owner to ensure optimum utilization of funds so that finance cost can be minimised. It is
an effective and strategic tool to properly administrate funds and remove potential difficulties.
Target return method concluded that bakery shop has to offer products at selling price at £17.5 so
that 40% return can be generated on cost. Whereas, capital budgeting techniques concluded that
project Y is seems to be more superior because it provide huge return to the business. Another, sales
budget, cash budget and purchase budget are the tools that provide huge assistance to manage
business sales, purchasing and cash transactions effectively. At the end, report concluded that
Sainsbury's financial performance is not good in the year 2015.
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REFERENCES
Books and Journals
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Online
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<http://people.stern.nyu.edu/adamodar/pdfiles/invphiloh/finstatement.pdf>. [Accessed on
19th April, 2016].
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<http://www.iasplus.com/en/binary/efrag/0905userneeds.pdf>. [Accessed on 19th April,
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Lewis, B., 2012. Importance of financial planning. [Pdf]. Available through:
<https://www.napfa.org/UserFiles/File/ImportanceofFinancialPlanningRelease100312.pdf>.
[Accessed on 19th April, 2016].
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