Accounting for Business - Financial Analysis and Budgeting Assignment

This document presents a comprehensive accounting assignment solution. Section A includes an income statement and statement of financial position for NS Ltd, detailing financial statement analysis and adjustments. Section B focuses on investment appraisal techniques, comparing Project A and Project B using payback period and net present value (NPV) methods, followed by a discussion on risk assessment and influencing factors for investment decisions. Question 4 addresses budgeting, calculating budgeted profit, breakeven points, and margin of safety under various scenarios, along with limitations of these calculations. The assignment demonstrates practical application of accounting principles and financial analysis.

Accounting for Business

TABLE OF CONTENTS
Section A....................................................................................................................................3
Question 1..............................................................................................................................3
Section B....................................................................................................................................5
Question 2..............................................................................................................................5
Question 4..............................................................................................................................7
REFERENCES...........................................................................................................................9

Section A
Question 1
a)
NS Ltd Income statement for the year ended 31/12/2020 (£000s)
Sales 1204
Cost of sales
Opening inventory 44
Purchases 805
Closing inventory (60) (789)
Gross Profit 415
Expenses
Rates and insurance (40 – 5) 35
Salaries and wages (190 + 2) 192
Audit fee 10
Energy bills (28 + 1) 29
Debenture interest (4 + 2) see note below 6
Depreciation of vehicles (90 – 30) 0.2 12
Depreciation of equipment (100 x 0.2) 20
Telephone 5
Bad debt 2
Directors’ remuneration 33 (344)
Profit Before Tax 71
Corporate tax (20)
Profit After Tax 51
Dividends – interim paid 15
-- final proposed (300 x £0.06) 18 (33)
Retained profit for the year 18
Retained profit b/f 141
Retained profit c/f 159
The Debenture interest due/incurred for the year is: 6% on £100,0000 (6% Debenture of
£100,000) is £6,000.

From the trial balance, the debenture interest paid is £4,000.
This requires an accruals adjustment of £2,000; so, the amount to be charged as debenture
interest is £6,000 (£4,000 + £2,000).
b)
NS Ltd Statement of financial position as at 31/12/2020 (£000)
Non – current assets Cost Accumulated NBV
Depreciation
Land and buildings 550 - 550
Equipment 100 40 60
Vehicles 90 42 48
740 82 658
Current assets
Inventory 60
Receivables 81
Prepayment 5
Bank 2
Cash 1 149
Total assets 807
Share capital
£1 Ordinary shares 300
Reserves
Share premium 160
Retained profit 159
Shareholders’ funds 619
Non-current liabilities
6 % debentures 100
Current liabilities
Accruals (2 +1 +2) 5
Payables 45
CT 20
Dividends proposed 18 88
Shareholders’ funds & liabilities 807

Section B
Question 2
Years
Project
A
Cumulative cash
flows
Project
B
Cumulative cash
flows
1 150 150 300 300
2 250 400 300 600
3 350 750 300 900
4 300 1050 300 1200
5 300 1500
6 300 1800
Initial
investment 750 1125
Payback
period 3rd year
3year + (1125-
900)/300
3 year +0.75
3.75 years
Years
Projec
t A
Cost of
capital
Discounted
cash flow
Project
B
Cost of
capital
Discounted
cash flow
1 150 0.909091 136.3636 300 0.909091 272.7273
2 250 0.826446 206.6116 300 0.826446 247.9338
3 350 0.751315 262.9602 300 0.751315 225.3945
4 300 0.683013 204.904 300 0.683013 204.9039
5 300 0.620921 186.2764
6 300 0.564474 169.3422
Total
discounted
cash flow 810.8394 1306.578
Initial
Investment 750 1125

Net present
value
Total
Discounted
Cash Flow-
initial
investment
60.83942 181.578
b.
On the basis of Payback period
From the evaluation it can be stated that Project A has years as well project B has 3.75 years.
By making comparison it can be interrelated that project A should be selected. The object of
every organization to continue with any project is to derive profitability and sustainability in
lesser time. Project A has lower period for recovering initial amount so decision must be
made in favor of fist project.
On the basis of Net present value
The results are judged as per the amount derived from subtracting discounted cash flow as
organization wants to have positive outcome. From the evaluation of net present value
obtained it can be stated that B is more beneficial than project A. In addition to this, it must
be articulated that company should select project By from the net present value perspective.
The most
c.
It is suggested to the organization to have sufficient evaluation technique in order to match its
decision with objective. There are various criteria that need to be considered while making
any investment appraisal technique (Zeff and Dyckman, 2020). The company must go with
project A as it has lesser payback period which is most important factor while considering
investment appraisal techniques. The suggestion is made on the validation that there is as
positive net present value which supports the decision making of particular company.

d.
 It is essential for organization to have appropriate analysis of associated risk and
reward with selected investment. This gives insights about earning capability and loss
bearing margin of any particular investors (Hsieh, Ma and Novoselov, 2019). There
are various other factors which highly influence decision making but one of the most
important is risk & reward as it influences return on investment.
 Individual risk appetite, capital , time horizon are another elements that as well impact
the decision making criteria of any organization.
 Earning momentum, assets utilization, etc. are included in important factors impacting
reaching conclusion practice for making investment decisions.
 Industrial standards, government regulations, employees acceptance, etc. are some
non-financial factors affecting the growth and profitability of any investments o
giving emphasis on this elements as well become crucial while indulging into
investment appraisal activities.
Question 4
a) Budgeted profit for the 30,000 meals, breakeven sales volume and margin of safety
Contribution per unit = Selling price – Variable cost = £ (15 – 5) = £10
Budgeted profit = Total contribution – Total fixed costs
= £10/unit x 30,000 meals - £200,000 = £100,000
BEP (units) = Total fixed costs / Contribution per unit
= £200,000 / £10 = 20,000 meals
Margin of safety = Budgeted sales – BEP = 30,000 – 20,000 = 10,000 meals
b) Calculate the sales volume required to make a profit of £225,000
Contribution required = Profit + Fixed costs = £225,000 + £200,000
= £425,000
Sales volume required = Total contribution / Contribution per unit
= £425,000 / £10 = 42,500 units

c) Calculate the budgeted profit for the 30,000 meal deals and breakeven point
Selling price £13 per meal
Sell 30,000 units
Contribution per unit = £13 - £5 = £8
Profit = £8 x 30,000 units - £200,000 = £240,000 - £200000 = £40,000
BEP (units) = £200,000 / £8 = 25,000 meals
Comment: The decrease in the selling price per meal has led to a reduction in the
contribution per unit. This will increase the BEP and consequently leads to the reduction of
the margin of safety.
d) Limitations of the above calculations
 BEP can only be computed only if all the costs and expenses are bifurcated int fixed
and variable cost which in practice, may be impossible to achieve the accurate
division of the costs.
 It is being assumed that the fixed costs remain the same and constant at all the levels
of activity. But it is important to understand that the fixed cost tends to vary beyond a
certain level of activity.
 It is assumed that the variable cost varies in the proportion of variation in the sales
volume but in actual practice, it changes with the volume of output but may not be in
direct proportion.
 It does not take into consideration, the amount employed into the business which is an
important factor in determining the profitability of the business.
 In addition to this, it assumes that the production and sales quantities are equivalent
and also there will be no variation in the opening and closing inventory of the finished
goods which is not true in the real business practices.
 Along with that, it is assumed that the business conditions do not change which is
completely incorrect as it is affected by the factors like the market demand and supply
etc.
REFERENCES
Books and Journals

Zeff, S. A. and Dyckman, T.R., 2020. Accounting and Business Research: the first 50 years,
1970–2019. Accounting and Business Research. 50(4). pp.360-395.
Hsieh, C. C., Ma, Z. and Novoselov, K. E., 2019. Accounting conservatism, business
strategy, and ambiguity. Accounting, Organizations and Society. 74. pp.41-55.