Accounting and Finance: Financial Analysis and Investment Appraisal

This report provides a comprehensive analysis of accounting and finance concepts, including the preparation and evaluation of an income statement and financial position for Tom and Jerry Limited. It calculates break-even points and margins of safety, assesses the impact of advertising strategies on profitability, and discusses the limitations of the break-even model. Furthermore, the report calculates and recommends investment appraisal techniques such as Net Present Value (NPV), payback period, and Accounting Rate of Return (ARR) for Bimbagu Plc, concluding with a recommendation to invest in the machinery based on the positive NPV and other factors. The analysis includes detailed calculations and justifications for each technique, offering a thorough understanding of financial decision-making.

Introduction to Accounting
and Finance

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
QUESTION 1...................................................................................................................................3
QUESTION 2...................................................................................................................................5
a) .................................................................................................................................................5
b)..................................................................................................................................................5
c)..................................................................................................................................................7
d)..................................................................................................................................................7
e)..................................................................................................................................................8
QUESTION 3...................................................................................................................................9
c)..................................................................................................................................................9
Question 4......................................................................................................................................11
Calculating investment appraisal techniques.............................................................................11
Analyses the key merits and limitations of the differing investment appraisal techniques. .....13
REFERENCES..............................................................................................................................15

QUESTION 1
Income statement for the year ended 31st December 2020
Particulars Amount
Net sales 633000
Less: Cost of goods sold 297000
Wages 119175
Gross profit 216825
Less: Indirect expenses
Rent 90000
Electricity bills 7725
Van running expenses 33600
Bad debt 1500
Depreciation on van 9600
Tax 5775
Net profit 68625
From the evaluation of above prepared income statement it can be interpreted that Tom
and Jerry Limited is earning good amount of profitability. There are various expenses that are
paid by organization for having sufficient capabilities to have smooth functioning. Preparing the
income statement that helps in gaining proper ability to identify the crucial insights that
regarding income and expenses that are incurred by firm for having appropriate function in turn
getting appropriate amount of market position can become possible. To have reliable and
relevant information that can be shared with stakeholders of company it becomes essential for
the specified organization to formulate income statement by involving all relevant expenses
associated with particular specified period. In addition to this, it can be specified that there are
several benefits that can be obtained by particular organization through proceeding like this. Tom
and Jerry Limited can be benefited by focusing on gaining proper understanding regarding the

amount of expenses incurred by firm for achieving proper smooth functioning in turn higher
profitability and sustainability can be derived.
From the evaluation of above presented income statement it can be interpreted that tax,
rent, van using expense, etc are few indirect expenditure are paid by specified firm for having
appropriate ability to gain proper ability to have sufficient liquidity for have relevant processing.
Financial Position as at 31 December 2020
Assets Amount
Current assets
Prepaid rent 22500
Prepaid tax 1125
Inventory 39000
Trade receivables 436500
Fixed asset
Van 50400
Total 642675
Liabilities
equity 180000
net profit 67500
Out sanding wages 2175
Trade payable 393000
Total 642675
The above illustrated table formulated for the year ending 31 December 2020 indicating
that there is sufficient liquidity that helps in getting balance in overall proceeding of company.
In the assets side of prepared financial position there is availability of both current and fixed
assets for having higher level of smooth functioning. On the basis of formulated balance sheet it
can be articulated that there is as well presence of short term as well long term liabilities that
includes trade payables, etc. on the basis of this, it can be interpreted that there are several

reasons for which preparing the financial statement can be beneficial for the specified
organization as allows getting summarized details of transaction conducted for annual period. In
addition to this, it can be stated that equal balance in overall practices of firm can be achieved. It
is required that company should largely concentrate on overcoming the prevailing obligations so
that higher stability in turn can be derived. It can be identified that there is much requirement to
formulate balance sheet so that appropriate extent of trustworthiness and credibility can be
maintained.
QUESTION 2
a)
Particulars Amount £
Selling price 13
Variable Costs (per unit)
Materials 5.25
Labour 2.95
Variable overheads 1.85
Contribution per unit 2.95
contribution that each electric kettle is £2.95
b)
Break even point (In units) = fixed cost / (selling price cost per unit- variable cost unit)
Particulars Amount £
Fixed costs 106600
SP per unit 13
VC per unit 10.05

Break-even point (In units) 36135.59
From the above prepared table it can be interpreted that break even point that specified firm
should obtain for having no profit or loss situation is 3636 units.
Break even points (In revenue)= fixed cost / contribution margin per unit
Particulars Amount £
Total revenue 689000
variable cost 53265
Contribution margin 29.35%
Particulars Amount £
Fixed costs 106600
Contribution margin 29.35%
Break even points (In revenue)= fixed
cost / contribution margin per unit 363202.73
From the assessment of above table it can be articulated that the total amount of revenue that
firm required to generate for reaching the situation of break even point. The specified amount of
units that has been budgeted by firm will require to have sufficient amount of revenue such as
£363202.725 that will assist the company to have reliable position in industry by obtaining the
situation of the no profit and loss by recovering all the expenses.
Margin of safety in revenue = currents sales — break even sales
= 689000 – 363202.73
= 325797.27

Margin of safety in units= Currents sales units – break even units
= 53000-3636
= 49364 units
On the basis of above calculation it can be interpreted that margin of units that helps company
to have make sure that there is proper safety is maintain so that maximum ability to earn higher
revenue can be derived. On the basis of above derived outcome in units and revenue includes
49364 units and £325797.27. From this it can be stated that significant risk affecting firm can be
declined through maintaining this majors in internal processes.
c)
Particulars Amount
Sales 624000
Less Variable Costs
Materials 252000
Labour 141600
Variable overheads 88800
Contribution per unit 141600
Less Fixed costs:
Production 59000
Selling etc 47600
Profit 35000
d)
Particulars Amount
(after
Amount
(Before

advertising
)
advertising
)
Sales 878681.7 689000
Less Variable Costs
Materials 325552.5 278250
Labour 182929.5 156350
Variable overheads 114718.5 98050
Contribution per unit 255481.2 156350
Less Fixed costs:
Production 59000 59000
selling etc 47600 47600
Profit 148881.2 49750
From the above table it can be articulated that there the specified strategy it can be articulated
after spending the particular amount of advertising the mentioned organization will become able
to incline the profitability. In addition to this, advertising play important role in influencing the
market forces that provides assistance in inclining sales revenue. The mentioned strategy of
increasing the advertising expenses is good strategy that is helpful in inclining the sales revenue
and therefore profitability. To be successful in industry it becomes essential for the specified
company to pay attention on taking such course of action in turn higher productivity and
sustainability can be achieved. There are various benefits which can be achieved by conducting a
suitable advertising and promotional activities. It helps in achieving ability to spread awareness
regarding operational practices so that higher brand awareness can be derived. This can be stated
by referring specified table inclining trend can be seen. From the evaluation it can be articulate
that implementing the particular strategy helps firm to have positive impact which can contribute

in having stable position in sector. It provides assistance to have both monetary and non financial
rewards that allows getting success in industry.
e)
Break even model is associated with paying attention on deriving the situation that has no profit
and loss. In addition to this, it can be articulated that there are number of benefits which can be
obtained by applying the break even model for taking strategic decision. On the basis of this, it
can be articulated that firms irrespective of their scale of operation emphasize on having
significant ability to reach situation where it can cover s all the incurred expenses.
Each technique has few limitations that are required to be focused for having reliable
information in turn irrelevant actions can be removed (ASSUMPTIONS OF BREAK EVEN
Model, 2021). From the evaluation it can be articulated that there are number of limitation which
arise due to implementation of various assumptions. The one of the significant assumption that
need to be taken into consideration for having depth information about break even model
(Aslanidis and Hartigan, 2021). The particular model has assumption that cost will be divided
into fixed and variable. There is no focus is provided on semi variable that does not permit to
have reliable information.
There is presence of assumption that cost and revenue variable will remain linear that si
not possible in actual market (Messer, 2020). There is as well assumed that sales volume and
production units are equal which is not possible in current market situation. Selling price of
product is assumed to remain constant that is one of the major factor that serve adverse impact
on decision-making process. The main reason behind identifying this as one of the biggest
limitation is that prices of product keeps on changing as they are dependent on market forces in
turn better compliance with gaining higher profitability. Constant technology and no
improvement in labour efficiency that is inaccurate in current situation. It can be specified that
these keeps on altering with changing time. It becomes essential to focus on several factors that
are providing insignificant outcome that is hampering decision-making procedure of business.
Along with mentioned limitation the biggest issue that has been specified in current report
includes constant rate of increase in variable cost. From the evaluation it can be articulated that
these are the crucial assumptions which lead to impact business functioning.

Question 4
Calculating investment appraisal techniques
Net cash flow assessment
Year
Cash
inflows
(in £)
Less:
Cash
outflows
(in £)
Less:
Depreciatio
n
EAT (in
£)
Add:
Depreciatio
n
Net cash
inflows
(in £)
1
17,000,00
0
6,400,00
0 7000000
3,600,00
0 7000000
10,600,00
0
2 17000000
6,400,00
0 7000000
3,600,00
0 7000000
10,600,00
0
3 17000000
6,400,00
0 7000000
3,600,00
0 7000000
10,600,00
0
4 17000000
6,400,00
0 7000000
3,600,00
0 7000000
10,600,00
0
5 17000000
6,400,00
0 7000000
3,600,00
0 7000000
15,600,00
0
Year
Net cash inflows
(in £)
PV factor @
7%
PV of cash flows (in
£)
1 10,600,000 0.935 9906542
2 10,600,000 0.873 9258451
3 10,600,000 0.816 8652757
4 10,600,000 0.763 8086689
5 15,600,000 0.713 11122584
Total discounted cash inflows 47027024
Less: initial investment 40,000,000
NPV 7,027,024
Payback period
Year Net cash inflows (in £)
Cumulative cash
inflows (in £)
1 10,600,000 10,600,000
2 10,600,000 21,200,000
3 10,600,000 31,800,000
4 10,600,000 42,400,000
5 15,600,000 58,000,000