Finance Online Exam: Financial Statement Analysis and Budgeting

This document presents a solved online finance exam covering key areas such as financial statement analysis, budgeting, and investment appraisal. Section A involves preparing an income statement and balance sheet from given financial data. Section B focuses on investment decisions, including calculating payback period and Net Present Value (NPV) for a project, along with discussing the impact of changes in the cost of capital and the benefits of using NPV. It also explores other factors to consider in investment decisions, such as internal rate of return, average rate of return, qualitative factors, demand forecasts, and technological changes. The exam further addresses the benefits and limitations of budgeting, its use in performance evaluation, and the information it provides for cash management. The document concludes with references to relevant books and journals. Desklib provides students with access to this and other solved assignments.

Finance[online exam]

TABLE OF CONTENTS
SECTION A.....................................................................................................................................3
SECTION B.....................................................................................................................................4
Question 3...................................................................................................................................4
Question 4...................................................................................................................................6
REFERENCES................................................................................................................................8

SECTION A
Question 1
A. Income statement
Particulars Amount
Sales 800
Less: COGS
Opening stock 50
Purchases 300
Closing stock 40
310
Gross profit 490
Less
Rates and insurance 60
General expenses 27
Energy bills 25
Audit fee 15
Directors remuneration 50
Debenture interest
Salaries and wages 150
Depreciation 70
397
Profit before interest and tax 93
Interest on bank loan 3
Tax 20
profit after tax 70
b. balance sheet
Particular
Land and building 400
Machinery 100
Less: depreciation 20 80
Fixtures and fittings 200
Less: depreciation 50 150
Receivables 86
Less; bad debt 1 85

Cash 3
Bank 9
Closing stock 40
Prepaid insurance 2
769
Liabilities
5 % bank loan 60
10 % debentures 40
Payable 65
Energy bill 1
Audit fee 5
Rates owing 1
Debenture interest 4
Share capital 400
Share premium 20
Retained profits 50
Net profit 70
Dividend 60
776
SECTION B
Question 3
A
Payback period
Year Cash inflows Cumulative cash inflows
1 800 800
2 300 1100
3 1200 2300
4 1200 3500
5 1200 4700
Initial investment 3000
Payback period 3
0.6
Payback period 3 year and 6 month

NPV
Year Cash inflows PV factor @ 10 %
Discounted
cash inflows
1 800 0.909 727.27
2 300 0.826 247.93
3 1200 0.751 901.58
4 1200 0.683 819.62
5 1200 0.621 745.11
Total discounted cash
inflow 3442
Initial investment 3000
NPV (Total discounted
cash inflows - initial
investment) 442
B
With the valuation of the findings in the above question it is clear that the project is worth
investing. This is particularly because of the reason that I'm as per the net present value the
current value of the future cash flows 442. This simply implies that the company will on a profit
of 442 currently if they invest within the project. But in case of payback period the payback
period is 3.6 years. But the criteria of RR PLC are of a payback period of two years. Hence as
per this criterion the 3.6 year is more and is not a good project to invest.
C
In case the cost of capital increases then the NPV will decrease. Thus this simply means that an
increase in cost of capital will result in the reduction within the net present value. This implies
that the current value of the future cash flow is reducing in case the cost of capital will increase.
D
The major benefit of undertaking the use of net present value as an investment decision is that it
considers the time value of money which is very essential for the successful calculation of the
future cash flows. In addition to this another major benefit of undertaking the use of NPV is that
it uses the cash flows and not the net earnings. This is beneficial because net earning includes in
non cash items as well like depreciation. Hence they are not considered and time of using cash
flow and this is better for calculating the future cash flows.
E

There are many different factors which can be considered as well while taking the final decision.
These factors are as follows-
1. The first element is the use of internal rate of return. This method will also assist in
evaluating the viability of the project and to select a single one.
2. Along with this the use of average rate of return that is ARR can also be conducted
because it will calculate average annual amount of cash flow being generated over life of
investment.
3. Moreover qualitative factors can also be considered while using the capital budgeting.
This factor majorly involves the cash flow that is been generated by the company while
investing in the project.
4. The demand forecast can also be a factor which can affect the final decision because in
case the demand will not be good than investing within the technology will not be
beneficial.
5. Moreover the technological changes taking place within the external environment will
also be affecting the final decision as it can also affect the selection of the investment
project.
Question 4
A
Budgeting is the estimation of all the estimated income and expenses which company might face
with an accounting period for stop the major benefits of budgeting involves the following-
The key benefit of undertaking the use of budgeting is that assist in planning for the company.
The budget provides estimation and thus provides a base to the employees that how working has
to be planned in order to attain the budgeted performance.
In addition to this another major benefit of using budgeting is to evaluate the performance and
profitability of the company. This is particularly because of the reason that with help of
budgeting and estimated sales and profits are being evaluated and it guides the employees to
obtain that budgeted performance.
Along with this budgeting also assist the company in allocating the cash and other resources very
effectively and precisely. This assists the company in managing the cash in optimal way.
B

Along with the benefits there are also some limitations which restrict the use of budgeting first of
these limitations are as follows-
The major limitation is that process of budgeting is very time consuming. This is particularly
because of the reason that firstly a budget has to be prepared on basis of past data and after that
actual data is being compared with the budgeted data. Hence this takes a lot of time and efforts.
In addition to this another limitation of budgeting is that there are high chance of manipulation
with empty budget first of this is particularly the budget is being prepared on the basis of past
data and hear the budget makers can undertake any manipulation.
Along with this another limitation is that the company might show example of spending within
the budget.
C
The management undertake the use of budget in order to evaluate the performance of the
company. This is particularly because of the reason that the budget is being undertaken or used
as a benchmark of the performance. In this budget is used in order to evaluate that whether the
employees have reached the target or the budgeted performance or not. Thus this budget is
helpful for the managers in order to decide that whether the intended outcome has been attained
or not. In case it will not have been attained with and managers will take corrective actions.
Along with this the budget also assists the manager in deciding the actual output of the
employees.
D
To undertake information relating to cash receipt
To evaluate information relating to cash payments
To analyse the match changes within the cash
To examine the areas in which cash is lacking
to identify the areas where in cash is excessively use and where there is a requirement of cash
to project the use of cash on basis of cash flow statement

REFERENCES
Books and Journals
Goodell, J.W., 2020. COVID-19 and finance: Agendas for future research. Finance Research
Letters, 35, p.101512.
Salehi, M., BehrouziYekta, M. and Ranjbar, H.R., 2020. The impact of changes in cash flow
statement items on audit fees: evidence from Iran. Journal of Financial Reporting and
Accounting.