Financial Accounting for Businesses

This assignment delves into the fundamentals of financial accounting across various business structures. It provides a comprehensive overview of key financial statements like balance sheets, profitability statements, and ratio analysis. The content explores these concepts in the context of sole proprietorships, partnerships, and companies, illustrating their application through illustrative examples and references to academic research.

MANAGING FINANCIAL
RESOURCE DECISIONS

Table of Contents
INTRODUCTION......................................................................................................................1
TASK 1......................................................................................................................................1
AC 1.1 Identify the sources of finance available to restaurant business...............................1
AC 1.2 Implication of finance sources..................................................................................2
AC 1.3 Evaluation of appropriate source..............................................................................2
TASK 2......................................................................................................................................3
AC 2.1 Cost of each finance source......................................................................................3
AC 2.2 Importance of financial planning..............................................................................3
AC 2.3 Information need of internal and external decision makers......................................3
AC 2.4 Impact of finance sources on the financial statements..............................................4
TASK 3......................................................................................................................................5
AC 3.1 Projected budget for six months................................................................................5
AC 3.2 Computation of unit costs and pricing decisions......................................................6
AC 3.3 Implication of capital budging tools.........................................................................6
TASK 4......................................................................................................................................7
AC 4.1 Main financial statements produced by different organizations...............................7
AC 4.2 Structure, content and details of main financial statements......................................7
AC 4.3 Interpretation of financial statements........................................................................7
CONCLUSION..........................................................................................................................7
REFERENCES...........................................................................................................................7

Illustration Index
Illustration 1: Balance sheet of sole trader.................................................................................9
Illustration 2: Profitability statement of sole trader..................................................................10
Illustration 3: profitability statement of partnership.................................................................10
Illustration 4: balance sheet of partnership...............................................................................11
Illustration 5: profitability statement of company....................................................................12
Illustration 6: balance sheet of company..................................................................................13

INTRODUCTION
Finance is a very crucial element in every business organizations. It is necessary for
establishing new firms and hazard free operating functions. . Without having adequate
amount of funds, business cannot survive in the market. In the present report, Government
provide opportunities to small firms by setting target in which 1£ of every 3£ government
spending will be for small businesses by 2020. The report will discuss the significance of
finance for establishing a small restaurant business in UK. Moreover, financial performance
will be analysed for Sainsbury business organization.
TASK 1
AC 1.1 Identify the sources of finance available to restaurant business
As per the scenario, restaurant owner requires 300000£ for contract bidding while
only 20000£ is available to them. Hence, additional finance requirement can be fulfilled
through following sources:
Bank Loans: Banks assist the restaurant business by providing funds in the way of
loans. UK government's National Loan Guarantee Scheme (NLGS) and Funding for Lending
Scheme (FLS) provide huge assistance to the restaurant owners for getting funds at cheaper
rates. It reduces cost of borrowings for businesses and mitigates their funds requirement for
different time durations (Cassar, Ittner and Cavalluzzo, 2015). Further, it increases unsecured
business lending on the basis of government guarantee. In UK, Scottland, Natwest, Barclays,
Lombard, Santander and Ulstar bank provide funds to small organizations whose annual
turnover lies under the maximum limit of 250£ million.
Equity finance: Restaurant unit can obtain funds in the form of equity. It can start its
restaurant by issuing equity share capital. Government Enterprise Investment Scheme (EIS)
encourages potential investors to invest their funds in small enterprises by providing tax
reliefs. According to the scheme, investors can invest up to 1£ million and they will be
qualified to take tax benefits of 30% of investment cost.
Venture capital: UK government Venture Capital Trust Scheme (VCTS) encourages
capitalists to invest funds in small firms. They can invest funds in the form of equity and
debt. As per the scheme, investors whose total investment is less than 200000£ in each
financial year will be eligible for income tax relief at 30% rate. Moreover, capital gain at the
time of disposal and dividend earnings on such investment are exempted from income tax.
Thus, restaurant business can fulfil their financial need by taking venture capital.
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AC 1.2 Implication of finance sources
Different types of financial sources have some kind of implication to restaurant
business performance which is described as under:
Bank loan: At the initial stage, restaurant unit has to fulfil some legal formalities
required by the banks. They have to give assets as a collateral security for securing their debt.
Moreover, bank provides loans at interest rates which the restaurant is required to pay on
time. Thus, it imposes fixed financial burden to the business (Tan, Lee and Faff, 2015).
However, the advantage is that lenders have no control over the restaurant operations hence;
it does not dilute business control.
Equity finance: Restaurant business has to provide dividend return to the investors
although the rate of dividend is not fixed. Thus, it is not the legal obligation to pay regular
return to the shareholders. Restaurant business can provide dividend in case of having
adequate amount of profits while it does no need to pay dividend in the situation of loss
(Lewis and Tan, 2016.). Equity investors have voting rights which they can access to control
restaurant operations. In other words, dilution on control exists in equity finance.
Venture capital: Venture capitalist invests funds to get maximum amount of return.
Thus, it is important for the restaurant business to provide adequate return to the capitalists.
Thus, if capitalist provide fund in the form of debt then restaurant business has to pay a fixed
amount of interest at a fixed interval. However, if they invest funds in the way of shares, then
it has to pay return to them.
AC 1.3 Evaluation of appropriate source
On the basis of above implications, it can be reported that bank loan will be the most
appropriate source for restaurant unit. The reason behind this is various government schemes
helps to acquire cheaper loans. Thus, it provides assistance to reduce their finance cost.
Furthermore, cheaper loan availability assists the restaurant to reduce their spending and
enhance profitability (Cheng, 2015). Moreover, government guaranteed schemes which
provide help to restaurant to acquire funds without any business security. As per the plan,
banks mitigate restaurant's financial requirement on behalf of guarantee given by
government. Moreover, no diversification of control to lenders assists the owners to control
their operations as per their own desires (Hatten, 2015). On the other hand, equity and
venture capitalist will diversify its business control. In addition, interest obligations on loans
provide tax reliefs to the restaurant unit henceforth, reduce tax obligations and improve
profits.
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TASK 2
AC 2.1 Cost of each finance source
On the amount of borrowed funds, restaurant is required to pay periodically interest to
banks. Thus, it will be the cost of bank loans which reduce company's profits. Moreover, the
interest rate may be fixed or fluctuating. Fixed interest rate impose fixed financial burden
contribute to high financial risk. On the contrary, fluctuating interest rate can increase or
decrease restaurant financial obligations and change their cost (DeYoungm and et.al, 2015).
However, cost of equity finance is restaurant has to provide returns in the form of dividend to
the shareholders. Another, venture capital can be in the form of both debt and equity. If the
venture capitalists provide debt funds than its cost will be periodically interest payments and
the restaurant owner has to pay while equity funds imposes cost of dividend. Furthermore,
expenses for issuing prospectus and shares are also included in restaurant unit financial cost.
AC 2.2 Importance of financial planning
The role of monetary planning is very vital for restaurant business success. At the
initial stage, restaurant unit has to determine their capital requirement for establishing. They
have to estimate the cost of construction of building and purchasing furniture, building and
other equipment. Thereafter, alternative finance sources such as debt and equity must be
analysed to select the most suitable source. Moreover, a financial projection of all business
functions must be constructed by the owners (Dunn and Liang, 2015). They have to ascertain
their future sales and payments for purchase, utilities, office expenses, repair and other
operating expenses. It provide assistance to manage organization cash flows and avail better
surplus cash availability to support its operations. It makes restaurant business able to make
effective administration of funds, remove financial difficulties and helps in running
successfully in the market (Gaskill, Van Auken and Kim, 2015).
AC 2.3 Information need of internal and external decision makers
Internal decision makers are the part of the restaurant business while external decision
makers are outsiders such as investors and lenders. Their different information need is
described hereunder:
Managers: They play a significant role in managing overall business functioning of
the restaurant. Thus, they need information about knowing operational as well as financial
performance. They make detailed analysis of restaurant operating activities to maximize their
revenues and minimize their expenditures. This in turn, profitability can be improved to a
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great extent. Further, they need information about cash earning capacity, liquidity, solvency
and assets using efficiency to make effective balance and improve restaurant's performance.
Employees: They are working with the organization and serve their customers to
attain good monetary and non-monetary benefits. They analyse restaurant's operational
results to determine profits margins (Zager and Zager, 2006). Improved profitability is the
good sign of business performance and satisfies employees need in a great manner.
Investors: They need higher return on their funds hence, require information about
restaurant's profits, leverage, cash flow capacity, investors earning and growth in share
prices. High growth earning businesses are able to attract more investors and eliminate their
financial requirement.
Lenders: They assess restaurant's interest bearing capacity, profit margin, cash
generating ability, manager's efficiency and solvency position (Nowduri, n.d). Rising
profitability, balanced solvency position and good credit rating firms can attract lenders for
investment purpose.
Creditors: They provide funds through analyse restaurant liquidity position and
profitability. Thus, they need information about working capital management, inventory
turnover ratio, and receivable turnover ratio and accounts payable days.
AC 2.4 Impact of finance sources on the financial statements
Cost of borrowed funds interest is shown under the payment side of profit and loss
account and reduces from cash balance on the assets side. Moreover, amount of borrowed
funds will be shows in liability side under the long term liabilities head and will be added in
cash under the current assets head. On contrary, cost of equity finance, dividend will be
shows in profitability statement as business expenditure and will be deduct from cash
balance. However, issued share capital amount will be shown under the liability side of share
capital head. On the other side, it will be include in total cash balance. For instance, loan of
200000£ at the interest rate of 10% and issued share capital of 80000£ with the dividend
payment of 8000£ will be shows as under:
Profit and loss account for the year ended 31st March, 2015
Particular Amount Particular Amount
To interest on loan 20000
To dividend payment 8000
Balance sheet as on 31st march, 2015
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Liabilities Amount Assets Amount
Issued share capital Current assets
Share capital 80000 Cash (80000+200000-
20000-8000)
252000
Long term liabilities
Bank loan 200000
TASK 3
AC 3.1 Projected budget for six months
Revenues/Expenses March April May June July August
Expected sales 32000 48000 60000 65000 72000 90000
Total cash revenues 32000 48000 60000 65000 72000 90000
Cash payments
Total Purchase 20000 28000 40000 47000 65000 75000
Purchase of furniture and
equipment 7000 3000 2000 1000 1000
Other operational expenses 2000 2200 2200 2350 2500 2550
Administrative expenditures 800 1000 1000 1200 1200 1250
Electricity bill 500 500 800 1000 1200 1650
Total cash expenses 30300 31700 47000 53550 70900 81450
Net cash flow
(Surplus/deficit) 1700 16300 13000 11450 1100 8550
Opening cash balance 1200 17500 30500 41950 43050
Closing cash balance 1200 17500 30500 41950 43050 51600
The projected budget indicates that in all the subsequent months, restaurant unit will
generate increased sales. It shows an inclining trend as it got improved from 32000£ to
90000£ in August. However, total cash payments got increased from 30300£ to 81450£ in
August. As per the projected budget, purchase payment got changed from 20000£ to 75000£.
Moreover, administrative expenses, electricity bill and other expenses are also increasing in
the budgeted period. On contrary, capital expenses will be incurred for acquiring furniture
and equipment. Due to this impact, NCF got shows a fluctuating trend as it got improved to
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16300£ in April. Thereafter, it shows a decreasing trend because it got reduced to 8550£in
August. It impact restaurant business operations in an adverse manner (Ross, Laing and Parle,
2015). The reason behind this is lower availability of surplus balance reduce company's cash
generating ability from operations.
Recommendations: Thus, it should be recommended that restaurant managers have to
maintain effective control over the expenditures to reduce their total payments.
Administrative expenses can be reduce through managing staff salaries, office rent, printing
and stationery expenses and management of hiring new staff. Furthermore, electricity bills
can be reduced through using electricity at the time of need. Moreover, by switching off the
lights, energy can be saved. In addition to it, finding new suppliers who supply goods at
cheaper rates without affecting the quality will reduce restaurant purchase cost (Citi, 2013).
Furthermore, food broker contract assist restaurant to negotiate their food prices and take cost
savings benefits. Another, contract with suppliers, equipment contract, cleaning and
marketing contract is helpful for cost reduction. On contrary, effective marketing, stability in
price, improved quality and serving tasty food as per the customer desires bring benefits to
enhance total sales revenues. This in turn, restaurant business will be able to have high NCF
and operate efficiently in the market.
AC 3.2 Computation of unit costs and pricing decisions
Cost per unit: Per unit cost can be determined through dividing total cost of the
product to the number of unit produced. Fixed cost remains constant with the production
changes while variable cost get changes in same direction production changes (Rodríguez
and Aydın, 2015). In context to restaurant business, unit cost at total production of 1000 units
has been calculated as under:
Particular Cost
Material cost 20000£
Labour cost 15000£
Other overheads 8000£
Fixed cost 12000£
Total cost 55000£
Unit cost (Total product cost/No. Of unit produced)
=(55000£/1000 units) = 55£
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Pricing decisions: Unit cost is a good basis for price determination (Haynes, 2015).
For instance, when restaurant unit intend to earn a 30% return on total cost then selling
price will be as under:
Particular Calculation Amount
Unit Cost 55£
Add: Required return @30% (55£*30%) 16.5£
Selling price 71.5£
Thus, by providing food services at the rate of 71.5£, restaurant can earn 30% return
on their total cost. Henceforth, cost basis of price determination ensure return availability for
the business.
AC 3.3 Implication of capital budging tools
Capital budgeting: It is also known as investment appraisal techniques help to test
project viability so that restaurant can select best investment proposal. In context to the
present scenario, restaurant business has two equipment contract available at 280000£ and
350000£ with a life span of 5 years. Capital budgeting techniques will guide managers to
determine that which contract will be more feasible and provide high benefits to the
restaurant.
Pay-back period: Recovery period of initial cash investment of 280000£ and
350000£ is known as PP (Halttunen, 2012.). Project which generates its cash outlay
earlier will be more viable for restaurant unit.
Year Project 1 CCF Project 2 CCF
0 -280000 -280000 -350000 -350000
1 120000 -160000 80000 -270000
2 230000 70000 170000 -100000
3 250000 320000 250000 150000
4 310000 630000 380000 530000
5 350000 980000 520000 1050000
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980000 1050000
PP (A) = 1 year + (160000£/230000£) = 1.7 year
PP (B) = 2 year + (100000£/250000£) = 2.4 year
Accounting rate of return: It indicates the overall profit return on initial project
investment. High ARR will be considered more feasible for investment purpose.
ARR (A) = (980000£/5)/280000£*100 = 70%
ARR (B) = (1050000£/5)/350000£*100 = 60%
Net present value and internal rate of return: According to this discounted cash flow
method, difference between discounted cash inflow and outflow is called NPV (McAllister,
n.d). For the given scenario, 10% discount rate has been used for predicting future values.
However, IRR is the rate at which NPV will be zero.
Year Project 1 Project 2 Discount rate
of £1 @ 10%
DCF DCF
0 -280000 -350000 1 -280000 -350000
1 120000 80000 0.909 109080 72720
2 230000 170000 0.826 189980 140420
3 250000 250000 0.751 187750 187750
4 310000 380000 0.683 211730 259540
5 350000 520000 0.621 217350 322920
IRR = 65.77% IRR = 49.51% 635890 633350
Interpretation: Lower PP of 1.7 year indicates that a project will generate its initial
investment earlier than project B. Moreover, ARR, NPV and IRR of this project is higher to
70%, 635890£ and 65.77% indicate that this restaurant business has to accept project A. It
will be more feasible and provide high benefits to restaurant unit.
TASK 4
AC 4.1 Main financial statements produced by different organizations
Profit and loss account Summarized statement of restaurant expenditures and revenues
is known as profitability statement. Its purpose is to determine
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operational results in terms of gross profit, net profit and
operating profit.
Balance sheet Summarized statement of restaurant assets and liabilities is
known as balance sheet (Ormiston and Fraser, 2013). Its
purpose is to determine financial status of restaurant business.
Cash flow statement Its combines cash inflows and outflows from operating,
financing and investing activities. Its purpose is to determine
cash changes between two balance sheet period (Schroeder,
Clark and Cathey, 2013).
AC 4.2 Structure, content and details of main financial statements
Structure, content and details of financial statement of sole proprietorship, partnership
and company are presented here:
In sole proprietorship, all the capital is invested by trader themselves, henceforth, all
the profits and losses are available for him. However, partnership is the combined efforts of
two or more individuals thus; all the profits and losses will be share between all the partners.
However, company's owners are the shareholders therefore; all the profits are distributed to
the shareholders. It prepares its financial statement as per the company act requirements
while partnership constructed their final accounts according to partnership act. On the other
hand, sole trader does not need to follow any specific format for preparing their final
accounts. All the organization prepares profit and losses through combining total
expenditures and incomes while balance sheet includes all the assets and liabilities.
Illustration 1: Balance sheet of sole trader
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Illustration 2: Profitability statement of sole trader
Illustration 3: profitability statement of partnership
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Illustration 4: balance sheet of partnership
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Illustration 5: profitability statement of company
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Illustration 6: balance sheet of company
AC 4.3 Interpretation of financial statements
Gross profit 1377 1277
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Operating profit 1009 887
Net profit 716 614
Net Sales 23949 23303
Current Assets 4362 1901
Current Liabilities 12171 3115
Closing Stock 1005 987
Total assets 16540 12695
Cost of goods sold 22562 22026
Inventory 1005 987
Debt 2250 2617
Equity 6005 5733
Net income 716 614
Interest expenses 159 142
Ratio analysis
Ratios Formula 2014 2013
Profitability ratios
Gross Profit Ratio (Gross Profit/ Net Sales) *100 5.75 % 5.48 %
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Operating Profit Ratio (Operating Profit/ Net Sales) *100 4.21 % 3.81%
Net Profit Ratio (Net Profit/ Net Sales) *100 2.99 % 2.63 %
Liquidity ratios
Current Ratio Current Assets / current Liabilities 0.36 0.61
Quick Ratio
(Cu. Assets - Cl. Stock)/Cu.
Liabilities 0.28 0.29
Efficiency Ratios
Total Assets Turnover Ratio Net Sales/ Total Assets 1.45 times 1.84 times
Inventory Turnover ratio COGS/Inventory
22.45
times
22.32
times
Gearing ratios
Debt Equity Ratio Debt/ Equity 0.37 0.46
Times Interest Ratio Net Income/ Interest expense 4.5 times 4.32 times
On the basis of above table, it can be concluded that Sainsbury is performing well in
the market because it is generating higher profits as compared to 2013. However, decreased
CR and QR indicate that Sainsbury's ability to pay its short-term liabilities went fall in 2014.
Thus, Sainsbury need to manage its working capital and ensure smooth operations. Moreover,
declined assets turnover ratio indicates that Sainsbury do not using its assets efficiently while
inventory has been utilized in an efficient manner (Ratio analysis, n.d.). On contrary, reduced
debt equity ratio indicate less financial risk to the company whereas time interest ratio got
improved. It indicates that Sainsbury is able to bear fixed financial burden hence, it can take
additional borrowings.
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CONCLUSION
The presented report concluded that restaurant business can acquire funds through
bank loans. Moreover, financial planning guide managers to establish effective administration
of funds and ensure adequate surplus cash for operational purpose. The report explained that
budget is an effective tool that helps in optimum utilization of business resources and avail
appropriate cash balance. Furthermore, cost oriented method is a good technique in price
decisions and ensure desired return. On the other hand, Sainsbury's ratio analysis interpreted
that its operational performance and solvency position is good. However, financial analysis
indicates that Sainsbury managers need to keep focus on its working capital management and
assets using efficiency. Through improving this, it can improve its financial performance to a
great extent.
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REFERENCES
Books and Journals
Cassar, G., Ittner, C.D. and Cavalluzzo, K.S., 2015. Alternative information sources and
information asymmetry reduction: Evidence from small business debt. Journal of
Accounting and Economics. 59(2). pp. 242-263.
Cheng, S., 2015. Potential lending discrimination? Insights from small business financing and
new venture survival. Journal of Small Business Management. 53(4). pp. 905-923.
Citi, M., 2013. EU budgetary dynamics: incremental or punctuated equilibrium?. Journal of
European Public Policy.
DeYoung, R. and et.al., 2015. Risk overhang and loan portfolio decisions: small business
loan supply before and during the financial crisis. The Journal of Finance. 70(6). pp.
2451-2488.
Dunn, P. and Liang, C.L.K., 2015. Fallacies versus realities in financial planning and
management among entrepreneurs: Lessons from the trenches. Journal of Small
Business Strategy. 13(1). pp. 95-104.
Gaskill, L.R., Van Auken, H.E. and Kim, H.S., 2015. Impact of operational planning on small
business retail performance. Journal of Small Business Strategy. 5(1). pp. 21-36.
Hatten, T.S., 2015. Small business management: Entrepreneurship and beyond. Nelson
Education.
Haynes, W.W., 2015. Pricing decisions in small business. University Press of Kentucky.
Lewis, C.M. and Tan, Y., 2016. Debt-equity choices, R&D investment and market timing.
Journal of Financial Economics.
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Education.
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selling through dual channels. European Journal of Operational Research. 242(3). pp.
901-909.
Ross, S., Laing, G. and Parle, G., 2015. Attitudes towards Budgets in SME's: Exploring the
Theory of Planned Behaviour. E-Journal of Social & Behavioural Research in
Business. 6(2). p. 34.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2013. Financial accounting theory and
analysis: text and cases. Wiley Global Education.
Tan, K.J.K., Lee, J.M. and Faff, R.W., 2015. Short‐selling pressure and last‐resort debt
finance: evidence from 144A high‐yield risk‐adjusted debt. Accounting & Finance.
Online
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