Financial Analysis Report: EOQ, Payback, Ratios, and IFRS Framework

This finance report delves into core financial concepts and calculations. It begins with an introduction to finance, followed by the calculation of the Economic Order Quantity (EOQ) and the Total Annual Cost. It then analyzes two investment options using the payback period and accounting rate of return, including a discussion of capital investment decision characteristics. The report also includes a detailed calculation and interpretation of various financial ratios for the year ended March 31, 2019, focusing on profitability, asset usage, and liquidity. Furthermore, it demonstrates the roles of the IFRS foundation, IFRS interpretation committee, and IFRS advisory council within the international regulatory framework for accounting, as well as the role of the audit committee within corporate governance. The report concludes with a summary of key findings and a list of references.

INTRODUCTION TO
FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Question 1........................................................................................................................................3
a) Calculation of EOQ:-..............................................................................................................3
b) Calculation of Total Annual Cost:-.........................................................................................3
Question 2........................................................................................................................................5
a) Payback Period:-.....................................................................................................................5
b) Accounting rate of return:-.....................................................................................................5
Accounting Rate of Return Technique:-.....................................................................................6
d) Characteristics of capital investment decisions:-....................................................................7
Question .3 ......................................................................................................................................8
Calculation of Ratios for the year ended 31st March, 2019:-.....................................................8
QUESTION 4.................................................................................................................................10
Demonstrates the role of IFRS foundation, IFRS interpretation committee and IFRS advisory
council with international regulatory framework for accounting.............................................10
Demonstrating upon role of the audit committee within the corporate governance. ...............11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Finance is considered to be as the term which is is significant to describe the key financial
activities of the business. This study tends to mainly focus on contrasting the key varied set of
different sources of finance within the business. Furthermore, this study also calculates the
economic order quantity and payback period for option A and option B. Furthermore, this study
also critically demonstrate the importance or relevance of the considering audience linked with
the financial statement analysis. The present study demonstrates the role of IFRS foundation,
IFRS interpretation committee and IFRS advisory council with international regulatory
framework for accounting . This study tends to mainly demonstrate upon role of the audit
committee within the corporate governance.
MAIN BODY
Question 1
a) Calculation of EOQ:-
CALCULATION OF EOQ
Annual Consumption 27000 kg
Ordering cost per order $14
Inventory holding cost per kg per year $1.75
EOQ
√2* Annual consumption* ordering cost per
order/ inventory hoding cost 657.267 units
b) Calculation of Total Annual Cost:-
Cost of Hard Plastic per kg 0.9 per kg

Annual cost Hard Plastic
( Annual Consumption* cost of
Hard Plastic) 24300
No. of orders (Annual Consumption / EOQ) 41
Ordering cost per order 14
Total Ordering cost
(No. of orders* Ordering cost per
order) 574
Carrying cost per kg per year 1.75 per kg
Average Inventory (27000/12) = 2250
Total Carrying Cost
(Average Inventory* Carrying
cost per kg per year) 3938
Annual cost Hard Plastic 24300
(+)Total Ordering cost 574
(+)Total Carrying Cost 3938
Total Annual Cost 28812
It is assumed that the inventory of the company is evenly used throughout the year.
c) Evaluation of EOQ model:- EOQ is model that is used to calculate the ideal ordering quantity
for a company such that it minimises the total inventory cost incurred. At EOQ level the total
inventory cost is minimum. It is the most optimal quantity that is to be ordered where the
carrying, shortage, and the ordering cost together is minimum (Yang,2018). The basic
assumption of applying this model shall be that the usage of inventory over the year shall be
even. It can also be used for smoother and better cash flow over the year. Determining the
perfect reorder point shall govern profitability of the company and prospects of growth.
d)

Costs of holding Inventories:- Costs of holding inventories is an essential part of the total
inventory cost. It includes the carrying cost of the damaged goods, storage cost, warehouse rent,
insurance cost, watchmen cost etc. All these cost combined together gives the holding cost per
kg per annum charged on the inventory. It increases with the increase in quantity to be ordered as
higher quantity ordered has to be stored. Also there can be damages in the warehouse of the
company which increases its cost (Gorshkov, Murgul, and Oliynyk, 2016).
Costs of failing to manage inventories:- There are certain costs that are incurred when the
management is inefficient in managing the inventory like the damaged goods cost, transportation
cost and the cost of short supply of goods.
Practical implications of managing inventory:-
 a good inventory management system shall help in saving cost and time
 it shall also reduce amount of damages
 it will allow the company to know when order is to be placed
 shall avoid overstocking and under stocking it shall help in timely meeting the demands of the customers
Question 2
a) Payback Period:-
Option A Option B
Gulf stream G650ER
Boeing
BBJ Max
7
Year Cash Inflows
Cash
Inflows
1 3200 3900
2 3300 3600
3 3100 3300
4 3000 3100
5 2900 2600

Net Cash Inflow 15500 16500
Initial Investment 51000 76500
Payback
Period
Initial Investment / Net
Cash Inflow 3.290 4.636
b) Accounting rate of return:-
Expected Life 5 5
Scrap value 40110 60120
Depreciati
on
Initial Investment –
Scrap Value /
Expected life 2178 3276
Option A
Option
B
Gulfstream
G650ER
Boeing
BBJ
Max 7
Year Cash Inflows
Depr
eciati
on
Net
Annual
Profit
Cash
Inflows
Depr
eciati
on
Net
Annual
Profit
1 3200 2178 1022 3900 3276 624
2 3300 2178 1122 3600 3276 324
3 3100 2178 922 3300 3276 24
4 3000 2178 822 3100 3276 -176

5 2900 2178 722 2600 3276 -676
4610 120
Average Net Profit Net Annual Profit / 5 922 24
Annual
Rate Of
Return
Average Net Profit /
Average Investment 0.0181
0.000
3
Accounting Rate of Return Technique:-
Accounting rate of return is also called as average rate of return which is used as a technique in
capital budgeting for investment appraisal. It can be used to analyse the various investment
options based on the returns generated from it. It shows the average net income that is generated
over the life of the asset on the capital investment made. The more returns generated the better is
the proposal for the company (Çalışkan, 2020). If the calculated percentage is equal to or more
than the required rate of return then the project shall be accepted otherwise it shall be rejected.
As we can see above the accounting rate of return of option A isd better than that of option B. the
major disadvantage that it focuses on is that iot does not consider time value of money and also
the risks associated with long term investments.
d) Characteristics of capital investment decisions:-
1) Large Investments- Since capital investment decision involves large amount of funds
they are to be taken carefully with due diligence. As these decisions are based on high
value capital they shall have long term impact on company and also if takien wrongly
shall bring huge loss to the company (Sebatjane and Adetunji, ., 2019).
2) High Risk involved- In such capital budgeting decisions huge risk is involved as they
shall determine long term profitability and financial health of the organization. Higher the
risk higher are the returns for the company but such decisions should be taken by the
experts.

3) Irreversible Decisions- Such decisions as taken by the management of the company are
irreversible in nature which means once taken cannot be reversed. The management has
to take these decisions with utmost care as there are higher risk associated and also last
longer (Kadim, Sunardi and Husain, T2020).
4) Cost Structure- Obviously these decisions shall impact the cost structure of the company
and shall minimise profits of the company. If a huge cost decision is not able to generate
the simultaneous incomes then it shall lead to losses.
5) Affects Competitive Strengths- A profitable decision taken shall contribute to the
strengths of the company vis a vis decision taken wrong shall lead to company bearing
consequences.
Advantages and disadvantages of IRR:-
Advantages:-
 The major advantage of IRR as a capital budgeting technique is that it considers the time
value of money to calculate whether a investment proposal shall be accepted or rejected.
 It is a simple technique and does not require experts for its calculation. Its easily
calculated as well as analysed. If its greater than the cost of capital the decision is to
accepted, otherwise rejected.
 It does not need required rate of return for its calculation which simplifies the process in
itself. Required rate of return is just a rough estimate and so its better that IRR does not
require it.
Disadvantages:-
 The main disadvantage that such projects carry is that it does not focus on economies of
scale in the operations of a business. Economies of scale is always beneficial for the
company as it decreases the cost per unit. But this concept is completely ignored by IRR.
 Certain projects like the Dependent and mutually exclusive ones are ignored in this
technique of capital budgeting (Hosaka, 2019).
 If there is a mix of positive as well as negative cash flows in that case multiple IRR's are
generated.

Question .3
Calculation of Ratios for the year ended 31st March, 2019:-
S.NO. RATIO FORMULA 2019 2018
Revenue 3495
Cost of Goods Sold 2182
1)
GROSS PROFIT
MARGIN
Revenue – Cost of Goods Sold /
Revenue 0.376
Revenue 3495
Opening Assets 2503
Closing Assets 3812
Average Total Assets 3157.5
2) ASSETS USAGE Revenue / Average Total Assets 1.107
Inventories 150 102
Cash Receivables 1010 315
Short Term Investments 75 0
Cash at Bank 452 1
Current Assets 1687 418
Trade Payables 289 119
Bank Overdraft 143 98
Taxation 312 285
Current Liabilities 744 502
3) CURRENT RATIO
Current Assets / Current
Liabilities 2.267 0.833
Current Assets 1687 418
Inventories 150 102
Current Liabilities 744 502
4) ACID TEST Current Assets – Inventories 2.066 0.629

/Current Liabilities
Opening Inventory 102
Closing Inventory 150
Average Inventory 126
Cost of Goods Sold 2182
5)
INVENTORIES
HOLDING PERIOD
Average Inventory / Cost of Goods
Sold * 365 21.077
Trade Payables 289 98
Bank Overdraft 143 285
Taxation 312 383
Long Term Loans 170 50
Total Liabilities 914 816
Total Shareholders Equity 2898 1951
6)
DEBT TO EQUITY
RATIO
Total Liabilities / Total
Shareholders Equity 0.315 0.418
1) Gross Profit Margin- It is the ratio that calculates the percentage of gross profit earned
per dollar of sales made. The higher such ratio is the better it is as it shows the efficiency
of the management in generating revenues above cost. The data of Agro Co. shows that it
is generating 37.6% of its revenues into profits.
2) Assets Usage- The asset utilization ratio calculates the amount that is earned on per dollar
of asset used. The more such ratio is the better the efficiency of the company as it can be
said that there is optimum utilization of assets for generating revenues. Agro company
has very good asset usage ratio as $1 of asset is bringing $1.107 sales for the company.
3) Current Ratio- The current ratio states the ability of the company to meet its short term
debts and obligations. It shows the availability of current assets to cover up thye current
liabilities of the company. For Agro company the ratio in 2018 is very poor as the current
assets are not even sufficient to meet its short term liabilities. But gradually the company

is performing better as in the year 2019 its current assets are more than double its current
liabilities.
4) Acid Test- This is a more specific version of current ratio where it is found out how much
short term assets are there to cover short term liabilities. In 2018 it is an alarming
situation as there are less assets to meet up the obligations but in 2019 they are double the
amount of liabilities (Arkan, 2016).
5) Inventories holding period- It shows the average number of days a firm holds the
inventory. The Agro company averagely holds the inventory for 21 days.
6) Debt to Equity Ratio- The percentage of company's operations being financed by its debt
funds. It shows the financial leverage of the company. In the year 2018 it is 41.8% and in
the year 2019 it is 31.5%.
b) It is very important to consider the audience in the financial statement analysis as there are
various users of such information. The external and internal users of the financial data of an
organization are crucial for the growth of the company.
1) Debt management- In order to manage the debts of the company and its timely
recoveries, the debtors have to be considered while doing the financial analysis. In how
much time are the debts to be recovered and what amount can get converted into bad
debts and what impact shall it have on the operating cycle.
2) Avoiding fraudulent activities- To avoid frauds and manipulations in an organization it is
important to analyse the financial data through auditors. It is also mandatory to supervise
the operations of employees and the management in an organisation.
3) Investments- For carrying out smooth and efficient operations in a company it is very
essential that there are sufficient funds available. These funds are provided by the
existing shareholders or can be provided by the potential ones. So it is important to
consider such audience in the financial analysis and to generate better results for them,
which shall ultimately lead to growth of the company.
4) Trend analysis- For the growth and development of Agro company it is important to
analyse the current trend in the market. For such analysis it is very important to consider
the tastes and preferences of customers and also the competitors.

QUESTION 4
Demonstrates the role of IFRS foundation, IFRS interpretation committee and IFRS advisory
council with international regulatory framework for accounting.
IFRS foundation: It is considered to be as a non- profit organization. The primary role of
the company is to develop the IFRS standards and also bring out accountability, efficiency and
transparency (Williams, 2014). It is useful in fostering long term financial stability associated
with the global economy. It is considered to be highly significant in setting the high quality
standards and also tends to comply with the accepted degree of financial reporting.
IFRS advisory council: It is considered to be as a formal advisory body to the trustee
associated with the IFRS foundation as well as international accounting standard board. It is
significant in effectively providing strategic set of support as well as the advice. It is significant
in advising the board upon the priorities and agenda for the decision making. It is prominent in
significant standard setting projects. International regulatory framework for accounting is the
prominent framework for preparation of the key financial statements in order to examine the
position of the organization.
IFRS interpretation committee: It is referred to as an interpretative body associated with
the international accounting standard board (Mexmonov, 2020). This is useful for the members
in providing best possible technical set of expertise and also improve the market experience
associated with the application of the IFRS standards. International regulatory framework for
accounting is prominent to provide the specific set of rules as well as the key regulations
associated with the accounting.
Demonstrating upon role of the audit committee within the corporate governance.
Corporate governance in turn is referred to as the prominent system through which the
company has been controlled as well as directed. However, the corporate governance is crucial
because it usually influence how the decision markers tend to act and they can be effectively held
highly accountable for the actions and decisions (Suryanto, Thalassinos and Thalassinos, 2017).
The audit committee must in turn also have at least one individual within the committee who is
referred to as a financial expert. They must have complete degree of knowledge associated with
the key financial issues. The key primary role of the audit committee is to effectively form the
significant set of the cornerstone related with the effective corporate governance. However, the

boards tends to completely rely upon the audit committee in order to offer significant oversight
related with the annual auditing process (Raimo, and et.al., 2020). Also, the audit committee
tends to significantly oversee the system related with the internal controls and is useful in
ensuring that the organization is compliant with the regulations and laws. The key significant
role associated with the corporate governance is that, it helps in providing actionable set of
oversight related with the financial reporting procedure. It is also relevant in maintaining and
creating high degree of anti- fraud programs and also useful in enhancing the audit functions
(Role of the Audit Committee in Corporate Governance, 2019). Another key prominent role is
that, it is useful in overseeing the external audit of the company. The audit committee tends to
mainly focus upon effectively protecting the investors and also the health of capital markets. The
key role of the audit committee within the corporate governance seek valid set of information
and also effectively obtain the legal set of advice from the professionals. An audit committee is
significantly made of the members of the board of directors of the company and is significant in
effectively overseeing the financial statements as well as the reporting of the company. The key
significant role of the audit committee is to effectively oversee the independent and internal
auditor. It is prominent in overnighting the financial disclosures and financial reporting.
CONCLUSION
This project reflects the economic order quantity, its calculations, advantages and disadvantages
and the total annual cost by following such model. Apart from this it highlights the various
investment appraisal techniques that are used to determine the option which is to be accepted.
Calculations of IRR, accounting rate of return and the payback period. And lastly it is showing
various important ratios that are used to carry out the financial analysis. Based on these ratios
important business decisions are taken. It can also be used as a tool to compare the company's
performance with its competitors.

REFERENCES
Books and Journals
Arkan, T., 2016. The importance of financial ratios in predicting stock price trends: A case study
in emerging markets. Finanse, Rynki Finansowe, Ubezpieczenia, (79), pp.13-26.
Çalışkan, C., 2020. The economic order quantity model with compounding. Omega, p.102307.
Gorshkov, A., Murgul, V. and Oliynyk, O., 2016. Forecasted payback period in the case of
energy-efficient activities. In MATEC Web of Conferences (Vol. 53, p. 01045). EDP
Sciences.
Hosaka, T., 2019. Bankruptcy prediction using imaged financial ratios and convolutional neural
networks. Expert systems with applications, 117, pp.287-299.
Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial
ratios, intellectual capital and dividend policy. Accounting, 6(5), pp.859-870.
Mexmonov, S., 2020. The Role of the Internal Audit Based International Internal Audit
Standards in Uzbekistan. Архив научных исследований. 33(1).
Raimo, N and et.al., 2020. Do audit committee attributes influence integrated reporting quality?
An agency theory viewpoint. Business Strategy and the Environment.
Sebatjane, M. and Adetunji, O., 2019. Economic order quantity model for growing items with
incremental quantity discounts. Journal of Industrial Engineering International, 15(4),
pp.545-556.
Suryanto, T., Thalassinos, J.E. and Thalassinos, E.I., 2017. Board characteristics, audit
committee and audit quality: The case of Indonesia.
Williams, P.F., 2014. The IFAC framework: International accounting and the public interest.
In Accounting for the Public Interest (pp. 161-174). Springer, Dordrecht.
Yang, M.H., 2018. Payback period investigation of the organic Rankine cycle with mixed
working fluids to recover waste heat from the exhaust gas of a large marine diesel
engine. Energy Conversion and Management, 162, pp.189-202.
Online
Role of the Audit Committee in Corporate Governance. 2019. [Online]. Available through:
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