Financial Statement Analysis and Management

The assignment focuses on the analysis of financial statements and the different methods used to assess a company's financial health. It delves into investment appraisal techniques, commonly used in capital budgeting decisions. The document also examines various sources of funds available to businesses, including internal and external financing options, highlighting the importance of choosing appropriate funding strategies based on specific business needs.

Managing Financial Resource and Decisions

Table of Contents
INTRODUCTION.........................................................................................................................................4
TASK 1..........................................................................................................................................................4
1.1...............................................................................................................................................................4
1.2...............................................................................................................................................................5
1.3...............................................................................................................................................................6
TASK 2..........................................................................................................................................................7
2.1...............................................................................................................................................................7
2.2...............................................................................................................................................................7
2.3...............................................................................................................................................................8
2.4...............................................................................................................................................................8
TASK 3..........................................................................................................................................................9
3.1...............................................................................................................................................................9
3.2.............................................................................................................................................................10
3.3.............................................................................................................................................................11
TASK 4........................................................................................................................................................13
4.1.............................................................................................................................................................13
4.2.............................................................................................................................................................14
4.3.............................................................................................................................................................14
CONCLUSION............................................................................................................................................16
REFERENCES............................................................................................................................................17

INTRODUCTION
Money is an essential requirement of every small, medium and large scale commercial as
well as service rendering enterprises. Moreover, in the current era, establishments find wide
range of difficulty to survive in the market due to changing external market forces like
competition, demand fluctuations, higher interest rate, inflation and many others. Therefore,
companies need to collect funds from variety of internal and external sources to satisfy their
short, medium and long-term financial demand. These assignments investigate numerous source
of funds from which corporations can meet their monetary requirement. It will also highlight the
ways to achieve monetary targets through financial planning, budgetary principles and pricing
techniques. In addition, presently businesses not only incur expenditures on daily or regular
business activities, but they also make capital expenses for purchasing fixed assets. Henceforth,
the report will consider the key techniques and methods available to identify the most beneficial
project that will yield higher return in future. At the end, financial performance of the company
will be examined through computing different kind of ratios i.e liquidity, performance, long-term
solvency and efficiency as well.
TASK 1
1.1
Sainsbury one of the largest supermarket of UK can meet their monetary need through
generating enough amount of money from following sources, enumerated underneath:
Proprietor’s fund: It is very obvious thing that in every business, entrepreneur put his
own money or fund to finance the corporation. Referring Sainsbury, money can be raised
through issuing additional equity and preferences shares up to the maximum extent of authorized
share capital (Sullivan, 2009). It helps to meet long-term financial requirement for buying fixed
assets like plant, property and furniture.
Loan from bank: Sainsbury can also apply loan from commercial banks and generate
money by compliance with the legal requirement and legislation such as reporting annual reports
and collateral security (Sources of funds, 2014). Loan is considered as best way to meet long-
period monetary need and finance business assets.

Hire purchase: It is a contract or agreement undertaken between assets vendor and buyer,
in which, owner provide right to the purchaser to utilize assets by making regular installment
payments with interest charges (Broadbent and Cullen, 2012). However, legally property right
will be transferred at the time of payment of final installment.
Retained earnings: The residual proportion of Sainsbury’s net earnings after paying
dividend to the shareholders is called retained earnings or profit (De Wit,2016). Company can
invest back their residual return or yield in the business and thereby fulfill their monetary
requirement.
1.2
Source of funds Legal Financial Control dilution Bankruptcy
Properietr or’s
fund
Shares can be
issued to the
maximum extent
of authorized
share capital
(Thomas, 2001).
Moreover,
adherence and
compliance with
the rules and
regulations of
Security
Exchange
Commission
(SEC) is
required.
On prefernce share
capital, Sainsbury
is liable to pay
fixed rate of
dividend whereas
on equity share
capital, it need to
pay a proposed rate
of dividend from
the net earnings
(De Wit,2016).
Equity share holders
have power to vote,
henceforth, they
have right to control
operations and make
decisions, wherease
preference
shareholders are not
entitled to make
business decisions
(Thomas, 2001).
Not exist but still
preference
shareholders will be
repaied earlier
before repayment of
capital to ordinary
share holders.
Bank loan Adherence to the
legal rules and
regulations like
collateral
Interest needs to be
paid either on
principle amount or
residual or balanced
Not exist. Loan will be repaid
even at the time of
insolvency by
disposal of business

security is
required
(Broadbent and
Cullen, 2012).
loan amount
(Sullivan, 2009)
assets.
Hire purchase Compliance with
contractual terms
and agreeent
conditions is
necessary
Installment
payments inclusion
of interest.
Not exists Not exists
Retained
earnings
No legal
obligations and
invest entire
amount of
retained earnings
in business again
(Thomas, 2001).
Not exists. It is the part of
ordinary
shareholders capital
who have right to
change business
decisions.
Not exists.
1.3
Out of above listed sources, loans and retained earnings are considered best or highly
suitable source for the Sainsbury. The rationale behind suggesting loan as better financial source
because interest liabilities on loan provides tax benefits to the corporation as taxation authority
allow tax deductions upto the amount of interest paid (Thomas,2001). Moreover, funds can be
generated for different time as per the business monetary need. Further, it will be highly
convenient for Sainsbury’s financial manager to efficiently manage their funds through making
payments of loan amount in equal insallments (Sullivan, 2009). In addition, lenders have only
right to get their money back and unlike equity share capital, they don’t have any right to alter
business decisions. Apart from this retained earning is suggesting because unexistence of both
the legal and financial implications. Further, it just change the capital structure and does not
diversify more control to the shareholders through issuing additional shares.

TASK 2
2.1
Interest cost: As discussed earlier, that there is a financial implication exists on loan
regards to interest payment. Henceforth, it is the cost of bank loan, higher the interest rate rises
the burden of debt on business enterprise or vice-versa (Malik, Field and Gorwood, 2016).
Moreover, vendor of the assets also charge a fixed rate of interest in hire purchase agreement, but
still, both the interest obligation provides tax benefit to the business.
Dividend: If Sainsbury will raise monetary resources through issuance of either equity or
preference share capital, then it will need to pay dividend to the shareholders (De Wit,2016). In
such respect, rate of dividend on preference share capital is fixed whereas on equity share
capital, Sainsbury is not liable to pay fixed rate of dividend annually.
2.2
Sainsbury’s financial manager is responsible to gather sufficient quantum of money,
procurement and its efffective utilization in business activities through making effective and
strong financial plan (Sabri and et.al., 2015).
Significance of monetary planning:
 Gathering enough amount of monetary resources from variety of financial sources such
as share capital, debt, lease, hire purchase, retained earnings etc.
 Maximum and optimum utilization of funds in the business operations.
 Maintain surplus of cash through creating better balance between sources of cash and its
disposal (Bir, 2016).
 Overcoming shortcomings and shortfall of funds through generating higher turnover and
other revenues.
 Combat threats due to external market volatility and fluctuations such as sudden increase
in price, reduction in consumer demand, introduction of new product in market by rival
firms and others (Revell, 2016).
 Ensure growth and development by running a successful business without any financial
difficulties and problems.

2.3
Shareholders: They are interested in business growth, progress and improved
performance. Before investing their own money, investors examine Sainsbury’s profitability,
dividend payment, movement in share’s market price and financial risk as well.
Employees: Sainsbury’s personnel are responsible for giving their best contribution to
deliver quality goods and services as per their need. They expect better working condition, good
salary, rewards and staff welfare activities in return for their valuable and exceptional efforts to
meet business goals (Malik, Field and Gorwood, 2016).
Creditors: They supply material and other resources to Sainsbury for a fixed credit
period. In order to get payment timely, they inquire about company’s liquidity position, net
profitability, cash flow generating capacity and sufficiency of nearby resources to pay short-term
liability (Speybroeck and et.al., 2015).
Government: They are interested in getting timely tax receipts on Sainsbury’s net
operating profit after interest payment. Moreover, they assure that all the establishments are
conducting operations ethically or legally and in consumer interest (Bir, 2016). Further,
compliance and adherence to legislations and governmental rules is also necessary for the
company,
Lender: They need collateral security and examine Sainsbury’s annual accounting
reports to assess profitability, net cash position, debt-service coverage ratio, interest bearing
ability and financial burden (Sabri and et.al., 2015).. They provide long-term fund if they are
confident that about their fund security.
2.4
Balance sheet represents both the preference and ordinary share capital in the liability
side of balance sheet. Collection of fund through share capital increase Sainsbury’s cash or bank
balance. However, cost that is dividend is deducted from net profit after interest and taxes to
determined retained or residual earnings, at the same time, cash balance will be reduced to the
extent of dividend payment (Huang, Ritter and Zhang, 2016). Contrary to this, loan amount is
reported under the non-current liability head and also improve total cash position. However, on
the other side, interest payment is considered as operational spending hence results in less net

return and cash position. On the other, investment in fixed assets is reported under the head long-
terrm assets of balance sheet. However, equal periodical instalments paid to assets vendor is
reported as expenditures and decline net yield (Shibata and Nishihara, 2015).
TASK 3
3.1
Items July Augus
t
Septembe
r
Octobe
r
Novembe
r
Decembe
r
Sources of cash
Turnover 9360
0
96408 97372.08 98345.
8
99624.3 1494.36
other revenues 5000 6000 7200 8640 10368 12441.6
Total 9860
0
10240
8
104572.0
8
106986 109992 13936
Cash utilization or disposal
Purchase 3000
0
33000 36300 39930 51909 77863.5
staff salary 2040
0
22440 24684 27152.
4
35298.1 52947.2
Overheds 7200 7920 8712 9583.2 12458.2 18687.2
administration overhead 1000 1050 1102.5 1300 1420 1545
Selling and distribution 800 800 800 1100 1100 1100
Total 5940
0
65210 71598.5 79065.
6
102185 152143
Net cash flow
(Surplus/shortfall)
3920
0
37198 32973.58 27920.
2
7807.02 -138207
Opening cash balance 6000 45200 82398 115372 143292 151099
Closing cash balance 4520
0
82398 115371.5
8
143292 151099 12891.8
Predetermined targets in above budget reveals that Sainsbury will generate rising
turnover as it is increasing at 1% till October and afterwards, it is rising by 1.3% and 1.5%
respectively. However, on the other side, other revenues of the business will shows a fixed
growth rate at 1.2% each month. Contrary to this, purchase payment at £25 per unit is increasing
due to more sales unit over the budgeted period. Similarly, staff salary and overhead
expenditures are increasing @ £17 and £6 per unit. On the other side, administration overheads
are increasing at 5% till September and after this, it shows a sudden increase to £1300, £1420

and £1545 whilst S&D expenditures remains constant till September to 800 and afterwards rose
to £1100 per month. Due to lower increase in revenues than cash outflow, surplus balance shows
a decreasing trend and in end, indicates cash shortfall.
Ways to remove shortfall and maximize surplus
- Investing surplus money in other profitable purpose rather than keeping it in account
where Sainsbury can generate yield or return (Lowe and Tinker, 2015).
- Controlling administration expenditures through better monitoring and controlling.
- Buying quality material at reasonable prices and recruiting skilled labor at an affordable
wages rate.
3.2
Fixed cost comprises all the business spending that have no relation with total output and
production and remains constant throughout the period such as depreciation and insurance
(Kaplan and Atkinson, 2015).
Variable cost consists of expenditures that have direct relationship with total
manufacturing as at high production volume, it moves upwards or vice-versa such as material,
labor and direct overheads (Haynes, 2015).
Total cost = Total Fixed cost (TFC) + Total Variable cost (TVC)
Unit cost/per unit cost = Total production cost/Quantity of goods produced
Items Per unit cost Cost
Material 25 125000
Labor 17 85000
Overheads 6 30000
TVC 28 240000
TFC 60000
TC 300000
Quantity of goods produced = 5000
= £300,000/5000 units
= £60

Selling price as per Cost-oriented method = Cost per unit + Mark-up on cost
= £60 + (£60*30%)
= £60 + £18
= £78
BEP (Units) = TFC/Contribution each unit
Contribution per unit = selling price – TVC
= £60,000/(£78-£28)
= £60,000/£50
= 1200
Derived results reveal that at selling price of £78 per unit, Sainsbury needs to sell 1200
units so as to recover both the fixed and variable costs. After this break-even point, every
additional selling unit will drive profit into the business as BEP represents maximum utilization
of business resources. While, if company became unable to achieve this point than it will
definitely bear loss.
3.3
Sainsbury can use capital budgeting techniques to examine and evaluate relative
attractiveness of different projects and identify the most worthy project (Investment appraisal
techniques, 2016). Payback period (PBP) and Accounting rate of return (ARR) are non-
discounting methods of project evaluation whereas net present value (NPV) and internal rate of
return (IRR) are discounted techniques which consider time value of relevant cash flows.
PBP: The time lag or length in which, cumulative cash flows of the projects comes just
equal to the initial cash outlay is called PBP (Götze, Northcott and Schuster, 2015). Lower PBP
is always considered superior or attracts those investors who are highly interested to generate
back earlier their initial investment.

ARR: Profit percentage on money invested in the project or capital proposal is called
ARR. Greater ARR representing project is considered good especially for those investors who
are highly focused to meet their shareholder’s return expectations.
NPV: Excess or surplus of discounted values or present value of future cash flows during
overall project duration over initial investment is called NPV (Upton and et.al., 2015). Positive
NPV reflecting proposal is considered beneficial or detrimental to Sainsbury’s future.
IRR: Rate of discounting that equates total present value of potential cash flows to the
project cost is called IRR. Higher the IRR than discounting factor reveals that project is viable
and suitable for Sainsbury (Andor, Mohanty and Toth, 2015).
Year Machiner
y A
Cumulativ
e cash
flows
Machiner
y B
Cumulativ
e cash
flows
Discounte
d value
@12%
PV (A) PV (B)
2016 -485000 -485000 -500000 -500000 1 -485000 -500000
2017 89000 -396000 78000 -422000 0.892857 79464.2
9
69642.86
2018 125000 -271000 127000 -295000 0.797194 99649.2
3
101243.6
2019 268000 -3000 272000 -23000 0.71178 190757.
1
193604.2
2020 342000 339000 367000 344000 0.635518 217347.
2
233235.1
2021 423000 762000 412000 756000 0.567427 240021.
6
233779.9
IRR 31% 30% NPV 342239.
4
331505.7
PBP (A) = 3 + (£3000/£342000)
= 3.008 year
PBP (B) = 3 + (£23000/£367000)
= 3.06 year
Year Machinery A Machinery B
2016 -485000 -500000
2017 89000 78000
2018 125000 127000
2019 268000 272000

2020 342000 367000
2021 423000 412000
Total 1247000 1256000
ARR = (Average return /Initial investment)*100
ARR (A) = (£1247000/5)/(£485000)*100
= 51.43%
ARR (B) = (£1256000/5)/(£500000)*100
= 50.24%
After getting the results, proposal to buy Machinery A is considered viable option because of
lower PP to 3.008 year, greater ARR to 51.43% and high NPV and IRR to £342239.4 and 31%
respectively. Henceforth, Sainsbury must invest £485,000 in this project so as improve their
position in future period.
TASK 4
4.1
At the end of every accounting year, Sainsbury prepare several financial statement, in
which, they report their financial transactions and activities and thereby measure their net
earnings and financial status as well.
Income/Profitability statement: Sainsbury’s account reflecting their total cash and non-
cash revenues and payments like sales, cost of goods sold, staff salary, depreciation, marketing,
selling and distribution expenses, provision for taxation and others is called statement of
comprehensive income (Kim and et.al., 2016). Company prepares SOCI to identify their gross
earnings (excess of total turnover over COGS) and net return (excess of total income over total
spending) during a specified period.
Balance sheet: Summary of fixed and current assets as well as short-term and long-term
liabilities along with total owner’s capital employed is called balance sheet (Florou and Kosi,
2015). It includes property, plant, machinery, debtors, reeivable, cash, inventory, long-term loan,

debentures, lease properties, creditors, bank overdraft and others. Sainsbury construct balance
sheet at closing end of financial year to examine and assess financial status by determining
business ability to meet out nearby or long-term obligations and utilization of corporate assets to
generate turnover,
Statement of cash flow: SOCF is prepared to examine cash inflow and its utilization in
operation, financing and investing activities (Zeghal, 2015). It is mainly construct to identify the
causes for having two different cash balances at two different balance sheet date.
4.2
Sole proprietor construct profitability statement and balance sheet through using
generally accepted accounting principles, conventions and conepts. Trader prepare this statement
just to measure their net return and financial position without any legal compliance and
obligations. Henceforth, it is not necessary for the traders to construct annual accounts in any
specified format or structure. Parntership, on the other side, prepare partners capital, current
account and balance sheet adhering to the principes of partnership act (Minsky, 2015). They
prepare capital account to know the amount invested by every partners in the business to conduct
operations. In contrast to this, companies are large-scale entities, in which, number of
stakeholders have some kind of either direct or indirect stake. They are obliged to follow
Company Act, International Accounting Standard and International Financial Reporting Standard
to construct their annual financial statement (Florou and Kosi, 2015). They also present their
annual accounts in the front of annual general meeting, shareholders, taxation authority and
government. Aparting this, they also publish their audited financial statements to report
authentic, prominent and acccurate information to the external stakeholders. All the statements
are structured in specied format as per the provision of schedules mentioned in company act,
2006.
4.3

Seeing the financial ratios presented in the table, it can be said that Sainsbury improved
their profitability position in the year 2014 by generating high gross margin, net margin and
operating margin to 5.75%, 2.99% and 4.21% which is good (Garefalakis and et.al., 2016).
Contrary to this, liquidity ratio, CR and QR drop down to 0.36 and 0.28 which reflects that less
nearby assets is available to Sainsbury to meet their deferral payments to the suppliers (Rauch
and Wende, 2015). However, stock turnover ratio improved to 22.45 indicates effective and
better inventory utilization whereas lower assets turnover ratio to 1.45 times reveal that managers
are not using corporate assets in the best way (Cao, Chychyla and Stewart, 2015). Apart from
this, recceivable turnover ratio also got decreased to 55.31 times demonstrating delayed time
period to get payments through receiables. On the other side, debt /equity ratio came down to

0.37 due to repayment of some debt and issue of more equity shares (Coleman, Cotei and Farhat,
2016). It declined financial risk in the business as Sainsbury have less interest obligations.
CONCLUSION
Report summarized that Sainbury’s CFO needs to procure required amount of capital via
loan and reinvest their net earnings for expansion. Moroever, report identified that company
needs to reach atleast BEP point so as to get back their incurred fixed and variable cost. Capital
budgeting techniques inferred that Sainsbury must acquire Machinery A so as to get better return
in future. At the end, ratio analysis technique concluded that although Sainsbury’s profitability
position got improved and long-term risk got reduced, but still, liquidity position drop down.
Henceforth, managers need to work on it and maximize their short-term assets like debtors,
stock, cash so as to meet nearby obligations on time.

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