Report on Faux Fashion Limited

“Faux Fashion Limited” Words: 2500

Table of Contents
List of Tables.............................................................................................................................................3
1) Review of Annual Accounts.............................................................................................................4
a) Purpose of Financial Statements................................................................................................4
b) Analysis of Income Statement.....................................................................................................4
c) Overview of accounting fundamentals.......................................................................................6
2) Costing and Pricing...........................................................................................................................9
a) Cost for single men’s black Faux leather jacket.......................................................................9
b) Total production overheads and calculation of an alternative total cost................................9
c) Difference between current costing and alternative total cost method and the pros and
cons of the two alternative approaches.............................................................................................9
3) Variance Analysis...........................................................................................................................11
a) Budget for April (using experienced labour)............................................................................11
b) Budget for May (using apprentice labour)................................................................................12
c) Recommendation........................................................................................................................13
4) Capex Appraisal..............................................................................................................................14
a) Payback Period...........................................................................................................................14
b) Accounting rate of return (ARR)................................................................................................14
c) Net Present Value (NPV)...........................................................................................................15
d) Internal Rate of return (IRR)......................................................................................................15
5. Budgeting.........................................................................................................................................17
a) Budget Forecast..........................................................................................................................17
b) Cash flow forecast......................................................................................................................18
References..............................................................................................................................................20

List of Tables
Table 1: Income Statement.....................................................................................................................5
Table 2: Ratio analysis.............................................................................................................................5
Table 3: Working capital cycle................................................................................................................7
Table 4: Liquidity Ratio.............................................................................................................................7
Table 5: Cost per unit...............................................................................................................................9
Table 6: Total cost under AAA costing...................................................................................................9
Table 7: Original budget.........................................................................................................................11
Table 8: Actual budget...........................................................................................................................11
Table 9: Flex budget...............................................................................................................................11
Table 10: Variance analysis..................................................................................................................12
Table 11: Actual Budget (May).............................................................................................................13
Table 12: Variance analysis (May).......................................................................................................13
Table 13: NPV.........................................................................................................................................15
Table 14: Budget Forecast....................................................................................................................17
Table 15: Cash Flow Forecast..............................................................................................................18

1) Review of Annual Accounts
a) Purpose of Financial Statements
Financial statements are prepared at the end of the financial year and are published for
the general public so that the investors can get the idea about the performance of a
company. There are four common financial statements which are income statement,
statement of financial position, statement of cash flows and statement of changes in
equity (Healy and Palepu, 2012).
a. Income Statement: Income statement identifies the profit and loss of a company
by subtracting revenues and expenses. It is helpful for the analysis of change in
income of the organization over the financial year (Brigham and Houston, 2012).
b. Statement of Financial position: This financial statement highlights the assets,
liabilities and equity held by a company. It is useful in identifying the liquidity risk
which can have an impact on the investing side of a company (Brigham and
Houston, 2012).
c. Statement of Cash flow: Statement of cash flow defines the inflow and outflow
of cash by dividing the function of the entities into operating activities, financing
activities and investing activities. Positive cash flows are said to have a good
impact on the stakeholders (Brigham and Houston, 2012).
d. Statement of Changes in equity: This statement identifies the changes in
equity side of the company by showing the impact of reserves, retained earnings
and any increased investments by the shareholders. It is helpful in identifying the
confidence if the investors ob a company (Brigham and Houston, 2012).
b) Analysis of Income Statement
The income statement of the Faux fashion Limited is shown in the table 1.