Comprehensive Financial Ratio Analysis and Project Appraisal

This assignment provides a comprehensive analysis of financial statements, focusing on ratio analysis and investment appraisal techniques. The first section presents an analysis of accounts, including the calculation of net profit and the preparation of a balance sheet. The second section involves a detailed ratio analysis of two companies (A and B), examining profitability, efficiency, and liquidity through calculations such as gross profit margin, operating profit margin, inventory turnover ratio, receivables turnover ratio, current ratio, and acid-test ratio. The analysis concludes that Company B is more successful based on the calculated ratios. The third section assesses a project's financial viability using payback period and net present value (NPV) calculations. It also discusses factors J Ltd should consider for project validity, such as legal aspects, competitor strategies, staff capabilities, supplier relationships, and market reputation. The importance and advantages of the Internal Rate of Return (IRR) are also highlighted. Desklib offers more solved assignments and study tools for students.

Accounts

SECTION A
Particulars Amount
Sales 20000
Less: Cost of goods sold 14700
Opening inventory 2000
Add: Purchases 15200
Less: inventory 2500
Gross Profit 5300
Operating expenses and
incomes
4200
Buildings- accumulated
depreciation 400
520
Add: depriciation120
Machinery- Accumulated
depreciation 500
1000
Add: depreciation 500
Administration costs 400 300
Less: Prepaid administration
expenses 100
Selling expenses 700
Distribution expenses 200
Audit fee 70 90
Add: owed audit fees 20
Bad debt 30
Salaries and wages 900 930
Add: Salaries accrued 30
Directors’ remuneration 300
Debenture’s interest paid
60
80
Add: owed interest 20
Interim ordinary dividend
paid
50
Net profit 1100
Less: taxation 200
Net profit after tax 900
Less: ordinary dividend 27 27
Net profit 873
Liabilities and capital
Salaries accrued 30

Audit fees owed 20
Payables 1000
Unpaid tax 200
£1 Ordinary shares 8000 8027
Unpaid dividend 27
5% Debentures 1600 1620
Add: owed debenture interest 20
Retained profits 1390 2263
Add: profit after tax 873
Total 13160
Assets
Buildings at cost 2400 2280
Less: depreciation 120
Free hold premises at cost 6000
Machinery 3000 2500
Less: depreciation 500
Prepaid administration expenses 100
Inventory 2500
Receivables 1400
cash 50
bank 130
Total 14960
SECTION 2
Question 2
Particulars A B Particulars A B
Opening Inventory 20 40 Sales 450 880
Cost of Sales 220 370 Closing Inventory 30 50
Gross Profit 240 520
480 930 480 930
a) Profitability Ratios:
1) Gross Profit Margin = Gross Profit/ Sales* 100

Gross Profit of A = 240/450* 100 = 46.15%
Gross Profit of B = 520/880* 100 = 59.09%
2) Operating Profit = operating Income/ Sales
A = 100/450* 100 = 22.22
B = 300/880* 100 = 34.09
b) Efficiency Ratios:
1) Inventory Turnover ratio = Cost of Sales/ Average Inventory
A = 220/25 = 8.8 times
B = 370/45 = 8.22 times
2) Receivables Turnover Ratio = Credit Sales/ Average Accounts Receivable
A = 450/35 = 12.8 times
B= 880/55 = 16 times
c) Calculation for Current ratio:
Particulars A B
Cash 20 30
Inventory 30 50
Accounts Receivables 35 55
Current Assets 85 135
Accounts Payables 40 60
Current Liabilities 40 60
Current Ratio = Current Assets/ Current Liabilities
A= 85/40 = 2.125
B = 135/60 = 2.25
d) Acid Test ratio = (Current Assets - Inventory)/ Current Liabilities

A = (85 - 30)/40 = 1.375
B = (135 - 50)/60 =1.417
e) Company B is the most successful in the ratios calculated above. All the ratios calculated show that
Company B has performed better than Company B.
● Gross Profit ratio of Company B is more than Company A. It means that The profit margin of
Company B is more than Company A
● Inventory Turnover Ratio of COmpany A is more than Company B. Which is not that good but
there is a minor difference. It shows how many times the company is restocking its products.
● Receivables Turnover ratio of Company B is more than Company A. It means that the customers
are paying their debt on time and the company is receiving their debts on time.
● Current ratio of Company B is more than Company A. It helps the company to pay its short-term
obligations and shows that the company is able to pay its debts effectively.
Question 3
Year Annual Cash Inflows£ Cumulative Cash Inflows
1 600000 600000
2 700000 1300000
3 800000 2100000
4 500000 2600000
5 400000 3000000
6 300000 3300000
6 (Scrap
Value)
500000 2800000
a) The table shows that the cumulative cash flow at the end of 6th years is more than initial
investment of £2000000
Payback Period = Initial Investment/ Total Cash inflow = 2000000/2800000 = 0.71 years.
b) Net Present Value = Total Present Value of Cash INflows - Present values of initial investment
= 8,662,000 - 2,000,000 = 6,662,000.

c) Financial Viability measures the risk of the company. It shows that there is a low risk and the
payback period is also 0.71 years.
(d) There are various factors that can be considered by J ltd for considering the validity of
project and taking financial decision.
(1) The management must consider the changes occurring in legal aspects of business. It has to
consider that there are no such changes which can negatively impact the working of the project.
(2) Manager must compare the marketing strategies of competitors and its future impact on its
own product.
(3) It should also evaluate the abilities of its staff members, that whether they are capable of
handling the project or not.
(4) Relationship with suppliers should also be considered for ensuring that there will be no
problem at the time of procurement of funds.
(5) reputation of business in market also matters while evaluating the performance of project.
e) 1. IRR is important because it measures how well a project, capital expenditure or investment
performs over time.
2. It helps companies compare one investment to another or determine whether or not
a particular project is viable.
IRR is the value at which the discounted value of inflows and initial investment is equal to each
other.
Advantages
a) It does not consider the hurdle rate which makes its calculation easy.
b) It takes into account the time value of money which presents the true value of inflow of
cash.