Accounting and Finance: Investment Appraisal and Budgeting

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Introduction to Accounting and Finance Assessment
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Table of Contents
Part A: Yarnshaw Limited...............................................................................................................3
Part B: Reckturk Plc........................................................................................................................6
Part C: Roseville Plc......................................................................................................................11
Reference list.................................................................................................................................18
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Part A: Yarnshaw Limited
Prepare a Statement of Income for the year ended 31st December 2018 and a Statement of
Financial Position as at 31 December 2018 for Yarnshaw Limited.
Depending upon the costs and expenses along with the sales revenue that the newly trading
business Yarnshaw Limited has spent and earned during the year 2018, the following financial
statements have been developed for the company for the period ending December 31st, 2018 -
Statement of Profit & Loss of Yarnshaw Limited
For the period ending December 31st, 2018
Particulars Amount Amount
Revenues earned from sale of goods £ 759,600.00
(-) Cost of sales £ 356,400.00
(+) Closing inventories £ 273,600.00
Gross income £ 676,800.00
(-) Operational expenditure
Total payment of rent to owner of premises £ 135,000.00
Expenses for running van £ 40,320.00
Payment of wages to employees £ 140,400.00
Depreciation charged over delivery van £ 11,000.00
Payment of electricity bills £ 6,840.00
Credit customer turned out as bad debt £ 1,800.00
Total operational expenditure £ 335,360.00
(+) Prepaid rent expense £ 27,000.00
(-) Amount of outstanding wages £ 2,610.00
(-) Amount of electricity bills of last quarter outstanding £ 2,430.00
Operating income (Income before taxes) £ 363,400.00
(-) Amount of taxes (business rates) £ 8,280.00
(+) Taxes (business rates) for 2019 paid in advance £ 1,350.00
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Net profit (Income after taxes) £ 356,470.00
Table 1: Income Statement of Yarnshaw Limited
(Source: Learner)
Notes to financial statements -
1. Revenues earned from sale of goods = Credit sales + Cash sales = £ 604800 + £ 154800 =
£759600
2. Cost of sales = Cost of sales made on credit + Cost of sales made in cash = £ 291600 + £
64800 = £ 356400
3. Closing inventories = Inventories purchased on credit + Inventories purchased on cash -
Inventories sold on credit - Inventories sold in cash = (£ 583200 + £ 46800) - (£ 291600 + £
64800) = £ 630000 - £ 356400 = £ 273600
4. Depreciation charged over delivery van = (Total value of delivery van - Residual value of
delivery van) / 6 years = (£ 72000 - £ 6000) / 6 = £ 66000 / 6 = £ 11000
5. Prepaid rent expense = Total amount of rent paid during the year - Annual rate at which
premises had been taken on rent from January 1, 2018 = £ 135000 - £ 108000 = £ 13000
6. Taxes (business rates) for 2019 paid in advance = (£ 5400 / 12) * 3 months = 450 * 3 = £ 1350
7. Gross income = Revenues earned from sale of goods - Cost of sales = £ 759600 - £ 356400 =
£ 273600
8. Operating income = Gross income - Operational expenditure + Prepaid expenditure -
Outstanding expenditure = £ 676800 - £ 335360 + £ 27000 - £ 2610 - £ 2430 = £ 363400
Statement of Financial Position of Yarnshaw Limited
As at December 31st, 2018
Particulars Amount Amount
Assets
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I. Current assets
(a) Inventories in hand £ 273,600.00
(b) Trade receivables £ 525,600.00
(-) Bad debts realised £ 1,800.00 £ 523,800.00
(c) Cash & cash equivalents £ 162,360.00
(d) Prepaid rent expense £ 27,000.00
(e) Taxes (business rates) for 2019 paid in advance £ 1,350.00
Net current assets £ 988,110.00
II. Non-current assets
(a) Delivery van £ 72,000.00
Less: Depreciation charged over delivery van £ 11,000.00 £ 61,000.00
Net non-current assets £ 61,000.00
Total assets (I+II) £ 1,049,110.00
Liabilities & Equity
III. Current liabilities
(a) Amount of outstanding wages £ 2,610.00
(b) Amount of electricity bills of last quarter
outstanding
£ 2,430.00
(c) Trade payables £ 471,600.00
Net current liabilities £ 476,640.00
IV. Non-current liabilities -
Net non-current liabilities Nil
V. Shareholders’ fund
(a) Equity capital £ 216,000.00
(b) Net profit (Income after taxes) [carried forward
from the statement of profit & loss]
£ 356,470.00
Net shareholders’ fund £ 572,470.00
Total liabilities & equity (III+IV+V) £ 1,049,110.00
Table 2: Financial Position Statement of Yarnshaw Limited
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(Source: Learner)
Part B: Reckturk Plc
(a) What is the contribution that each wardrobe makes towards covering fixed costs if it is
sold for £40?
In the following discussion, there is a presentation made on the calculations performed to
compute the entity Reckturk Plc’s contribution from its wardrobe based on a per unit basis -
Prices at which wardrobes are sold = £ 40 for each of the units
Variable expenses that have been incurred for the wardrobes = £ (5.55 + 15.75 + 8.85) = £30.15
Contribution of the entity for each of the units
= Prices at which wardrobes are sold - Variable expenses that have been incurred for the
wardrobes
= £40 - £30.15
= £9.85
(b) What is the break-even point and margin of safety in terms of both units of wardrobe
and revenue if each wardrobe is sold for £40?
In the following discussion, there is a presentation made on the calculations performed to
compute the entity Reckturk Plc’s breakeven point based on units as well as revenues -
Contribution of the entity for each of the units = £9.85
Total value of fixed expenditure = £142800 + £177000 = £319800
Prices at which the entity will be selling each of its unit of wardrobe = £40
Therefore,
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Breakeven point (BEP) in terms of revenue = £319800 ÷ (9.85 ÷ 40) = £319800 - 0.2462 =
£1298680.2
On the contrary, Breakeven point (BEP) in terms of units = 319800 ÷ 9.85 = 32467.005 = 32467
units
Reckturk Plc’s margin of safety
= Revenues earned in the current situation - 100 * BEP in terms of revenue ÷ Revenues earned in
the current situation
= 2400000 - 100 * 1298680.2 ÷ 2400000
= 110131980 ÷ 2400000
= 45.888%
= 45.89%
Therefore, the discussion above provides an insight that the sales revenue of Reckturk Plc has to
be 1298680.2 for achieving breakeven whereas the sales units have to be 32467 units in order to
reach the breakeven point. On the other hand, the margin of safety for the entity is found to be
45.89%.
(c) Calculate the profit the company makes if it produces and sells 54,000 wardrobe at £40
per wardrobe.
According to the budget of Reckturk Plc, the entity would be selling 60000 wardrobes during the
span of the upcoming year. However, if the entity sells a volume of 54000 units and the selling
price stays the same at £40, the following is going to be the profit that the entity would be
earning -
Revenues earned from sale of wardrobes =
Net amount of costs spent =
Thus, total level of profits to be earned in Reckturk Plc
= Revenues earned from sale of wardrobes - Net amount of costs spent
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= 2160000 - 1947900
= £212100
Therefore, if the entity sells a volume of 54000 units and the selling price stays the same at £40,
the profit that the entity would be earning will be amounting to £212100.
(d) Reckturk Plc is considering whether to spend £135,000 on marketing and advertising
but consequently raising the selling price by 8%. At this new sales price and with the
advertising, sales level (in units of wardrobe), as planned in (c) above will increase by 15%.
Analyse whether this is a good strategy for Reckturk Plc?
In the current scenario, a strategy has been developed within the context of Reckturk Plc that
states that an amount of 135000 pounds would be spent over marketing and advertisements and
this amount is going to be a fixed expense for the entity. However, this strategy of the entity
would lead to an elevation of the selling price of the entity by a margin of 8% along with
enhancing the sales level by a margin of 15%. Considering this strategy, the following is going to
be the sales revenue and profits of the entity -
Total value of fixed expenditure = £142800 + £177000 + £135000 = £454800
Total value of variable expenditure = £30.15 * 60000 = £1809000
Prices at which the wardrobes will be sold = 8% * 40 + 40 = 3.2 + 40 = £43.2
Thus, total units that will be sold (according to the plan in part c)
= 15% * 54000 + 54000 = 8100 + 54000 = 62100
Consequently, the sales revenues of Reckturk Plc = 62100 * 43.2 = £2682720
On the other hand, the net profit that Reckturk Plc would earn = £2682720 - £454800 -
£1809000 = £418920
Therefore, it can be seen that considering the strategy, which the Reckturk Plc has proposed, will
be leading the entity towards earning a higher level of profit with the figure being 418920 along
with the total sales revenue being 2682720. However, in case if this strategy is not adopted and
no investments are made on marketing and advertisements, the entity will be having profits
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worth 212100 that is about 206820 lesser than the profits that it would be earning if the strategy
is adopted. Hence, due to increase in both the sales revenues and sales level along with an
increase in the profit levels of Reckturk Plc because of the adoption of the strategy, it can be said
that it is an effectual and good strategy.
(e) Identify and explain the underpinning assumptions attached to the break-even model
including analysing whether the model can successfully be utilised by a range of differing
businesses.
The breakeven model is a globally adopted and applied tool in the field of financial management,
as it assists in differing such as analysing relations amongst fixed and variable expenses,
prediction of the effect of changes occurring within sales prices and such ways (Drury, 2015).
However, attached with the breakeven model, there is a number of underpinning assumptions,
which include the ones mentioned below -
 In businesses that use breakeven model, there lie only two sorts of expenses - fixed and
variable.
 Fixed expenditure of an entity remains consistent and unaltered irrespective of alterations
occurring within the output level.
 Alterations can be occurring in the entity’s variable expenditure but it would be
proportionate directly to the entity’s volume of outputs.
 There is not going to be taking place any sort of alterations in the prices at which the
entity sells its goods.
 The entity using this model possesses only one product mix and there does not take place
any sort of alterations in the product mix.
 The productivity that every employee within the entity would be having is going to stay
unaltered and unchanged if the breakeven model is used.
 At the same time, there will not be any sort of closing stock in the entity. The stocks
produced in the entity would be equivalent to the stocks that have been sold within it.
However, this model is neither ideal for nor successfully usable for every business organisation
around the world and the reason behind this is the wide-ranging unrealistic assumptions that are
underpinned within it (Atrill and Mclaney, 2012). For instance, all business organisations have
certain amount of semi-fixed expenses such as electricity bills cannot be the same every month, a
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part of them is fixed and the other part is variable, because of which it is not ideal for every
business organisation. On the other hand, one of the basic strategies using which business
organisations are enabled to maintain and enhance their market share is via product
diversification. However, it is an underpinned assumption in the breakeven model that a business
possesses only one product mix and there does not take place any sort of alterations in the
product mix, which is yet again unrealistic (Glautier and Underdown, 2010). Thus, business
entities two or higher product mix cannot use the method.
Contrastingly, it is assumed in the breakeven model that there will not be any sort of closing
stock in the entity and the stocks produced in the entity would be equivalent to the stocks that
have been sold within it (Watson and Head, 2013). Almost every business organisation across
the world has a number of stocks left in hand and it is not possible to produce the exact same
volume of goods that it would be selling. Thus, for all these reasons, the breakeven model cannot
be utilised successfully within differing kinds of businesses.
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Part C: Roseville Plc
(a) Calculate the Payback Period, the Accounting Rate of Return, and the Net Present
Value of the machine, and provide recommendations as to whether Roseville Plc should
buy the machine.
Payback period computation
Particulars 1st
Year
2nd
Year
3rd
Year
4th
Year
5th
Year
Cost of machinery purchasing -
8000000
Total value of cash inflowing
within the entity (3400000 -
1280000)
212000
0
212000
0
212000
0
212000
0
212000
0
Total cumulating cash inflowing -
588000
0
-
376000
0
-
164000
0
480000 260000
0
Table 3: Table used for payback period calculation
(Source: Learner)
Payback period
= Last year displaying negative cumulating cash inflowing into an entity + (Net cash flowing
into it during this period / Cash actually flown into the entity during the successive period)
= (1640000 / 21200000) + 3
= 0.7735 + 3
= 3.7735 years
= 3.77 years
Accounting rate of return computation
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Particulars Net value of
cash inflowing
Net value of
cash out
flowing
Net cash
remaining in
hand (Inflow -
Outflow)
Year no. 1 3400000 1280000 2120000
Year no. 2 3400000 1280000 2120000
Year no. 3 3400000 1280000 2120000
Year no. 4 3400000 1280000 2120000
Year no. 5 3400000 1280000 2120000
Table 4: Table used for accounting rate of return calculation
(Source: Learner)
Thus, total cash in Roseville Plc from the machine = 5 * 2120000 = 10600000
Net profit attained in the 5 year span = 10600000 - 7000000 = 3600000
Average amount of profit earned = 3600000 / 5 = 720000
Contrastingly,
Average amount of investment or machine purchase cost = (1000000 + 8000000) / 2 = 4500000
As a result,
Accounting rate of return
= 100 * Total profit earned on an average / Total investment on an average
= 100 * 720000 / 450000
=100 * 0.16
= 16%
Net present value computation
Particulars Year Year Year Year Year no.
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