Introduction to Accounting and Finance Report: Analysis and Evaluation

This report provides an overview of key accounting and finance concepts. It begins with the preparation of financial statements, including an income statement and balance sheet, for Collins Colman Limited. The report then delves into break-even analysis and margin of safety calculations for Parksmead Limited, examining the impact of changes in selling price and quantity. Finally, the report assesses investment appraisal techniques, such as payback period, accounting rate of return (ARR), and net present value (NPV), to determine whether Skipsey Clifford Plc. should purchase new machinery, along with the merits and demerits of each technique and the benefits and limitations of budgeting for strategic planning. The report concludes with a recommendation based on the analysis and evaluation of the investment appraisal techniques.

Introduction to Accounting and Finance

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Part A – Collins Colman Limited....................................................................................................1
a. Income statement.....................................................................................................................1
b. Balance sheet...........................................................................................................................2
Part B – Parks mead Limited...........................................................................................................3
a. Calculate the contribution of each microwave.........................................................................3
b. Calculate the break-even point and margin of safety..............................................................4
c. Calculate the profit of Parks mead Limited.............................................................................5
d. Selling price increased by 8% and quantity 15%....................................................................5
e. Explain the underpinning assumptions attached to the break-even model..............................6
Part C – Skipsey Clifford Plc...........................................................................................................6
a. By using investment appraisal technique, calculate several aspect and recommend that
company should purchase this machinery or not.........................................................................6
b. Explain and analyse the key merits or demerits of different investment appraisal technique.9
c. Explain the key benefits or limitations of using budgeting as a tool for strategic planning..11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Accounting is a method of tracking and documenting a firm's financial transactions. Finance
is the concept behind a company's asset control. Financial accounting, cost accounting, expense
control, tax planning etc. is the branches of accounting (Aiken, Lu and Ji, 2013). The distinction
among accounting and finance is that accounting deals on the daily basis movement of funds
inside and beyond a company or entity, while finance is a wider concept for wealth and liabilities
strategy and innovation successful marketing. Investors will use financial reports to gain useful
knowledge that has been used in businesses' assessment and debt research. Accounting
information allows analysts to assess the worth of an asset, identify the financing streams of a
company, measure performance, and quantify risks inherent in a balance sheet of a company.
This report based on several concepts of accounting and finance, this assessment classify in
three parts. First part is based on the preparation of income statement or balance sheet of Collins
Colman Ltd, another one is about calculating breakeven point or margin or safety of Parksmead
Limited Company. In addition, last part of this report based on the assessment of investment
appraisal techniques which helps the Skipsey Plc to identify whether they purchase new
machinery or not.
MAIN BODY
Part A – Collins Colman Limited
a. Income statement
This is also defined as the declaration of benefit and loss or the declaration of profits and
cost, the statement of income generally reflects on the sales and expenditures of the company
over a given period (Ainsworth and Deines, 2019). Below mention income statement provide
better understanding.
Income statement for the year ended
Particulars Details Amount
Sales revenues £759600
Less: cost of sale -£356400
£403200
1

Less operating expenses
Rent paid £135000
taxation £8280
Depreciation on delivery Van £11000
Wages £143010
Electricity bills £9270
van running expenses £40320
Bed debt expenses £1800 -£348680
Profit for the year £54520
Working Notes:
Sales Revenue = £604800 + £154800 = £759600
Cost of Goods Sold = 291600 + 64800 = £356400
Gross profit = Sales revenue - COGS
= £759600 - £356400 = £403200
Wages = 140400+2610 = £143010
Electricity = 6840+2430 = £9270
Depreciation on Van = Cost – Resale Value/ life
= £72000 - £6000/6 = £11000
Cash account:
Particulars Amount Particulars Amount
To cash from equity £216000 By rent paid £135000
Cash sales £154800 Tax £8280
Received form debtors £525600 wages £140400
Electricity £6840
2

Inventory £46800
Payment to trade payables £471600
Van running expenses £40320
closing cash balance £47160
£896400 £896400
b. Balance sheet
This financial report shows company's financial performance that contains at a certain
particular moment in time liabilities, assets, equity capital, net debt etc. To represent the true
image of the balance sheet, list of asset and liabilities mentioned in this report. Further internal or
external parties use this reports to make effective decisions.
Liabilities Amount Assets Amount
Equity £216000 Delivery van £61000
Profit £54520 Cash at bank £47160
Outstanding wages £2610 Prepaid rent £27000
Outstanding bills £2430 Advance tax £1350
Trade payables £111600 Trade receivables £77400
Closing inventory £173250
Total liabilities £387160 Total assets £387160
Part B – Parks mead Limited
a. Calculate the contribution of each microwave
Particulars Details Amount
Selling price £40.00
Less: variable cost
Material £15.75
3

Labour £8.85
Variable overhead £5.55 -£30.15
Contribution per unit £9.85
Sales £2400000
Less: Variable cost
Material £945000
Labour £531000
Variable overhead £333000 -£1809000
Contribution per unit £591000
Working notes:
Materials 15.75
Labour 8.85
Variable overheads 5.55
Total variable cost per unit 30.15
b. Calculate the break-even point and margin of safety
Break Even Point: The breakeven point is determined in accounting by calculating the
fixed manufacturing costs by price per item and minus the variable costs (Chiang, Nouri and
Samanta, 2014). The breakeven seems to be the output price during which the manufacturing
costs are equal to the sales for a commodity. Further calculation mentioned below:
Particulars Formula Calculation Amount
Fixed cost Production fixed +
selling fixed cost 177000+142800 319800
Contribution per unit 9.85
BEP (in units) Fixed cost / contribution
per unit 319800/9.85 32467.00508
BEP (in £) Fixed cost / contribution 319800/24.62 1298943.948
4

margin
Working Notes:
Fixed cost = Production fixed + selling fixed cost
= 177000+142800 = 319800
BEP (In Units) = Fixed cost / contribution per unit
= 319800/9.85 = 32467.00508
BEP (in Value) = Fixed cost / contribution margin =
= 319800/24.62 = 1298943.948
Margin of Safety: In accounting, the safety margin is determined by deducting the total
of the break-even point from real or budgeted revenue and then separating by revenue; the
outcome is measured as a proportion. Further calculations are as follow:
Particulars Formula Units/amount
Actual sales 2400000
BEP sales 1298944
MOS (in £) Actual sales - BEP
sales 1101056
Working Notes:
Margin of Safety = Actual sales - BEP sales
= 2400000 – 1298944
= 1101056
c. Calculate the profit of Parks mead Limited
Particulars Formula Amount
Sales 60000*40 2400000
less: Variable cost 60000*30.15 1809000
Contribution 591000
less: Fixed cost 177000+142800 319800
Profit 271200
5

d. Selling price increased by 8% and quantity 15%
Particulars Formula Amount
Sales 69000*43.2 2980800
less: variable cost 69000*30.15 2080350
contribution Sales – variable cost 900450
less: fixed cost 454800
Profits 445650
Working notes:
Particulars Increase 8% in selling price
Sales price 40
% increase 3.2
New sales 43.2
Particulars Increase in sales by 15 %
Old sales £60,000
% increase £9,000
New sales £69,000
e. Explain the underpinning assumptions attached to the break-even model
Assessment of break-even is vitally important when assessing the utility of value variables.
It depends heavily on various factors such as output quantity, quality, and benefit (Fischer-
Pauzenberger and Schwaiger, 2017). This is supposed to clarify the difficult connection among
total annual investment and productivity. For break-even analysis listed below, a number of
concerns have arisen:
 It is important to define fixed as well as variable costs benefit of the entire, where all
semi-variable effects are overlooked.
 Linear price and benefit feature stay, and the cost of manufacturing are assumed to
remain stable.
 Research break-even implies steady rate of maximization of variable cost.
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 This anticipates continuous development and not indispensable for enhancing labour
performance.
 The price of the good in this system is believed to be fixed.
 Changes in commodity prices or fluctuations are left out.
Part C – Skipsey Clifford Plc.
a. By using investment appraisal technique, calculate several aspect and recommend that
company should purchase this machinery or not
Payback period:
Initial investment = £ 8000,000
Life of Machinery = 5 years
Year Net cash flow Cash Flow
0 year -8000,000
1 year £2,120,000 £2,120,000
2 year £2,120,000 £4,240,000
3 year £2,120,000 £6,360,000
4 year £2,120,000 £8,480,000
5 year £3,120,000 £11,600,000
3 +
0.773584906
Payback period 3.77 years
As per above calculation, it has been analysed that recovery period of Skipsey Clifford
Plc’s investment will be 3.77 years and life of machinery is 5 years (Gao, 2013). It will be
recommended that company should purchase new machinery that is beneficial for them or helps
in maximising productivity as well as profitability.
Accounting Rate of Return (ARR):
Formula:
ARR = Average income / Average investment * 100
Year Earnings After Tax (EAT)
7

1 720000
2 720000
3 720000
4 720000
5 1720000
Average income 920000
Cost 8000000
Scrap value 1000000
Average investment 8500000
ARR 10.82 %
On the basis of above calculation of Accounting Rate of Return, the average return yield
of Skipsey Clifford Plc. is 10.82 %. This ensures that they can receive returns which are
beneficial for organizations at an annual average of 10.82 per cent.
Working Notes:
Calculation of depreciation:
Particulars Amount (in £)
Cost 8000000
Scrap Value 1000000
Expected useful life 5
Depreciation 14,00,000
Net cash inflow:
Year Cash
inflow
Cash
outflow Depreciation
EBIT (Inflow -
(outflow -
depreciation)
Add:
depreciation
Net cash
flow
1 3400000 1280000 1400000 720000 14,00,000 21,20,000
8

2 3400000 1280000 1400000 720000 14,00,000 21,20,000
3 3400000 1280000 1400000 720000 14,00,000 21,20,000
4 3400000 1280000 1400000 720000 14,00,000 21,20,000
5 3400000 1280000 1400000 720000 14,00,000 21,20,000
Total cash inflow of machine 1000000
Net Present Value (NPV):
Year Net cash
flow
PV factor
@ 9%
Discounted
cash flow
1 2120000 0.917431193 1944954.128
2 2120000 0.841679993 1784361.586
3 2120000 0.77218348 1637028.978
4 2120000 0.708425211 1501861.447
5 3120000 0.649931386 2027785.925
Total discounted cash flow 8895992.065
Less: initial investment 8000000
Net Present value 895992.0646
The NPV of the above calculation for new machinery is 8,95,992.06 pounds which means
their project is successful and organization should invest because of successful result of NPV
shows the organization would benefit from the project (Hyndman, 2018).
From the overall analysis, it has been analysed that Skipsey Clifford Plc should purchase
this machinery and as per the investment appraisal techniques, company can recover their initial
investment within 3.77 years and average return should be 10.82%. In addition, NPV is position
which means this project is beneficial as well as profitable for the organization or helps in
achieving business goals & objectives.
b. Explain and analyse the key merits or demerits of different investment appraisal technique
Introduction
9

Investment appraisal techniques include several methods which help the manager to make
strategic decisions such as payback period, IRR, NPV, ARR etc. It helps in evaluating
profitability of the particular project. This part consist merits or demerits of different investment
appraisal techniques.
Payback period: This method determined that how many years it requires to recoup the
original investment. The method is to develop out the original investment and split by annual
cash balance. Lower the payback period is accepted and higher one rejected because
organizations wants to recover their initial investment as soon as possible. Followings are the
merits and demerits of this approach:
 Merits: The payback method's greatest single benefit is its ease. Comparing many
projects and only choosing something that has fastest payback period is a simple way to
do so (Leauby and Wentzel, 2012). It helps the manager to make quick decisions on the
basis of low recovery period. In addition, by using this investment appraisal techniques
organization able to minimise the risk of losses.
 Demerits: The far more serious drawback of this method is that, it does not accept the
time value of money. Investment returns obtained throughout a proposal's early days get
a larger weight just like cash flows earned in final decades. Two tasks might have
similar payback period, but one proposal in the early days has the most cash flow, while
another proposal has higher revenues in the later life. The payback period method in this
case will not provide a thorough description about which proposal to choose.
Accounting Rate of Return (ARR): It is one of the effective methods of capital budgeting
which are used for evaluating different options of investment. Overall findings helps the
managers to make their decisions whether to invest or not in the particular project. It is a
calculation that represents the estimated profit margin of return on initial investment, or asset,
relative to the value of the original investment. The ARR equation splits the total profit of an
asset by the original cost of the business in order to calculate the amount or profit one would
assume over the lifespan of the asset or associated project. There are some merits or demerits
which are discussed below:
 Merits: This approach aims to equate a proposed project with those of cost-effective
programs, and with profitable projects. The payback time is easier to comprehend, and
quantify. This takes into account the gains or the gains that exist over the entire financial
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