Financial Statements Analysis and Interpretation

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MFRD
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
Scenario 1.....................................................................................................................................4
Identifying sources of finance......................................................................................................4
TASK 2............................................................................................................................................5
Scenario 1.....................................................................................................................................5
TASK 3............................................................................................................................................9
Scenario 1.....................................................................................................................................9
Scenario 2...................................................................................................................................10
Scenario 3...................................................................................................................................12
Scenario 4...................................................................................................................................15
TASK 4..........................................................................................................................................17
Scenario1 ...................................................................................................................................17
Scenario 2...................................................................................................................................19
Scenario 3...................................................................................................................................20
CONCLUSION .............................................................................................................................21
REFERENCES..............................................................................................................................22
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INTRODUCTION
Management of financial resources is the crucial aspect on which organizational success
is based. The organization is required to manage limited financial and human resources
effectually so as to achieve organizational objectives. The present report is based on different
case scenario and accordingly, it covers several sources of finance and their implications on the
overall business. Furthermore, cash budget and ratio analysis as an effective tool to manage the
financial performance of company are used. In addition to this, investment appraisal techniques
are explained along with their application in selecting right project for the corporation. Also,
detailed description has been given for different financial statements.
TASK 1
Scenario 1
Identifying sources of finance
There are number of sources of finance available to a business. The first one is Owner's
capital which is the most effective source of finance which can be used by small business or new
start up. This source is easily available and business can easily access the same in less time span.
The second source is retained profit which already exists in company. It can be used for the
purpose of expansion. However, business can be small or large. Furthermore, sale of old assets is
another source of finance available to existing business and to those who wish to expand their
business in the marketplace. It facilitates to raise quick fund for the purpose of expansion
(Bernstein, 2015). On the other hand, special financial institutions are another kind of source that
is available to a new start up and small business. It aids to raise sources of finance. Similarly,
bank loan is availed to existing organization which is operating at the large level. This is
because; finance is granted to them on the basis of reputation of their business. Apart from this,
leasing companies provide technical assistance to existing or new start up ventures as well as to
large organization. It leads to reduce the financial burden of companies (Chan and et.al., 2001).
In addition to this, issue of shares is available to a large organization that is operating with
minimum specified capital.
Implication of sources of finance
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There are several implications of sources of finance which affect the performance of an
organization. For example, retained profit incurs opportunity cost whereas bank loan generate
need of interest. On the other hand, issue of share is long procedure and also, dilutes the control
of business. Similarly, sale of fixed assets is that source where assets are sold with immediate
effect (Cox and Fardon, 2003). Owing to this, it might be possible that assets are not valued at
real price. Furthermore, leasing companies also charges for additional services as well as interest
or rent of assets. In addition to this, special financial institutions interfere in the decision making
process of the corporation and also takes extensive time in giving finance. In addition to this,
bank loan requires per month interest and in case of default in payment, company's credit rating
may be affected. Similarly, owner’s capital also requires certain rate of interest and payment of
full amount in case of emergency issues. This aspect creates insecurity for business in long term
but assist firm at the initial stage.
Appropriate source of finance for three different cases
Case 1: Small business start ups
The appropriate sources of finance for small business start-up are owner's capital and
special financial institutions. It facilitates to provide long as well as short term sources of finance
so that business can be started in less time span. It depicts that owner's capital and special
financial institutions are effective sources for starting a new business. Here, personal saving is
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another source of finance which can be arranged in less time. On the other hand, special financial
institutions provide appropriate finance to corporation. It enables the management to start a
business in short time in order to fulfill their pre-defined objectives. Similarly, it becomes less
risky to access owner's capital so that business can easily start its operations.
Case 2: Large business expansion
Under this, large business can access bank loan, leasing companies and issues of shares.
These sources prove to be effective to enhance the overall sources of finance which then
contribute towards achieving objectives (Cox and Fardon, 2003). For the expansion of large
business, management tends to focus on issue of shares. However, it takes extensive time to issue
of share but proves to be risk free. This is because; in case of issue of equity shares; company
does not require to pay its return among shareholders when it go through loss. On the other hand,
leasing companies provide technological assistance so that expansion can be done in less time
span. Apart from this, bank loan is also another source for large business as it is easy to be
accessed. However, credit rating of corporation has a direct impact on different sources of
finance.
Case 3: Small group of people
This is another form of business wherein owner's capital and special financial institutions
are appropriate sources of finance. This leads to provide support for corporation to start business
on right time. Such kind of businesses operates at a very low level where finance can be acquired
through self help group and owner's capital. In this regard, special financial institutions also play
a vital role but they require detailed information regarding project to be completed by small
group of people. Furthermore, owner’s capital is another most convenient source that facilitates
to start the work on right time.
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