UGB163 Accounting and Finance: Financial Performance Analysis Report

This assignment analyzes financial statements, including the income statement and balance sheet, for Brimwell Ltd. It calculates depreciation, inventories, trade receivables, cash, prepaid expenses, equity, and trade payables. The assignment also assesses Piketown Ltd's financial performance using ratio analysis, including return on capital employed, operating profit margin, gross profit margin, current ratio, quick ratio, receivables collection days, payables payment days, and inventory turnover days. Furthermore, the assignment explores investment appraisal techniques, such as Net Present Value (NPV), payback period, and accounting rate of return (ARR), evaluating their benefits and drawbacks. The report concludes with an assessment of the investment's viability based on these methods.

INTRODUCTION TO ACCOUNTING AND FINANCE
UGB163
Christina Kalantzi 209273388
Module Tutor: Eirini Lazaridou
Year 2020-2021

Part A – Brimwell Ltd
annual van depreciation (i.s)
initial cost-resale value
30000-3000
= 5400 per year
Number of years 5
Inventories (final inventories-b.s)
total inventories bought cost of goods sold
(284000+46000)-(188000+21000) = 121000
Trade receivables (b.s)
net trade receivables= sales revenue from trade receivables-receipts from trade receivables-bad Debt
502000-463000-4600 = 34400
Cash (b.s)
initial equity (capital) 175000
rent paid -81250

rates paid -4700
delivery van -30000
Wages -72000
Electricity -5000
cash inventories -46000
cash sales revenue 66000
trade receivables cash receipts 463000
trade payable cash payments -246000
van expenses -53000
166
Prepaid expenses (b.s)
Rent 16250 (81250-65000)
rates
12 months 2700 225 (per month)
9 months (2020) 2025
3 months (2021)--prepaid 675
Equity (b.s)
capital (initial)+profits of the year 319975
Trade payables (b.s)

inventories on credit-payments of inventories
284000-246000= 38000
accrued expenses (expenses to be paid) (b.s)
wages 3600
electricity 1400
5000
sales revenue (i.s) 568000 (502000+66000)
cost of goods sold (i.s) 209000 (188000+21000)
gross profit (i.s)
sales revenue-cost of goods sold 359000
rates (as expense 2014) (i.s)
1/1-31/3/2020 2000 months
per
month
1/4/2020-31/3/2021 2700 12 225

1/4/2020-31/12/2020 2025 9
4025
wages (as expense 2020) (i.s)
75600 (72000+3600)
electricity (as expense 2020) (i.s)
6400 (5000+1400)
van depreciation (as expense 2014) (straight-line depreciation)
(30000-3000)/5= 5400
income statement (31/12/2020)
sales revenue 382000
(cost of goods sold) -209000
gross profit 359000
(rent) -65000
(rates) -4025
(wages) -75600

(electricity) -6400
(bad debts) -4600
(annual van depreciation) -5400
(van expenses) -53000
profit of the year 144975
Balance Sheet (31/12/2020)
Assets
Fixed assets (non-current assets)
property plant and eqipment
delivery van 30000
accumulated depreciation -5400
24600
current assets
inventories 121000
trade receivables 34400
prepaid expensed 16250
cash 166
171816
total assets 362975

Part B – Piketown Ltd
Return on capital employed (ROCE): Most firms (except limited ones) use return on capital employed (ROCE) as their primary
metric of overall success. It combines profit and capital. More capital could improve one is potential to prosper. The ROCE ratio
measures profitability by comparing the profit generated to the capital needed to manufacture it (Whiting, E., 1986)
ROCE= Operating profit x100
share capital +reserves +noncurrent liabilities
Equity and Liabilities
Equity
closing balance (INITIAL EQUITY+PROFITS OF THE YEAR) 319975
Liabilities
current liabilities
trade payables 38000
accrued expenses 5000
43166
total equity and liabilities 362975

2019 2020
609 x100 425 x100
966 1290
= =
63% 32,9 %
Operating profit margin: Operating costs (overheads) incurred in running the company (salaries and wages, rent, insurance and so on) are
deducted from the gross profit. The resulting figure is known as the operating profit (McLaney, E. J. and Atrill, P. 2018).
operating profit
margin= oparating profit margin x100
sales revenue
2019 2020
609 x100 425 x100
2450 3190
= =
24,8% 13,3%
The difference between the purchase price and the cost of the products sold is the gross profit. The gross profit margin represents the
additional revenue generated from an additional unit of sales. (Alexander, D. and Nobes, C., 2007)

gross profit margin=
gross profit
margin x100
sales revenue
2019 2020
1130 x100 1030 x100
2450 3190
= =
46% 32,2%
Current ratio: The current ratio is a liquidity ratio that assesses a company's ability to pay short-term or one-year obligations. It explains
to investors and analysts how a firm can use existing assets on its balance sheet to pay down current debt and other obligations. A
company's ability to pay existing, or short-term, liabilities (debts and payables) with current, or short-term, assets is measured by the
current ratio (such as cash, inventory, and receivables) (Krishnankutty, R. and Chakraborty, K.S., 2011).
current ratio= current assets
current liabilities
2019 2020

385 821
404 473
= =
0,95 1,73
Quick ratio/acid test ratio: The quick ratio, also known as the acid test ratio, is similar to the current ratio in that it only considers
extremely liquid current assets for paying current liabilities (NARAYANAN, V. G. and SRINIVASAN, S. 2017).
quick ratio/acid ratio= current assets(excluding inentories)
current liabilities
2019 2020
173 356
404 473
= =
0,42 0,75
Receivable’s collection days: A receivables collection period is a cash flow measure calculated by dividing average receivables by daily
credit sales. (Collins 2021).

receivables collection
days= trade receivables x365
credit sales
revenue
2019 2020
152 x365 322 x365
2450 3190
= =
22 days 36 days
Payable’s payment days: Days payable outstanding is a financial ratio that shows how long it takes a company to pay its bills and
invoices to its trade creditors, who may be manufacturers, retailers, or financiers. The ratio is usually measured quarterly or annually and
shows how well a company's cash outflows are handled (Agbo, E.I. and Nwankwo, S.N.P., 2018).
paybles payment
days=
trade paybles
x365
credit purchases
2019 2020
197 x365 232 x365

1320 2160
= =
54 days 39 days
Inventory turnover days: The inventory turnover ratio shows how long inventory stays in a company on average between purchases and
sales. Inventory should be attributed to cost of products sold (which is also at cost) rather than sales since inventory is priced at cost
(which are at selling price). This, too, means that the information is accessible (Alexander, D. and Nobes, C., 2007)
inventory turnover
days=
inventories held
x365
cost of sales
2019 2020
197 x365 232 x365
1320 2160
= =
54 days 39 days

The objectives of this report are to assess Piketown Ltd's profitability and efficiency in terms of various financial characteristics
expressed in accounting ratios. Ratio analysis is a popular method for assessing a company’s financial performance and success. This
report used profitability and efficiency ratios to evaluate the firm's results. These ratios allow for the estimation of the firm's profit
sources and severity. Profitability ratios are used to determine a company's sales or operating efficiency over a period of time. The
company's ability to obtain debt and equity funding, as well as its capital status and ability to expand, is influenced by its income, or lack
thereof. As a result, both borrowers and consumers have a say in deciding earning capacity and profitability. It can be measured with
respect to sales (return on sales), return on equity, and return on assets (Gibson 2013).
To begin with, since the previous year, the gross profit margin has decreased. Any of the potential causes are self-evident. For example,
the selling price may have been purposefully reduced, or the cost of products sold may have risen, but no decision has been taken to raise
selling prices in response. Alternatively, the sales mix may have changed, with a rise in the relative amount of low-margin goods
(Alexander, D. and Nobes, C., 2007). Operating profit margin shows that, in terms of operating costs, as opposed to any funding costs,
the company’s productivity improved significantly in 2020). Liquidity levels have declined over the last two years and are close to the
borderline expectation for a manufacturing firm. A company's short-term liquidity status is calculated by comparing the prices of its
current assets and liabilities (Ciaran walsh 2003). The gross profit margin and operating margin are both smaller the year 2019 than they
were the year 2020, which has a negative effect on the ROCE ratio. This may suggest a more dynamic market setting. For the inventory
turnover days, it seems that between 2019 and 2020bcostumer seem to be taking longer to pay in 2020. Moreover, the quick ratio has
decreased. Concerns have been raised about the company's ability to fulfill its short-term commitments. The safety or acceptability of any
given ratio for a given business is determined by the business's day-to-day operations. Each industry has its own organizational and
financial structure, which can vary greatly from one industry to the next, and measured ratios should be compared to competitor or
industry-wide statistics (Alexander, D. and Nobes, C., 2007). The overall ratios show that success in 2019 has been more challenging
than in 2020. The average receivables settlement period has significantly improved.

To conclude, it seems to me that liquidity and profitability are the keys for a company to succeed. While most business owners will spend
time poring over their company's financial statements, this is just the beginning of assessing and forecasting results. It also forces them to
make decisions solely based on their financial situation. And they can't see the big picture if they 're just looking at the numbers. When
conditions are strong, taking the time to maximize liquidity will provide the business with the stable cash flow and resilience it requires
to succeed.

Part c:
NPV Calculations
1/(1+r)^t
Year
cash
flows
discount rate
(14%)
present
value
0 -60000000 1 -60000000
1 18500000 0.877192982 16228070.17
2 18500000 0.769467528 14235149.27
3 18500000 0.674971516 12486973.05
4 18500000 0.592080277 10953485.12
5 18500000 0.519368664 9608320.284
6 26000000 0.455586548 11845250.24
NPV 15357248.13 >0 accepted
Payback period
Year
cash
flows cumulative cash flows
0 -60000000 -
1 18500000 18500000
2 18500000 37000000

3 18500000 55500000
4 18500000 74000000
5 26000000 100000000
pbp=3year+(60000000-55500000)/18500000
pbp=3year+(4500000)/18500000
pbp=3year+0,2432
pbp=3year+0,2432*12
pbp=3year+2,91
pbp=3year+3 months accepted
Accounting rate of return
depreciation
8750000 per year
average profit
11000000
average investment

 This investment seems to be a viable option.
 Payback period tends to be appropriate because it returns the money before the 6 th year.
 Since ARR is higher than the cost of money, investment appears to be feasible.
 The NPV is positive, so this investment will be profitable.
B. This report outlines and evaluates the major benefits and drawbacks of various investment assessment techniques. The net present
value is described as the sum of the present values of the incoming (benefits) and outgoing (costs) cash flows for a time. The NPV is the
contrast between the sums of discounted cash inflows and outflows. (Gaspars-Wieloch, 2017). According to the investment viability
33750000
ARR=51625000/13000000 0.325925926 32.59259259 % > interest rate accepted

assessment method based on NPV, a cash flow now is more beneficial than an equal cash flow in the future, since a present flow can be
spent immediately and continue collecting dividends, while a future flow cannot (Berk et al. 2015). Because of its advantages, the NPV
method is widely used. To measure the current values of future cash flows, the cost of capital (or minimum necessary rate of return) is
used as the discount rate (Shim Ph.D. & Siegel Ph.D., 2008). If the project produces a positive outcome, it is approved since the net
present value exceeds the project's initial cost. To begin, NPV assumes that all cash inflows are reinvested at the appropriate rate of
return. Second NPV measures profitability in absolute manner (Heitger, Mowen, & Hansen, 2007). The most important feature of the net
present value method is that it assumes that future dollars are worth less than real bank dollars. To calculate the worth of future cash
flow, it is discounted down to the present (small business 2019).The most important drawback of estimating a company's cost of capital
using the NPV is that it requires making informed guesses about future cash flows (small business 2019). The NPV indicator shows the
absolute value of the effect. Alternative investment sizes are not considered. Secondly, the indicator has a high reliance on the discount
rate chosen. Future cashflows have little impact on the NPV when the discount rate is high. Furthermore, the discount rate cannot always
be determined objectively. Finally, it does not indicate the feasibility (effectiveness) of an investment project as an absolute predictor.
(Bora, B., 2015).
The payback period is known as the time it takes for the working cash surpluses produced by a particular investment to equal the capital
amount invested in total (Maroyi, V., 2011). This approach measures annual earnings from the start of a project until the accumulated
incomes exceed the asset's expense, at which point the investment is said to have been repaid (Awomewe & Ogundele 2008). There are
some advantages and disadvantages regarding the payback period. According to the article the importance of the Payback method in
Capital budgeting decision (Awomewe & Ogundele 2008) these are the advantages of payback period: Although it does not handle risk
directly, it helps a financial planner to deal with risk by examining how long it would take to recoup initial investment, It is still an
important auxiliary method in investment research, It is commonly used and easy to comprehend, It promotes company growth, reduces

risk, and increases liquidity. These are the disadvantages: It is subjective, ignores overall profitability after the payback period, and
ignores the time value of money – there is no simple investment signal.
The estimated project gain after taxation and depreciation is divided by the average book value of the investment over the investment's
lifetime (Davies, T., and Crawford, I.P., 2011). According to a report by Soni (2006), using ARR has the following advantages: Since the
approach relies on data from the books of accounts, there is no need to do any calculations. This approach can be used to assess the
performance of assets and even subsidiaries of a corporation. The disadvantage is that it is calculated based on accounting profit rather
than cash flows. It is also a relative rather than an absolute indicator, so it does not take the scale of the investment into account. And
finally, it ignores the time value of money, much like the payback method. (Drury 2004).
The rate at which the amount of discounted cash inflows equals the sum of discounted cash outflows is known as the internal rate of
return. It is the rate of return that equalizes the current value of cash inflows and cash outflows. Since the discount rate in this system is
unknown, the cash inflows and outflows are. The rate must be found to calculate the IRR. According to the article e- finance
management (29 feb, 2012) the advantages of IRR are: time value of money, simplicity, no requirement of find hurdle rate and that
managers make a rough estimate of required rate of return. According to Mackevičius, J. and Tomaševič, V., 2010 the disadvantages of
IRR are: Economies of scale are ignored, and an impractical implicit reinvestment rate is assumed. Projects that are dependent or
contingent, Projects that are mutually exclusive. Future cash flows that are both positive and negative, it is not possible to calculate the
IRR. The aim of wealth maximization is to make as much money as possible. The difference between the Internal Rate of Return (IRR)
and the Rate of Return (RoR).
To conclude, I believe that the best method is net present value because it determines the present value of cash flows based on the
opportunity cost of capital and the value that will be added to the shareholders' equity if the project is completed.

C. The report contains the relevant details concerning the key benefits and limitations of using budgets as a method for strategic
planning. Although it varies by company, planning plots the company's course over time to achieve a specific goal, such as increasing
profitability. Budgeting is important for maximizing resource efficiency and achieving overall corporate goals. Dropkin, M., Halpin, J.,
and La Touche, B. (2011) define a budget as a plan for getting and saving funds in order to achieve specific goals by a given deadline.
Maddox (1999) goes a step further, defining five distinct purposes for the budget in not-for-profit organizations: executing corporate
strategy, allocating money, offering benefits, exercising power, and interacting with internal and external audiences. Financial budgeting,
according to Kaliski et al. (2007), is the identification of sources and outflows of funds for budgeted activities as well as planned
operating results for the year. According to Shim, J.K., Siegel, J.G. and Shim, A.I., 2011 It provides the following benefits: Budgeting
allows for a proactive and disciplined approach to problem-solving in the workplace, as well as for management to decentralize oversight
while retaining control of the business. It easily identifies operational defects, inefficiencies, and variations that can be solved in order to
meet a specific goal, and it aids in the efficient allocation of capital and other services to the most productive networks. According to
Barsky and Bremser (1999), the ability to optimize the present value of potential cash flows to corporate shareholders is a measure of
shareholder value performance. Whatever new word is invented to describe a process that includes the use of financial forecasts, the
same thing can also be classified as budgeting. Of course, there is a link between financial data. The principle of net present value is used
in capital budgeting to make cash flow projections. Budgeting, which applies to planning in general, will not be eliminated by capital
budgeting. The authors listed that "economic value added (EVA)" has become a common "management performance indicator." Since
the government is a corporation, it should stand to reason that having budgeting as part of the framework is advantageous. It is difficult to
imagine how the government organization can regulate and maintain deficits without budgeting. The argument made by Wildavsky
(2001) is that budgeting can be used to manage inflation by limiting budget deficits.
Although budgeting serves several purposes and offers various benefits to an organization, it still has some limitations that must be
considered. One disadvantage of using budgets is that managers can make myopic decisions because they can only care about the short

term and neglect the long term (Otley, 1978). In the report, Neely et al. (2001) agrees with the last point but add further disadvantages:
the time taken to plan the budget, the little value created when considering the time required to create the budget, the emphasis on cost
reduction rather than value creation. Most budgets are created and updated once a year, which is not the best time frame, they should be
created and updated more frequently, with budget restrictions, vertical command and control tightens. According to Hope & Fraser
(2003), a budget can be far from fact, but this can be due to insufficient organizational structure, a lack of historical evidence, a lack of
cost system, or poor management. Finally, Jordan (1999) mentioned that budget issues will occur if the company is not well coordinated
by divisions or if the goals or action plans are not well specified.
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