Financial Management & Reporting

This assignment delves into the realm of financial management and reporting. It examines various sources of finance, including medium-term borrowing, and explores how financial statements provide insights into a company's health and performance. Concepts like financial ratio analysis are discussed, alongside the importance of accurate financial reporting and potential issues such as misstatement. The assignment draws upon scholarly articles and texts to support its analysis.

MFRD

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Identifying sources of finance available to Sweet Menu restaurant.....................................1
1.2 Assessing the implication of sources of finance which are identified above........................2
1.3 Evaluating the most appropriate source of finance for Sweet Menu Restaurant..................3
TASK 2............................................................................................................................................3
2.1 Analyzing the cost of different sources of finance for Sweet Menu Restaurant...................3
2.2 Stating the importance of financial planning for Sweet Menu Restaurant in context to
expansion project........................................................................................................................4
2.3 Assessment of information need of different decision makers.............................................5
2.4 Stating the impact of sources of finance upon financial statements of an organization.......5
TASK 3............................................................................................................................................6
3.1 Analysis of the cash budget of blue Island restaurant and decisions based upon it..............6
3.2 Stating the calculation of unit cost and making pricing decisions........................................7
3.3 Assessing the viability of project by using investment appraisal techniques.......................7
TASK 4..........................................................................................................................................10
4.1 Main financial statements of an organization.....................................................................10
4.2 Comparing formats of financial statements of different types of business.........................11
4.3 Interpreting the financial statements of Sweet Menu and Blue island restaurant by using
ratio analysis..............................................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCE.................................................................................................................................15

INTRODUCTION
Financial resources refer to money which is available to business organization for the
investments. Finance is the most essential element of business which helps organization in
making contribution for the achievement of organizational goals and objectives. Finance
manager of an organization plays a vital in managing funds more effectively and efficiently by
framing competent strategies or policies (Beaver, McNichols and Rhie, 2005). The present report
is based upon Sweet Menu Restaurant which is the most reputable restaurant of East London.
This project depicts various sources of finance which are available to Sweet Menu for their
expansion project. Besides this, it will also develop understanding about the importance of
financial planning which helps finance manager in making cost effective decisions. Further, it
will also examine the tools and techniques of capital budgeting which helps the organization in
making appropriate investment decisions. In addition to this, the present study will provide
information about financial health and performance of an organization.
TASK 1
1.1 Identifying sources of finance available to Sweet Menu restaurant
Sources of finance refer to the ways through which Sweet Menu restaurant can generate
suitable amount of money which they require for their expansion plan. As per the case scenario,
Sweet menu restaurant makes plan in relation to the opening of new branches in Central London
and Croydon. On the basis of this aspect, there are various internal and external sources of
finance which are available to Sweet Menu for their expansion of project which is enumerated
below:
Internal sources of finance Angel investors: Angel investors are the most important source of finance which includes
friends and family members of the company. Usually, friends and family members give
financial support to their loved ones. For this, restaurant needs to give shareholding to
their friends and family members. Through this, Sweet Menu can easily fulfill its
financial needs or requirements. Retained profit: Retained earnings are the most effective and cheaper source of finance.
To meet the future contingencies, each and every organization retains the fixed
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percentage of profit with itself. Thus, Sweet Menu can also meet its financial need by
making use of retained profit. Sale of assets: Sweet Menu restaurant can meet its financial need by selling unprofitable
asset which have no use in business. It helps company in generating money and thereby
provides money for its expansion project (Anheier and Winder, 2007).
External sources of finance Issuance of equity shares: It is the most effectual source of finance which helps
organization in meeting their financial needs for the longer duration. Sweet Menu can
generate money by offering share to their existing and potential shareholders. Leasing: Sweet menu can also expand its business operations and activities by taking
resort of leasing. It offers right to Sweet Menu to make use of building or other asset.
They pay amount to them on periodic basis for the same.
 Loan from financial institutions: Restaurant can also raise their finance by approaching
bank or other financial institution on the basis of collateral security. Through this, Sweet
Menu can easily meet its financial need and thereby expand their business operations
(Vitez, 2014).
1.2 Assessing the implication of sources of finance which are identified above
Each source of finance has different legal and cost implications. Implications of the
above mentioned sources of finance on Sweet Menu Restaurant are as follows:
Sources Legal aspects Dilution Bankruptcy
Angle investors Company is required
to follow a legal
procedure if shares are
issued to the angle
investors.
Ownership of the fund
borrowed by the
company changes.
Angle investors can
recover their money
by selling the assets of
the company in case of
bankruptcy.
Retained profit Company is not
required to follow any
legal procedure at the
time of using retained
profit.
Ownership of the
funds remains with the
owner of the company
only.
Condition of
bankruptcy cannot
occur if retained profit
is there.
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Sale of assets At the time of selling
the assets company is
required to follow a
legal procedure.
Ownership of the
assets changes as and
when legal procedure
is completed.
Creditors of the
company can recover
its money by selling
the assets of the
company.
Issuance of equity
shares
Company is required
to follow a proper
legal procedure at the
time of issuing the
shares (Bentz, 2007).
Ownership of the
shares issued by the
company changes.
Company will not be
able to pay dividend to
its shareholders if the
situation of bankruptcy
arises.
Leasing Valid contract is made
between the company
and the lessor at the
time of leasing the
property or any assets.
Ownership of the
leased property or
assets does not change.
In case of bankruptcy
company will not be
able to pay rent to the
owner of the property.
1.3 Evaluating the most appropriate source of finance for Sweet Menu Restaurant
On the basis of implications of each source of finance it has been identified the issuance
of equity share and retained profit is the most suitable source for Sweet Menu restaurant. By
undertaking such sources Sweet menu can easily meet their financial needs or requirements.
Sweet Menu can easily raise finance by offering equity share to their existing and potential
shareholders. For this, restaurant requires to give dividend to their shareholders whenever they
make profit. In equity shares, there is no financial obligation for firm to give dividend to their
shareholders in each year (Cetorelli and Strahan, 2006). In addition to this, retained profit is also
the most suitable source of finance which helps Sweet menu in meeting their financial needs.
Thus, Sweet Menu can easily open their restaurant in Central London and Croydon and thereby
make contribution in the organizational growth and development.
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TASK 2
2.1 Analyzing the cost of different sources of finance for Sweet Menu Restaurant
Different sources of finance imposing different cost upon Sweet Menu restaurant in terms
of monetary and opportunity cost in the following manner:
 Financial or monetary cost: In the case of equity shares, Sweet menu requires to give
dividend to their shareholders whenever they make profit. Usually, organization has to
pay dividend to their shareholder to build the interest of different stakeholder in the firm's
operations. In addition to this, as an owner shareholders also make interference in the
decision making aspect of an organization (Chandra, 2011). This aspect also affects
growth and profitability aspect of an organization.
 Opportunity cost: If Sweet menu make use retained earnings for expansion project they
are unable to give dividend to their shareholders. This aspect adversely affects the faith
and interest of shareholders.
On the basis of this aspect it can be said that both internal and external sources of finance
closely affects the growth and profitability aspect of an organization.
2.2 Stating the importance of financial planning for Sweet Menu Restaurant in context to
expansion project
Financial planning may be defined as a process which provides assistance to finance
manager in making effective decisions. By making financial plan manager of an organization is
able to spend their money more wisely and thereby make contribution in the achievement of
organizational goals and objectives. Sweet Menu restaurant is planning to expand their business
in Central London and Croydon. In this, financial planning provides more help to manager in
making effective financial decisions. By making financial plan manager is able to assess the
money which are available within the business organization (DRURY, 2013). In addition to this,
it also provides deeper insight to Sweet Menu about the fund which they need to raise from the
other sources of finance.
Financial planning plays a vital role in coordinating the activities of different department
such as production, marketing etc. Along with it, by making financial plan manager of Sweet
Menu restaurant is able to make optimum utilization of finance by reducing the wastage. Thus,
through financial planning manager of Sweet Menu is able to make contribution in the
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organizational growth and development. Manager of sweet Menu needs to frame effective
financial plan which helps them in expanding their restaurant chain or business. Through this,
Sweet Menu is able to achieve success in strategic business arena.
2.3 Assessment of information need of different decision makers
There are various stakeholders of an organization who have interest in the financial
performance of an organization. Different stakeholders who make use of financial statements to
make their decisions include management, employees, shareholders and financial institution.
Information needs of all these stakeholders are as follows:
 Management: Management of an organization undertakes income and cash flow
statement as well as balance sheet of an organization. All these statements help
management of an organization in making competent financial strategies and policies
(Eccles and Holt, 2005). By making assessment of such financial statements company is
able to manage their financial resources in an efficient manner.
 Employees: Service personnel of an organization are highly concerned with the
profitability aspect of an organization. Moreover, the growth of employees in monetary
terms is highly dependent upon the profitability aspect of an organization. Thus, they
make assessment of income and expenditure account which helps them in making their
career related decisions.
 Shareholders: They are also the owner of an organization so they undertake all financial
statement to calculate the ratios. By calculating ratio shareholder can easily assess the
liquidity and solvency aspect of an organization (Efendi, Srivastava and Swanson, 2007).
Through this, they are able to make suitable and profitable investment decisions.
 Financial institution: Financial institution undertakes balance sheet to assess the financial
health and position of an organization. Through this, financial institution is able to assess
the capability of an organization in relation to the repayment of loan.
2.4 Stating the impact of sources of finance upon financial statements of an organization
Different sources of finance having different impact upon the financial statements of an
organization. Each source of finance places impact upon cash flow and income statement as well
as balance sheet of an organization. Thus, manager of an organization needs to be taken
consideration the impact of financial source while they planning in relation to the raising of fund
(Penman and Penman, 2007). On the basis of case scenario Sweet Menu restaurant is planning
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in relation to the expansion of their restaurant chain in Central London and Croydon. For
expansion project Sweet Menu issue equity shares to meet their financial need for expansion
project. In addition to this, they also make use of retained profit to meet their financial need. In
this case both sources of finance having different impact upon the financial statements of an
organization. For instance: Sweet menu issue 10%equity shares of 350000 to meet their financial
needs. In this situation the impact of such source upon the financial statements can be seen in the
following manner:
Profit and loss a/c
Particulars Amount (In £) Particulars Amount (In £)
To Dividend a/c 35000
If company issues equity shares to meet their financial need then they requires paying
35000 dividends to their shareholders. It is expense for an organization so it is recorded in the
debit side of profit and loss a/c.
Balance Sheet
Liabilities Amount (In £) Assets Amount (In £)
To share capital a/c 350000 Cash 350000
Issuance of share capital is liability for an organization so liability side of balance sheet is
increased with the amount of £350000. In addition to this, cash element of an organization is also
increase if company Sweet issue equity shares to meet their financial needs
TASK 3
3.1 Analysis of the cash budget of Blue Island restaurant and decisions based upon it
Cash budget is the financial expression of income and expenditure of an organization. It
provides deeper insight about the cash which organization will generate over the period of time.
In addition to this, it also contains the expenses which organization will incur in the near future
to perform their business activities (Persons, 2011). On the basis of the given cash budget of
Blue Island restaurant it can be identified that from September to November sales of an
organization shows fluctuating as well as decreasing trend. In contrary to this, in December cash
flow of an organization is increasing. Besides this, salaries and wages, lighting as well as other
expenses is continuously increasing. It is the main cause due to which high cash deficit occurred
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in the cash budget of Blue Island restaurant. Thus, organization requires undertaking promotional
campaign to increase its sales. In addition to this, Blue Island restaurant needs to competent
strategies and policies which help them in making control over their expenses. Through this,
company is able to make optimum utilization of their financial resources.
3.2 Stating the calculation of unit cost and making pricing decisions
Unit cost refers to the cost of material, labor and overhead which are incurred by an
organization to produce per unit of output. Along with it, price is the sum up of unit cost and
profit percentage determined by an organization (Revsine and et.al, 2005). It enables Blue Island
restaurant to generate profit by retrieving all expenditures which are incurred by them.
Name of Items Costs (In £)
Steak 3
Vegetables and other ingredients 1.5
labor 3.5
Overheads 2
Total Costs 10
Mark Up (40%) 4
VAT (20%) 2
Selling Price 16
Profits (Sales - Cost) 6
Food cost percentage= Total costs of ingredients/Sale prices
Food cost percentage = 10£/16£*100
= 62.50%
Profit percentage on sales = Profit/sales prices*100
Profit percentage on sales = 6£/16£*10
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=37.5%
According to the above figure it has been identified that Blue Island restaurant charges
£16 from their customers for meal whereas unit cost of the meal is £10. This aspect clearly states
that restaurant earns £6 from each of their customer by offering meal. The total cost of ingredient
upon sales is 62.50% whereas percentage of profit on sales is 37.5%
3.3 Assessing the viability of project by using investment appraisal techniques
Investment appraisal may be defined as a tools and technique which helps organization in
assessing the viability of the investment. Investment appraisal techniques include payback period
and net present value method (Ross, 2008). By undertaking these tools Blue Island restaurant is
able to select most profitable investment. Blue Island restaurant is planning has to proposal
whose initial investment is £1,200. In order to assess the viability of project Blue Island
restaurant have undertaken net present value and payback period method.
Calculation of Net Present Value:
Proposal 1:
Year Cash Inflow
PV Factor
@10% Discounted cash flow
1 £800 0.909 £727
2 £600 0.826 £496
3 £400 0.751 £300
4 £200 0.683 £137
5 £50 0.62 £31
Residual value £0.00 0.62 £0.00
Total Discounted
cash flow £1,691.00
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Less: Initial
investment £1,200
Net present value £491.00
Proposal 2:
Year Inflow
PV Factor
@10% Discounted cash flow
1 £300 0.909 £273
2 £400 0.826 £330
3 £500 0.751 £376
4 £600 0.683 £410
5 £500 0.62 £310
Residual value £50 0.62 £31
Total inflow £1,729.00
Less: Initial
investment £1,200
Net present value £529.00
According to the above mentioned table Blue Island restaurant will get £491.00 as a
margin after five years if they make investment in proposal 1. In addition to this, restaurant will
generate £529.00 after the period of five years if they make investment in proposal 2. On the
basis of this aspect Blue Island restaurant requires to make investment in proposal 2 which
provides higher return to them. Thus, proposal 2 proves to be more fruitful for an organization
from the perspective of higher profitability.
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Calculation of payback Period:
Proposal 1:
Year Inflow Cumulative inflow
0 -£1,200 -£1,200
1 £800 -£400
2 £600 £200
3 £400 £600
4 £200 £800
5 £50 £850
Residual Value £0 £850
Payback Period 1.5 Years
Proposal 2:
Year Inflow Cumulative inflow
0 -£1,200 -£1,200
1 £300 -£900
2 £400 -£500
3 £500 £0
4 £600 £600
5 £500 £1,100
Residual Value £50 £1,150
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Payback Period 3 Years
The mentioned calculation shows that restaurant will recover its initial investment within
the 1 year and 5 months if they make investment in proposal 1. After this period company is able
to make profit. In addition to this, Blue Island will take 3 years in retrieving their initial
investment. Thus, as per the payback period method Blue Island needs to select proposal 1 which
helps them in regaining their initial investment within the less period of time.
On the basis of the outcomes of investment appraisal techniques
TASK 4
4.1 Main financial statements of an organization
Financial statements reflect financial activities which are performed by an organization.
In addition to this, it also provides information about financial performance and position of an
organization (Schroeder, Clark and Cathey, 2011). Financial statements include cash flow
statement, income statement and balance sheet. These statements help organization in evaluating
their financial strategies and policies to ascertain financial results. Each and every organization
prepares following financial statements to assess its financial position and is as under: Income statement: This statement reflects the ability of management in relation to the
generation of profit. Income statement provides information regarding the profitability
generated by an organization over the expenses incurred by them. Income statement has
two sides namely; income and expenditure (Sueyoshi, 2005). Income side contains
interest received, commission received etc. Whereas expenditure side includes salaries,
office and other miscellaneous expenses etc. It enable manager to make assessment of
the area of expenses upon which requires to control. Through this, company is able to
improve their profitability aspect.
 Cash flow statement: Cash flow statements provide information to company about their
cash related activities. Cash flow statement furnishes information about the operating,
investing and financing activities of an organization.
Cash flow statement
Operating activities:
Electricity expenses xxx
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Salaries
Office expenses
xxx
xxx
Investing activities:
Purchase of building
Purchase of machinery
Sales of fixtures and furniture
Xxx
xxx
xxx
Financing activities:
Issuance of shares
Redemption of preference shares
xxx
xxx
 Balance sheet: It is the formal record of financial health and performance of an
organization. It has two parts namely; assets and liabilities. It provides information about
the capability of an organization in relation to the meeting of their financial obligations.
Assets side of balance sheet includes building, fixtures and furniture, bank, debtor etc.
Further, liabilities side includes share capital, bank loan, reserves, creditors etc.
4.2 Comparing formats of financial statements of different types of business
Different types of business organization prepare various types of financial statements to
assess their financial health and performance. Differences between the formats of financial
statements are as follows:
Type of business Features Financial statements
Exclusive ownership firm In this, individual is the owner of
firm who regulates and control
business activities by their own.
They prepare only the income and
expenditure account to assess
their profitability aspect (Sullivan,
2009).
Income and expenditure
Partnership firm In this, two or more persons come
together to share their profits and
Income statement
Cash flow statement
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losses on the basis of
predetermined ratio. They prepare
all the financial statements which
are prepared by public
institutions. Moreover,
partnership firm also prepares
partners capital account. It
provides deeper insight to
business partners about their
financial activities.
Balance sheet
Partnership firm
Public and private limited
organization
Public and private limited
organization prepares income and
cash flow statement as well as
balance sheet. In addition to this,
they also require to publish their
financial statement to the general
public as per the legal standards.
Income statement
Cash flow statement
Balance sheet
Non profit making
organization
They are those who work for the
well being of others. Thus, non-
profit making organization
prepare receipt and payment
account. It provides information
about the receipts generated by an
organization during the
accounting year.
Receipt and payment
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4.3 Interpreting the financial statements of Sweet Menu and Blue Island restaurant by using ratio
analysis
Ratio analysis may be defined as tool which helps finance manager in summarizing the
financial statements of an organization. Through this, stakeholders are able to assess the liquidity
and solvency aspect of an organization (Anheier and Winder, 2007).
Ratios Formula
Sweet Menu
Restaurant
Blue Island
Restaurant
Profitability ratio
Net Profit margin Net profit/sales 0.01 0.13
Gross Profit margin Gross profit/sales 0.63 0.66
Liquidity ratio
Current Ratio
Current assets/
current liabilities 1.78 0.63
Quick Ratio
Current assets –
Inventory/ current
liabilities 0.63 0.15
Efficiency ratio
Asset Turnover Net sales / net assets 1.79 2.4
Solvency ratio
Debt/equity ratio Debt/Equity 0.41 0.58 Profitability ratio: On the basis of the above mentioned aspect it has been that net and
gross profitability aspect of Blue Island restaurant is sound as compared to Sweet Menu.
Thus, Sweet menu needs to undertake promotional strategies and campaign to improve
their profitability aspect.
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 Liquidity ratio: Current and Quick ratio of Sweet Menu restaurant is very near to ideal
ration. This aspect shows that Sweet Menu have sufficient amount of current assets to
meet their financial obligations. Whereas liquidity aspect of Blue Island is very far from
the ideal ratio. Thus, Blue Island requires making control over their financial activities. It
helps Blue Island in improving their liquidity position or aspect. Efficiency ratio: The above mentioned ratio analysis reflects that Blue Island is highly
efficient as compared to Sweet Menu. Asset turnover ratio of Blue Island is 2.4 whereas
1.79 of Sweet Menu. It shows that Blue Island have made optimum utilization their asset
to generate sales as compared to Sweet Menu. Thus, Sweet Menu requires framing cost
effective strategies and policies which facilitate optimum utilization of financial
resources to the great extent.
 Solvency ratio: debt-equity ratio of both restaurants shows they have raised their large
amount of capital through equity shares rather than debt instruments. This aspect clearly
shows that Sweet Menu and Blue Island is highly solvent.
CONCLUSION
From this project report it has been concluded that Sweet Menu restaurant needs to raise
their finance but issuing equity share to the public. In addition to this, they also require to make
use of retained earnings to meet their financial need for expansion project. Besides this, it can be
inferred that financial planning helps in making effective utilization of financial resources to the
large extent. It can be seen in the report that Blue Island restaurant will get higher return if they
make investment in proposal 2. Thus, they are required to make investment in proposal 2 which
proves to be more beneficial for them. Further, it can be concluded that profitability aspect of
Blue Island restaurant is sound. In addition to this, Sweet menu restaurant requires to frame
competent strategies and policies to improve its financial health and performance.
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REFERENCE
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informative? Evidence from the ability of financial ratios to predict bankruptcy. Review of
Accounting Studies. 10(1). pp. 93-122.
Bentz, R. P., 2007. Acquiring and managing financial resources.
Cetorelli, N. and Strahan, P.E., 2006. Finance as a barrier to entry: Bank competition and
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Chandra, P., 2011. Financial management. Tata McGraw-Hill Education.
DRURY, C.M., 2013. Management and cost accounting. Springer.
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Efendi, J., Srivastava, A. and Swanson, E. P., 2007. Why do corporate managers misstate
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Hall.
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McGraw-Hill/Irwin.
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2011. Financial accounting theory and
analysis: text and cases. John Wiley and Sons.
Sueyoshi, T., 2005. Financial ratio analysis of the electric power industry. Asia-Pacific Journal
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