Accounting and Finance Assessment: Financial Statement Analysis

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Accounting and Finance Assessment
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Table of Contents
Part A: Financial Statements...........................................................................................................3
Part B: Reckturk Plc........................................................................................................................4
a) Contribution.............................................................................................................................4
b) BEP and MOS (in units and revenue).....................................................................................4
c) Calculation of profit if sales is 54000 units for £ 40 per unit..................................................5
d) Sale price rise by 8% and unit increase by 15%......................................................................5
e) Assumptions of BEP...............................................................................................................5
Part C: Roseville Plc........................................................................................................................7
a) Calculations of Net present value, payback period and Accounting rate of return.................7
b) Merits and demerits of NPV, ARR and PBP...........................................................................8
c) Merits and demerits of budgets.............................................................................................10
References......................................................................................................................................12
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Part A: Financial Statements
Income statement:
Statement of Income
For the year ended 321st Dec. 2018
Particular Dr Particular Cr
Rent 135000 Sales
Tax 2880 Cash 90000
Tax 4050 Credit 313200
Depreciation 11000 Receipts from debtors 525600
Wages 140400
Electricity expenses 6840
Electricity charges 2430
Bad debts 1800
Payment to Trade payables 471600
Running expenses 40320
Net profit 112480
Total 928800 Total 928800
Statement of balance sheet:
Balance Sheet
As at 31st Dec. 2018
Liabilities Amount Assets Amount
Share Capital 216000 Bank 216000
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Outstanding wages 2610 Less: purchased of van 72000
Creditors for inventory 583200 Less: cash inventory 46800 97200
Advance tax 1350
Prepaid Rent 27000
Van 72000
Less: depreciation 11000 61000
Inventory 630000
Total Total
Assumption: It is assumed that the tax for the months April 2018 to March 2019 is same
distributed among all the quarters which is 1350 for each quarter.
Working note:
Tax for remaining 1
quarter 1350
tax for 3 quarter 4050
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Part B: Reckturk Plc
a) Contribution
PARTICULARS AMOUNT
SALES 2400000
less: VARIABLE
COST
MATERIAL 945000
LABOUR 531000
VARIABLE
OVERHEAD 333000
CONTRIBUTION 591000
less: FIXED COST
PRODUCTION 177000
SELLING 142800
PROFIT 271200
b) BEP and MOS (in units and revenue)
BEP (in units)
BEP in units
Fixed cost/
contribution
319800
9.85
32467.00508
BEP in (£)
BEP in £
Sales/unit *
BEP in units
40* 32467
1314680
MOS (in units)
Margin of
safety units
profit/contribution
271200/9.85
27532.99492
MOS (in £)
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Margin of safety £
Sales - BEP
2,400,000 -
1,314,680
1085320
c) Calculation of profit if sales is 54000 units for £ 40 per unit
PARTICULARS AMOUNT
SALES 2160000
less: VARIABLE COST
MATERIAL 850500
LABOUR 477900
VARIABLE
OVERHEAD 299700
CONTRIBUTION 531900
less: FIXED COST
PRODUCTION 177000
SELLING 142800
PROFIT 212100
d) Sale price rise by 8% and unit increase by 15%
PARTICULARS Units
Per
unit
SALES
5400
0 43.2
233280
0
less: VARIABLE
COST
MATERIAL
5400
0
15.7
5 850500
LABOUR
5400
0 8.85 477900
VARIABLE
OVERHEAD
5400
0 5.55 299700
CONTRIBUTION 704700
less: FIXED COST
PRODUCTION 177000
SELLING 277800
PROFIT 249900
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e) Assumptions of BEP
The entire break event point or system is totally exclusively based on a series of assumptions, it
means break even pint or analysis include various assumptions on which the break even analysis
conducted. Following are the assumptions on which break even analysis is based:
 Entire costs must be in such a manner that can be segregated into variable and fixed
components.
 Not change in the behavior of costs
 The prices which are to be paid for various factors should be remain equal.
 Income and cost are can be compared on common activity
 No change in any the methodology which is accepted for production, no change in man
power, etc.
 No change in selling price even if the supply of product changes.
 Constant price of sale should be taken (Nagarajan, and Visagamoorthi, 2018).
 Sum of all fixed costs must be same at each level of production
 Sum of all variable cost changes according to the output proportion
 Input price of elements such as material;, rent, wages and other are constant.
Advantages:
 This method aid company to measure profit or losses of business at several levels of
productions and also sales.
 Enable to forecast the effect of changes in selling price in future period.
 Establish a relation between the fixed cost and variable and then enable to analysis them.
 Forecast change in cost (Ionescu, and Dumitru, 2015).
 Profitability changes efficiency can be predict from this.
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Part C: Roseville Plc
a) Calculations of Net present value, payback period and Accounting rate of return
Net Present Value
Y
e
a
r
Investmen
t
Annual
cash
Outflow
Deprecia
tion
Annual
Cash Inflow
Net Cash
inflow
COC
@ 9%
Discounted
Cash Flows
0 8,000,000 - - -
(8,000,000
) 1.00 (8,000,000)
1 - 1,280,000
1,400,00
0 3,400,000 720,000 0.917 660,240
2 - 1,280,000
1,400,00
0 3,400,000 720,000 0.841 605,520
3 - 1,280,000
1,400,00
0 3,400,000 720,000 0.772 555,840
4 - 1,280,000
1,400,00
0 3,400,000 720,000 0.708 509,760
5 - 1,280,000
1,400,00
0 3,400,000 720,000 0.649 467,280
5 1,000,000 - 1,000,000 0.649 649,000
NPV (Net present
value) (4,552,360)
Accounting rate of return
ARR = Average Net profit X 100
Avg. investment
ARR = 720,000 X 100
4,500,000
ARR = 16
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Average Investment = (Initial Investment + Salvage
Value )/2
Average Investment = 4,5
00,000
Payback period
It is not possible to calculate payback period in this case because of the time in which the
company recover it cost of new machines is not possible within the given time. This is due to for
all the given 5 years company only able to generate and recover cost is £ 4,600,000 (including
salvage value which is 1,000,000) while the initial outlay of investment is £ 8,000,000 which is
more than the cost of recovering amount. The biggest reason of non-calculating payback period
is because the net present value of the company for the project investment is negative. Therefore,
payback period is not computed.
Recommendation
On the basis of accounting rate of return, it is recommended to the management of the company
that it should be consider investment project for buying new machines. The management of the
company select this investment appraisal because it shows positive value and the rest method i.e.
net present value is shown negative which is ignore for considering investment purpose. The
ARR is 16% while the cost of capital is 9%, as compare both values it is seen that value of ARR
is more than value of cost of capital. Hence the investment for purchasing new machines for £
8,000,000 is benefitted to the company.
b) Merits and demerits of NPV, ARR and PBP
Net Present Value:
This is a method of investment appraisal which is decided whether the decision for considering
the buying of assets for long term is beneficial or not. This technique is widely used by the
company because the outcome from this method is more accurate as compared rest methods of
investment. But sometimes this method is also difficult for calculate present value of cash
inflows as the conditions changes (Berlin, et. al., 2018). To understand benefits and limitations
of this method is are follow which helps in understanding:
Demerits:
 It is based on the future cash inflows which is totally depends on estimated values
 Deciding of cost of capital also become difficult.
 This method is only being considered in a situation if the life of machine remains
constant means not fluctuates.
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 Suffer from long and lengthy calculations so it need more time to compute. In other
words, it is a time consuming method (Hallstedt, et. al., 2015).
 Suitable when the amount of other mutual project is equal.
 Lack of guidelines which aid in determining the required rate of return from project.
 Lack of showing hidden cost
 Unable to make a comparison between different size of project.
Merits:
 This method is treated as an important method for the purpose of increase net worth
or value of enterprises.
 This method is an appropriate method due to it is taken risk and profit factors while
calculating net present value of project.
 It is important also in terms of considering time value of money; means provide
present value of cash inflows after considering future inflows and then convert it into
present value by the multiplication of cash inflow for particular year to present factor
of cost of capital for the same year (Hallstedt, et. al., 2015).
 This method aid management to make their decisions.
 Consider both before and after cash inflow after complete the propjet.
Payback period:
This is also another method of investment appraisal. Use of this method when company want to
see whether the cost of initial outlay can be cover up to the life of project or need some extra
years in order to cover entire amount of investment. This method offers various advantages along
with disadvantages which are as in below:
Merits:
 Easy to use.
 Easy to take decisions.
 Simple calculations are needed to calculate.
 Aid management to analysis future risk and also profits due to it is based on cash inflow
at present time by comparing the payback period and life of project.
 Easy to understand (Gorshkov, et al., 2016).
 Includes simple and easy steps for calculating payback period.
 Aid managers to go to choose best project by seeing payback period (in years).
Demerits:
 Sometimes decision taken on this method faced difficult situation because in sometime
the cash inflow is less before the payback period but after the payback period cash inflow
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is more generated and on this basis this method is dropped for the project investment
(Gorshkov, et al., 2016).
Accounting Rate of Return
Merits:
 This method is considered as an easiest method.
 Simple calculation, easily understandable
 No time consuming
 Not consume more business resources such as man, material and other
 Easy process (Lara, et. al., 2015).
 Considered as an important method due to it take into the account of EAT (earnings after
tax).
 Assist to make good and appropriate decisions
 Assist in analyzing profitability
 Satisfy owners and other stakeholder’s interest by providing dividend.
Demerits:
 Consider useful in case when investment made on same proposed investment project./
 While calculating profit from this method it not takes terminal value of project
investment.
 This method not provides an importance to cash inflow which is the key element of any
project investment.
 Not suitable in case if one project is calculated by using ARR method and other is
calculated by some other method.
c) Merits and demerits of budgets
Budget is a company written statement in which the company future income and expenses are
recorded in order to execute business plans accordingly and achieved the set targets. This is also
being aid in make comparison between the actual and budgeted plans outcomes.
Merits:
 Main advantage of budget as it aid in establishing proper coordination and
communication between the departments.
 It convert strategic plans of business into the action.
 It aid in providing business activities.
 It assists and aid managers to allocate business and other resources in appropriate
manner. This is done in good manner due to all the department requested are clarified and
justified (Ren, et. al., 2016).
 It facilitates to take correct step through the reallocation process.
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 Create a path for managers to take participation actively.
 Provide a base for make a comparison between the results and plans.
Demerits:
 Planning, prediction is not a science. All the data are based on guess process. It contains
various judgmental plans for budgeting.
 This is costly as it need to an experience person who can handle and manage all the
budgeted activities in good manner and analysis them properly.
 It is not a target; it means it is only a source which provides guidelines how to achieve
business goals (Aversano, 2016).
 It is a tool of management so it cannot take the place of management in any time.
 Faced problems when budgets are applied mechanically and rigidly.
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