Income Statement and Investment Analysis: Financial Accounting

This finance assignment provides a comprehensive analysis of financial accounting principles. It begins with the creation of an income statement for Danielle, including revenue, cost of sales, operating expenses, and net profit calculation. The assignment then delves into the concept of creative accounting, evaluating its definition and implications. Furthermore, the assignment explores investment analysis, calculating the payback period for a vending machine project and computing the net present value (NPV) of an investment. It also includes an interpretation of the results and a recommendation on whether to undertake the investment opportunity. Finally, the assignment explains the internal rate of return (IRR) and its role in investment decisions. This assignment is a valuable resource for students studying finance and accounting, offering practical examples and insights into key concepts.

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Section B.
(35 marks for each, total of 70 marks for this section)
Answer both the questions in this section
Question 1: Income statement
Title: Income statement for Danielle for the year ended 31st March 2020
Particular £ £
Revenue 102453
Less Return Outward 911 101542
Less Cost of Sales
Opening Stock 955
Add Purchases 48661
Less Discount allowed (560)
Less Return inward (743)
Less Closing Stock (1007) 47326
Gross Profit 54216
Less Operation Expenses
Salaries 28749
Motor Expenses 5673
Advertisement 1350
Insurance 3764
Heat and Light 2479
Rates 1245
General Expenses 941
Interest on Loan 4000
Rent 12000
Repairs and Renewals 7459
Stationery 780
Telephone bill 450
Total Operation Expenses 68900 (68900)
Net Profit / Net Loss (14682)
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b) Creative accounting has probably been best defined as “the use and abuse of accounting
techniques and principles to achieve financial results which, intentionally, do not
provide a true and fair view”. Evaluate this statement. Aim for this section to be around
300 - 400 words. (20 marks)
(Total 35 marks for Question B1)
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Creative accounting reflects a considerable challenge towards users, regulators and
accountants specifically in a climatic environment which has been informed heavily. In
essence, such practices take in account claims by regulators and accountants which
accounting data is reliable, useful and credible. A primary advantage of public
accounting statements is which would be allowing investors and stakeholders for
carrying out comparison related to financial health of competitive organisations. The
areas on which accounting has its special concentration is:
 It prioritizes that investors must always be able to go through financial statements
and the company shouldn't be playing any foul activities. It would be helpful for
them to evaluate the journey and achievements of the business in a such a way that
it would prove to be useful for the company.
 Creative accounting related tricks are observed to be varying in nature and
constantly evolve as regulatory changes. It can be explained as a useful tool which
would prove to be beneficial when there are enough alterations and modifications
being made and the company could cope its working according to it as well. Thus,
there wouldn't be any false figures recorded and no error would occur.
 It capitalizes and concentrates on loopholes in context of accounting standards for
falsely portraying a better picture of the business. It further explains that the true
and fair accounts should be prepared without hampering the working and
functioning of business in long run. It would be helpful for the business to gain and
build trust of people in the economic environment.
 It would help to reduce and eliminate risks which are associated with the running,
functioning and working of a firm. It is therefore useful for a company to find out
which medium would serve their goals right and how they can develop statements
that would result to be fruitful.
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Question 2.
a) Calculate the payback period of the vending machine investment project (show the
workings) (10 marks)
Year Cash flow Cumulative Cash Flow
0 (18000) (18000)
1 4000 (14000)
2 4120 (9880)
3 4244 (5636)
4 4371 (1265)
5 4502 3237
Payback period = 4 years + 1265 / 4502 = 4.28 Years
The above calculation shows that amount of 1265 will be recovered out of the cash flow
for the fifth year that is 4502. Therefore, we proportionate the same by dividing both
the values and the answer that is arrives is .28 years. Therefore, the final conclusion has
been made that the total amount invested in the beginning will be recovered in 4.28
years and that is the payback period.
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b) (I) Compute the net present value of the investment. (10 marks)
Years Cash Flow Discount Factor Present Value
1 300 .926 277.80
2 350 .857 299.95
3 400 .794 317.60
Total Present value
of cash inflow
1790.10
Less Cash Outflow (5000)
Net Present Value (3209.90)
The formula for calculating the Net Present Value will be mentioned under:
NPV = (Present Value of Cash Inflow – Present Value of Cash Outflow)
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b) (ii) Interpret your results and advise whether Algie should undertake the investment
opportunity on the basis of them. Aim for this section to be around 50 words.
(5 marks)
Interpretation: On the basis of the above result it has been interpreted that the net
present value for making the investment is negative that is 3209.90. Therefore, it is not
advisable for the company to make the investment in the above project. Those project
will be selected whose NPV will be positive as the returns in these project are beneficial
for the company.
c) Explain what is meant by the internal rate of return (IRR) of an investment, and how it
can be used to decide whether or not to undertake an investment.
Aim for this section to be around 150 -200 words. (10 marks)
IRR is the rate at which the present value of cash inflow is equals to present value of
cash outflow. Those projects will be selected that provides higher IRR. This rate is
useful in deciding the rate of return from the project which is under consideration. The
internal rate of return can be explained as a tool, technique or method which is adapted
for carrying out financial analysis for estimation of the profitability of potential
investments being made. IRR can be explained as discounting rate which makes the net
present value of all cash flow related activities equivalent to zero in a discounted cash
flow analysis. IRR can be used as a deciding factor which would help to proceed with the
project or investment being made. If IRR is observed to exceed the cost of capital, the
greater the projected IRR on a projected plan, the higher would be the net cash flow
towards a business enterprise. Based on such computation organisation will be able to
decide whether a project must be accepted or rejected.
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(Total 35 marks for Question B2)
End of Exam
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