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UNIT 7003V1 – Financial Management

   

Added on  2019-12-03

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UNIT 7003V1 – FINANCIAL MANAGEMENT

TABLE OF CONTENTSIntroduction......................................................................................................................................4Task 1...............................................................................................................................................4A.C.1.1:- .....................................................................................................................................4A.C.1.4:- Review and question financial data: ...........................................................................5Task 2...............................................................................................................................................6A.C. 1.2 and 1.3:- ........................................................................................................................6task 3..............................................................................................................................................11A.C. 2.1:- ...................................................................................................................................11Task 4.............................................................................................................................................12A.C.2.2:- ....................................................................................................................................12Task 5.............................................................................................................................................14A.C.3.1:- ....................................................................................................................................143.2 Analysis of viability of project for expenditure...................................................................15A.C. 3.3:- ...................................................................................................................................17A.C.3.4:- ...................................................................................................................................18References......................................................................................................................................19Index of TablesTable 1: Horizontal ratio analysis of Sainsbury.....................................................5Table 2: Vertical ratio analysis of Tesco and Sainsbury..........................................7Table 3: Net present value of investment proposal in Asian countries..............................16Table 4: Net present value of investment proposal in European countries....................16Table 5: Statement of cumulative inflow of project..................................................17Table 6: Statement of cumulative inflow of project.......................................................17Page 2 of 23

INTRODUCTIONAs a senior manager of company, analysis of company performance will be done in orderto identify the areas of improvement. In order to analyze the financial position of company,computation of ratios will be done by considering the financial information of Sainsbury.Further, description will be provided regarding budgetary analysis and investment appraisaltechniques in order to assist the business in making better decisions. Critical evaluation offinancial tools and techniques will by considering both theoretical and practical aspects. Company is performing in an effective manner as they were able to make increase of 1192million in sales and 127 million in profits. Along with the supermarket industry, they are alsooperating in sector of banking, phone network, online shopping services and fuel forecourts. Interms of turnover company had shows continuous increasing trend. However, in 2005 they hadfaced minor downfall due to restriction on operating activities. In most of the years, profit of theorganization is highly fluctuated but they are able to provide good return to the shareholders.TASK 1A.C.1.1:- Financial data of Sainsbury can be collected through internal and external sources ofinformation of business. Description of internal sources is enumerated as below-Internal accounting systems and processes- It is an internal source of financialinformation by which Sainsbury financial data can be derived. ◦Availability: This information is easily available by the financial department ofSainsbury.◦Reliability- This data is reliable because company is required to make regularauditing for the authenticity of information (Ratnatunga and Balachandran, 2009).However, still there is possibility of manipulation because data is managed by theinternal management. ◦Validity: Thus, reliability of information can be assessed through report of externalauditor or by conducting the norms of surprise audits.Description of External sources is enumerated as below-Page 3 of 23

Suppliers- Financial information of Sainsbury also attained by the suppliers of businessorganizations. It is because, suppliers of entity are aware about the liquidity and solvencyposition of business. ◦Availability: Information can be derived if user has good relationship with thesupplier. It is because, Sainsbury will not disclose information of entity to all parties.◦Reliability and validity: However, this external source is not authentic because it issupported by the assumptions and individual point of view of parties.Company house-All corporate entities are required to provide their financialinformation to the Company house for the legislatory purposes. ◦Reliability and validity: Information provided by Company house is completelyaccurate but it is not accessible to all parties. ◦Availability: Due to the legislatory aspect, all users are not able to access thisinformation. A.C.1.4:- Review and question financial data: It is very important to question financial data before using same for analysis purpose andpresenting before stakeholders. Many times ratios that are used for analysing the business firmbut its results does not give clear overview of the firm business performance. This is becausewith passage of time inflation rate increase. If this really happened that cost of production alsoenhanced which lower down firm profit. Ratio analysis will reveal that firm profitability declinein comparison to previous year. However, reason behind same is elevation in inflation rate.Hence, before using data for analysis purpose it is necessary to question to accountants in respectto financial data. It must be clarified whether they make any mistake due to which big change isobserved in the financial statement or due to any reason big increase or decrease happened inspecific variable value. Managers must review and question financial data because by usingwindow dressing methods some times better performance of the firm is revealed in the financialstatements. By using creative accounting methods it is showed that standards are followed forpreparing financial statements but in reality it does not happened. Hence, before finallypresenting financial statements before stakeholders it is necessary to question financialPage 4 of 23

statements and it must be ensured that financial statements are prepared by following all rulesand regulations. In the evaluation of financial ratios, various aspects are considered by the financialmanager in order to make viable decisions. It is because, it will make changes in the financialfigures and interpretation of data will vary accordingly (McLaney and Atrill, 2010). Thus, ifthere is any change in the policies then financial managers are required to consider the impactwhile decision making. Further, impact of window dressing and creative accounting techniquesshould be completely avoided because it manipulates the value. If such practices occur in thepreparation of financial statement, then ratio analysis will not able to provide appropriatefindings (Magena and Kinman, 2007). Along with this, emergence factors such as change ineconomic factors (interest rate and inflation) will also hamper the accuracy of data. As aconsequence, decision cannot be solely made by the manager by relying on financial data ofbusiness. In addition to the financial data, accounting policies of company and changes inenvironmental factors should also be considered by the financial manager in order to make betterdecisions. Income statement and balance sheet are two statements that one require to make itsinvestment related decisions in the business. There are no limitation in availability of thesestatements because same are available in the firm annual report which published annually anduploaded by the firm on its website. However, in case of small sized firms it is very difficult toobtain their financial statement. By establishing contact with CA of the firm one can easilyobtain financial statements. There are different organization structure in different firms. Thishappened because size of business is different in case of firms and due to this reason whateverstructure suit to one firm cannot be proved suitable for other firm. In order to test validity of datacomparative income statement and balance sheet will be prepared. If usual percentage change isobserved in both statements then there is no problem. Contrary to this if it is identified that thereis big percentage change in specific item of balance sheet then annual report will be reviewed.On review no such reason for big difference is identified then it can be assumed that data is notvalid.Page 5 of 23

TASK 2A.C. 1.2 and 1.3:- With the applicability of this tool on financial data, performance of company can be monitored inorder to make various decisions. Computation of financial ratios will be supported by verticaland horizontal analysis. With the vertical evaluation, performance of company can be determinedin the industry in comparison to their competitors (Financial ratio and Analysis, 2013). Invertical analysis, comparison of ratios of Sainsbury will be done with the ratio of Tesco. Forvertical analysis, Tesco has been selected because they are tough and close competitor ofSainsbury. For horizontal analysis, comparative evaluation of two years will be done to identifyimprovement in the performance and efficiency of company. These ratios are computedfrom annual report of Sainsbury and Tesco. Income statement and balance sheet ofthese reports are considered for computing ratios.Horizontal analysis of SainsburyTable 1: Horizontal ratio analysis of SainsburyName of the RatiosFormulaYear 2014Year 2013Profitability ratiosGross profit 13871277Net profit 716614Net Sales2229421102Gross Profit Ratio(Gross Profit/ Net Sales)*1006.22%6.05%Net Profit Ratio(Net Profit/ Net Sales) *1003.21%2.91%Liquidity ratios Current Assets 43621901Current Liabilities23961201Closing Stock1005987Current RatioCurrent Assets / currentLiabilities1.821.58Quick Ratio(Cu. Assets - Cl. Stock)/Cu.Liabilities1.40.76Efficiency RatiosPage 6 of 23

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