Financial Accounting and Reporting

The assignment delves into several key concepts within financial accounting. It requires students to demonstrate understanding of unit cost calculation, capital investment decisions, the impact of bank loan supply on equity capital, the cost of financial flexibility, and the interplay between foreign assets, lender choice, and loan pricing in the syndicated bank loan market.

MFRD

Table of Contents
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
1.1 Sources of finance available to Clariton Ltd....................................................................3
1.2 Evaluating the implications of different sources of finance.............................................4
1.3 Identifying the suitable financial source of business.......................................................5
TASK 2......................................................................................................................................6
2.1 Analyse the cost of two source of finance with their tax implications............................6
2.2 Importance of financial planning for Clariton Antiques..................................................7
2.3 Assessing the information need of different decision makers.........................................7
2.4 Impact of financial source on final accounts....................................................................7
TASK 3......................................................................................................................................8
3.1 Preparing and analyzing cash budget for the purpose of decision making......................8
3.2 Calculating unit cost for taking pricing decision.............................................................9
3.3 Evaluating the viability of proposed investments..........................................................10
TASK 4....................................................................................................................................12
4.1 Discussing the components of financial statements.......................................................12
4.2 Comparison of the formats used by Clariton Antiques to present their financial
statements.............................................................................................................................13
4.3 Interpreting the financial statements of Clariton using ratios of current and previous
year.......................................................................................................................................13
CONCLUSION........................................................................................................................15
REFERENCES.........................................................................................................................16

INTRODUCTION
Management of financial resources is the main tasks or activity of the firm which lays
high level of emphasis on the assessment of deviations. By using monetary tools business
entity can identify the causes of deviations and thereby becomes able to develop highly
competent framework. This assignment is based Clariton Antique Ltd which is planning to
expand business operations and functions with the motive to widen the research. For
expansion purpose, business entities require fund for the establishment of another unit. In
this, report will describe the financial sources that can be undertaken by the owner to raise
funds. In addition to this, the main focus on such study is to highlight the manner in which
monetary tools and technique facilitate better and effective decision making.
TASK 1
1.1 Sources of finance available to Clariton Ltd
Unincorporated business
 Personal savings: By using own savings sole trader can start venture more effectively
and efficiently. In this, business entity is not entitled to pay any kind of interest to
others which in turn may result into high savings.
 Sales of fixed assets: Business entity of Clariton Ltd can enhance fund by selling
unused assets such as land, plant etc at their scrap value.
 Short term lease: It is the most suitable source that can be undertaken by an
entrepreneur for fulfilling financial needs. On the basis of this aspect, by taking assets
like machinery, land & buildings, furniture’s and fixtures on lease entrepreneur can
implement the business idea within the suitable time frame.
Incorporated business
Clariton Ltd comes under the category of incorporated business that can raise funds
by considering following sources:
 Bank loan: Entrepreneur can meet financial requirements by approaching to financial
institution. Interest is the major sources of income for banking institutions (Bergbrant,

Bradley and Hunter, 2017). Due to this, firms operated in banking sector are always
ready to offer financial assistance on the basis of collateral security.
 Venture capitalists: With the aim to get higher returns now there are several venture
capitalists firm which offer financial advice to the firm (Abor, 2017). Such firms offer
both monetary and non-monetary advice to the entrepreneur and thereby make
contribution in the attainment of goals.
 Government or European Union grant: To encourage entrepreneurial activities now
European Union provides monetary assistance to the business entities at cost effective
rates. Hence, by presenting plan to European Union committee firm can raise fund to
the significant level.
1.2 Evaluating the implications of different sources of finance
Sources of
finance
Financial Bankruptcy
(priority in
getting back
money: High to
low)
Legal Dilution of
control
Internal source of finance
Personal savings Opportunity cost
in the form of
loss on interest
on capital.
Least No legal
obligations
Low
Sales of assets Expenses in
relation to
registry,
advertisement
are considered
as financial
expenses.
Least Transfer of
ownership rights
Low
External sources of finance
Bank loan Interest on bank
loan
First priority Fulfillment of
documentary
formalities (Kim,
Song and Wang,
Moderate

2017)
Leasing Rent on leased
assets
Lessor has right
to demand for
leased assets at
the time of
bankruptcy.
According to
legal aspects
business entity
is obliged to
make use of
assets in line
with the
contractual
terms.
Limited to
leased assets
European union
grant
In this, business
entity is obliged
to pay interest to
government
authority.
However,
interest rate is
negligible in the
case of
government
grant.
Government
authority also
has right to
demand for
monetary
assistance
provided when
business unit
becomes
bankrupt.
Disclosure of
suitable
information
regarding
business plan
Limited
Venture
capitalists
Dividend
imposes cost in
front of business
unit and thereby
affects
profitability
margin of firm
(Mehri, Jouaber-
Snoussi and
Hassan, 2017).
Least priority Offering of
shareholding
right to investors
such as
participation in
decision making
through voting.
1.3 Identifying the suitable financial source of business

Clariton Antiques Ltd can meet monetary funds and requirements by undertaking
venture capitalists and bank loan source. Both such sources have following advantages and
disadvantage is enumerated below:
Venture capitalists
 Advantages: In venture capitalists source, business entity offers dividend to investors
only when it earns enough amounts of profit. Thus, such source does not impose fixed
burden in front of company.
 Disadvantages: Interference of investors in decision making is high in the case of
venture capitalists source (Mishra, Bag and Misra, 2017). Moreover, venture
capitalists have right to take part in the decision making aspect because they have
more concern towards the monetary aspect.
Bank loan
 Advantages: In the case of bank loan, company enjoys tax exemption. This in turn
helps company in enhancing the profitability aspect to a great extent. Along with this,
in bank loan business unit repays the amount of loan in the form of installment
(Houston, Itzkowitz and Naranjo, 2017). In this way, such source offers high level of
convenience to the organization.
 Disadvantages: In the case of loan, business entity to make payment of interest at
fixed rate which in turn affects working capital and financial position of firm.
TASK 2
2.1 Analyse the cost of two source of finance with their tax implications
Either collecting capital in the form of debt borrowings or going to public charges
several financial costs which are presented here as under:
Dividend: It is the monetary return which is required to be paid by Clariton Antiques
by distribution of profitability. With the current case, it is stated that company can gather
capital by transferring 20% stake to the venture capitalists and in return, firm has to distribute
a proportion of their net profitability in the form of dividend to their investors.
Interest: Clariton can also raise long-term debt borrowings from the commercial banks
and for such financial risk, bank will charge a fixed interest rate (Gilbert and et.al., 2017).

Here, it is presented that Clariton can borrow required fund at 2% interest rate and also have
to pay brokerage at 1%. Thus, its cost can be computed here as under:
Interest: 500,000*2% = 10,000
Brokerage: 500,000*1% = 5,000
Cost of debt: 15,000/500,000*100 = 3%
Taxation: With respect to dividend, there is no tax benefits or relief will be exists to
the Clariton. In contrast, interest payment offers taxation allowance to the business because in
UK, regulatory body, HMRC provides tax relief to the establishment.
2.2 Importance of financial planning for Clariton Antiques
Financial planning is an important area of corporate growth and success which refers to
the procurement of required capital, its optimum & efficient utilization of the fund, cost-
curtailment, cash management and so on. The significance of monetary planning for Clariton
Antiques Ltd is enumerated below:
Budgeting: It is the most critical and important aspect which is regarded as the process
of estimating or anticipating potential capital requirement and possible cost that it will incur
in the forthcoming years. By making budgets for every year, Clariton can detect possible
monetary consequences and design remedial strategies accordingly (Bonaimé, Hankins and
Jordan, 2016).
Consequences of failure to manage funds: Not only the collection of fund is sufficient
for the Clariton to support its expansion plan but also it is essential to make sure that the
funds has been utilized in an efficient and proper way at minimal cost in order to drive better
return. Lack of funds may cause serious cash problems and affects corporate functions in an
adverse manner.
Over-trading: Aggressive expansion and sudden increase in the borrowed capital can
cause excessive cash shortfall due to shortage of cash and affects day-to-day activities of
business in an adverse way (Gilbert and et.al., 2017). It may liquidity and working capital
problems, therefore, Clariton must take extra care to eliminate such situation.
2.3 Assessing the information need of different decision makers
 Partners: They are highly concerned towards the financial performance and position
of firm. Hence, after making assessment of monetary aspects partners decide whether
they need to invest additional funds or not.
 Venture capitalists: Firms like ‘we finance limited’ evaluates the viability of business
plan. Thus, venture capitalists make assessment of market trend, competitor’s strategy

and position, current performance, customer base etc (Abor, 2017). By evaluating all
such aspect venture capitalists firm take investment decision.
 Finance broker: To prepare sound plan finance broker requires information regarding
the profitability, liquidity and solvency aspect. Thus, after making assessment of all
such aspects broker can make competent plan.
2.4 Impact of financial source on final accounts
Selected sources of finance have following impact on final accounts in the following
manner:
 Venture capitalists: In the case of venture capitalists Clariton Ltd will offer return to
the investors in the form of dividend. Hence, it is cost for the company so dividend
expenses are recorded in the debit side of profitability statement. In addition to this,
venture capitalists fund is recorded in liabilities side because firm has to repay this at
the time of dissolution of firm (Mehri, Jouaber-Snoussi and Hassan, 2017). Further,
cash side of balance sheet will also increase with the similar amount that is invested
by venture capitalists firm such as ‘We Finance Ltd’.
 Bank loan and Finance broker: Interest and brokerage are the main expenses which
are associated with such source. Hence, both these expenses are recorded in the debit
side of income statement. Along with this, bank loan is recognized as liability or long
term obligation which business unit has to fulfill after specific time period. In
accordance with dual side effect cash side of balance sheet will incline significantly.
TASK 3
3.1 Preparing and analyzing cash budget for the purpose of decision making
Cash budget may be served as a framework which exhibits monetary inflow and
outflow (Abor, 2017). Budget acts as a guide which in turn provides assistance to the
personnel in spending money more effectually.
Cash budget from the period of January to June is enumerated below:
Particula
rs
Januar
y (in £)
Februar
y (in £)
Marc
h (in
£)
April
(in £)
May
(in £)
June
(in £)
Opening
cash 110000 -539750
-
39200
-
76750 48500
16625
0

balance or
position 0
Cash sales
received
in similar
month 15000 22500 30000 15000 15000 3750
Amount
of sales
received
from
debtor (in
one
month) 120000 240000
36000
0
48000
0
24000
0
24000
0
Cash
Received
(in two
months) 22500 22500 45000 67500 90000 45000
Total
cash
receipts 267500 -254750 43000
48575
0
39350
0
45500
0
Cash outflows
Suppliers
payment 807250 137250
11975
0
43725
0
22725
0
21975
0
Closing
cash
balance
or
position
-
539750 -392000
-
76750 48500
16625
0
23525
0
The above mentioned cash budget shows that Clariton Antiques Ltd received higher
cash from debtors after one month. Further, total cash receipts of firm inclined from £267500
to £455000 at the end of June. During the period of 6 months total cash receipts of firm
fluctuated. Further, supplier’s payment also declined after the month of April. Thus, it can be
stated that business unit is required to make proper estimation of income and expenses after
making evaluation of each business activity.
3.2 Calculating unit cost for taking pricing decision
For the determination of suitable price firm is required to assess unit cost which it is
going to offer customers (Unit cost, 2017). Hence, by adding margin in unit cost entrepreneur
can determine suitable price Clariton antiques Ltd can get desired level of profit.
Calculation of unit cost

Particulars Amount (in £)
Rent of store 2000
Electricity expenses 900
Miscellaneous
expenditure 1200
Maintenance expenses 800
depreciation on fixed
assets 1600
Transportation charges 800
Personnel salaries 10000
Promotional expenses 2000
Total cost 19300
Assessment of price
Particulars Figure (in £)
Total cost 19300
units of antique items 120
unit cost 160.8
Gross profit margin 18%
Price per unit 189.78
Business entity wants to attain 18% profit margin by selling per unit of antique item.
On the basis of this aspect, by selling each antique item @ £189.78 Clariton antiques Ltd can
earn £29 from individual unit. In this way, concept of unit cost helps in making suitable
pricing decisions.
3.3 Evaluating the viability of proposed investments

In order to evaluate the return and profitability aspect business entities of Clariton
Antiques Ltd have undertaken following techniques:
Calculation of payback period, NPV and ARR
Payback period
Yea
rs
Proje
ct A
(in £)
Cumulati
ve cash
flows
Proje
ct B
(in £)
Cumulati
ve cash
flows
1 1.6 1.6 0.8 0.8
2 2.8 4.4 1.4 2.2
3 3.4 7.8 2 4.2
4 3.6 11.4 2.4 6.6
5 4 15.4 2.3 8.9
6 4.2 19.6 2.6 11.5
Project A: 3 + 2.8 / 3.6 = 3.2 years
Project B: 3 + .2 / 2.4 = 3.1 years
NPV and ARR
Years
Project
A cash
inflow
(in £)
PV
factor
@14
%
Discounte
d cash
inflow (in
£)
Project
B cash
inflow
(in £)
Discounte
d cash
inflow (in
£)
1 1.6 0.877 1.40 0.8 0.70
2 2.8 0.769 2.15 1.4 1.08
3 3.4 0.675 2.29 2 1.35
4 3.6 0.592 2.13 2.4 1.42
5 4 0.519 2.08 2.3 1.19
6 4.2 0.456 1.91 2.6 1.18
Total
discounte
d cash
inflow
(TDCF) 11.98 6.93
Initial
investmen
t (II) 8.6 4.4
Net 3.38 2.53

present
value
Total of
cash
inflow
19.6 11.5
Average
cash
inflow
3.67 1.67
Average
rate of
return
(ARR)
37.98
%
43.56
%
Interpretation: The above depicted table shows that payback period of project A and B is 3.2
and 3.1 years respectively. In accordance with the rules business entity should go with the
investment proposal which has less payback period. On the other side, NPV of proposal A
and B accounts for £3.38m & £2.53m significantly. Investment appraisal criteria entails that
project which has higher NPV is more beneficial as compared to others (Patz and Goetz,
2017). Further, ARR of both the available investment proposal is 37.98% and 43.56%.
Hence, by keeping such all the aspects in mind it is recommended to Clariton Ltd to select
proposal B. Moreover, in the case of project B amount of initial investment is £4.4m which is
half of project A. Along with this, NPV method does not help in making investment decision
when projects are mutually exclusive in terms of initial investment. Hence, by investing
money in project B Clariton Antiques Ltd can generate higher return.
TASK 4
4.1 Discussing the components of financial statements
Statement of comprehensive income: Income statement, also called profit and loss
account needs to be constructed keeping into account accrual concept of accounting which
reports revenues and expenses at their occurrence without considering that whether it will
drive cash into or result in cash outflow or not and targeted at profit determination (Schipper,
Francis and Weil, 2017), as follows:
Gross profit/gross loss: Turnover – cost of sale
Net profit/net loss: Total revenues – total expenses
Statement of financial position: It is called balance sheet which showcases the current
(inventory, cash, receivables) and non-current assets (property, plant and equipment) in the

assets side, whereas, under the liabilities side, current (short-term liabilities, trade payables)
& long-term obligations (debt borrowings) are reported (Elliott, 2017). Excess of total assets
over liabilities indicates owner’s financing, also termed as shareholders equity.
Statement of cash flow: It reports only those operational as well as capital transactions
that either drive cash into the Clariton and results in disposal of cash aims at determining the
net cash position at the end of the period. Here, operating activities (buying and selling of
antiques), investing (acquisition and sale of fixed assets) and financing (collection & disposal
of borrowings & equity capital) are reported.
Statement of change in equity & retained earnings: This statement only reports
change in owners equity by issue of additional shares, retained earnings, transfer to reserve
and others aims at determining the balance of closing shareholders equity.
Explanatory notes: It reports revenue recognition principles, accounting policies and
conventions, standards whether GAAP or IAS or both, segmental income & others.
4.2 Comparison of the formats used by Clariton Antiques to present their financial statements
Partnership and companies have distinctive characteristics and prepare their final
accounts in different formats. Partners prepares profit and loss appropriation account by
reporting remuneration distribution, partner’s interest on capital and share in profit in debit
side whereas being a company, Clariton does not need to prepare such account. In contrast to
this, its income statement will determine excess of total revenues over the expenses made to
determine net return. Out of it, a proportion of profit is distributed to the investors as dividend
which is disclosed as dividend and remainder as an shareholders earning. Besides this,
partners do not need to design statement of cash flow, unlike this, Clariton has to construct
SOCF in order to assess change in cash position over two balance sheet dates (Schipper,
Francis and Weil, 2017). Partnership firms has to prepare P&L appropriation and partners
current account also just following the principles and rules of accounting without any
specified format, in contrast, Clariton is obliged to create it in prescribed format under
Company Act, 2006. Further, under the capital section, partnership balance sheet reports only
the closing capital of all the partners whereas Clariton’s balance sheet report investors capital
in equity section. They has to comply and adhere with the IAS and IFRS and prepare the
accounts in given formats for the transparent reporting (Gilbert and et.al., 2017).
4.3 Interpreting the financial statements of Clariton using ratios of current and previous year

Profitability evaluation:
In the latest year, gross profit dropped to 14.18%, in contrast, net profit
margin goes high to 2.63%. Better sales but high increase in COGS resulted downward
change in GPM, still, strong monitoring, supervision and control of managers over
operational cost improved net earnings which indicates better performance (Rajendran,
2017).
Efficiency narratives:
Both the assets as well as stock turnover ratio indicates little bit improvement
in the CY to 1.60 & 26.70 times which shows that managers devised better plans and
strategies this year which brought little bit enhancement in optimum utilization of
resources for generating exceeding revenues.
Liquidity ratio analysis:

As per the financial statements, it is visualized that Clariton negotiated with
the creditors for delayed payments and thereby increase in cash position for
strengthening their working capital. As a result, CR moved up to 0.33:1 which indicates
improvement, however, it is still very far away from the idle ratio, 2:1 (Goldmann,
2017). Similarly, QR 0.18:1 is also not near to the standard ratio of 1:1 which presented
that Clariton has to maximize their working capital for the better creditworthiness.
Solvency ratio:
In latest year, debt to equity ratio came down to 0.55:1 due to excessive
fund collection from equity capital and less through long-term debt pursued less risk. It
also came to target ratio, 0.50 which indicates right capital structure composition
(Zentes, Morschet and Schramm-Klein, 2017). However, interest bearing ratio rose to
5.7 indicates that its capability has been improved to pay higher interest as fixed cost to
the lenders.
CONCLUSION
From the above report, it has been concluded that entrepreneur should take financial
assistance from two sources such as venture capitalists and bank loan source. Hence, by using
both such sources Clariton Antiques Ltd can develop highly optimal capital structure. Besides
this, it can be inferred that company can continuous monitoring of financial position by
taking into consideration the budgeting system. It can be seen in the report that both the
projects are viable in monetary terms according to standard criteria. Hence, investment
appraisal techniques provide assistance to the company in evaluating attractiveness of project.
It can be revealed from ratio analysis that owner of business unit is required to make
modifications in existing strategic framework in accordance with market trend and
competition. By doing this firm can improve its profitability, liquidity and solvency aspect to
a great extent.

REFERENCES
Books and Journals
Abor, J. Y., 2017. Venture Capital Finance. In Entrepreneurial Finance for MSMEs (pp. 87-
105). Springer International Publishing.
Abor, J.Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting. In
Entrepreneurial Finance for MSMEs (pp. 293-320). Springer International Publishing.
Bergbrant, M. C., Bradley, D. and Hunter, D. M., 2017. Does bank loan supply affect the
supply of equity capital? Evidence from new share issuance and withdrawal. Journal of
Financial Intermediation. 29. pp.32-45.
Bonaimé, A.A., Hankins, K.W. and Jordan, B.D., 2016. The cost of financial flexibility:
Evidence from share repurchases. Journal of Corporate Finance. 38(12). pp.345-362.
Elliott, B., 2017. Financial Accounting and Reporting 18th Edition. Pearson Higher Ed.
Gilbert, A. and et.al., 2017. Cost overruns and financial risk in the construction of nuclear
power reactors: a critical appraisal. Energy Policy. 102(16). pp.644-649.
Goldmann, K., 2017. Financial Liquidity and Profitability Management in Practice of Polish
Business. In Financial Environment and Business Development. Springer International
Publishing. 12(3). pp.103-112
Houston, J. F., Itzkowitz, J. and Naranjo, A., 2017. Borrowing beyond borders: Foreign
assets, lender choice, and loan pricing in the syndicated bank loan market. Journal of
Corporate Finance. 42. pp.315-334.
Kim, J. B., Song, B.Y. and Wang, Z., 2017. Special purpose entities and bank loan
contracting. Journal of Banking & Finance. 74. pp.133-152.
Mehri, M., Jouaber-Snoussi, K. and Hassan, M. K., 2017. Profit-sharing ratio as a screening
device in venture capital. Chapters. pp.579-601.
Mishra, S., Bag, D. and Misra, S., 2017. Venture Capital Investment Choice: Multicriteria
Decision Matrix. The Journal of Private Equity. 20(2). pp.52-68.
Patz, R. and Goetz, K. H., 2017. Changing Budgeting Administration in International
Organizations: Budgetary Pressures, Complex Principals and Administrative Leadership.
In International Bureaucracy (pp. 123-150). Palgrave Macmillan UK.

Rajendran, A., 2017. A Review on Studies Relating to Profitability Performance.
International Journal of Scientific Research. 5(10). pp.15-39.
Schipper, K., Francis, J. and Weil, R., 2017. Financial Accounting: Introduction to Concepts,
Methods and Uses. Cengage Learning.
Zentes, J., Morschett, D. and Schramm-Klein, H., 2017. Monitoring Operational and
Financial Performance. In Strategic Retail Management. Springer Fachmedien Wiesbaden.
14(6). pp. 441-461
Online
Unit cost. 2017. Online. Available through: < http://www.accountingtools.com/questions-and-
answers/how-to-calculate-cost-per-unit.html>. [Accessed on 5th April 2017].