Accounting and Finance: Investment Appraisal, Statements & Analysis

This report provides a comprehensive analysis of accounting and finance concepts through various case scenarios. It begins with the preparation of financial statements for Tom & Jerry Limited, detailing profitability and financial position based on provided transactions. The report then delves into break-even analysis for Fidel & Ana Limited, assessing contribution margins, break-even points, and the impact of strategic decisions like advertising. Furthermore, it evaluates the viability of a new machine for Bimbagu Plc using investment appraisal tools such as payback period, net present value, and average rate of return, discussing the merits and limitations of each technique. The report also explores the benefits and limitations of budgets as strategic planning tools, providing a holistic view of financial decision-making in business contexts. Desklib offers this and many other solved assignments for students.

Introduction to Accounting and Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1 –TOM & JERRY LIMITED....................................................................................3
Preparing statement of profitability and Financial Position by following the given transactions
.....................................................................................................................................................3
QUESTION 2 – FIDEL & ANA LIMITED....................................................................................3
a. Assessing contribution that each electric kettle will make referring the given scenario.........3
b. Computing break-even point and margin of safety.................................................................3
c. Calculating profit which firm will make if it produces and sells 48,000 electric kettles........3
d. Analyzing whether proposed strategy for Stockstone Ltd is good or not................................3
e. Explain the underpinning assumptions associated with the break-even model.......................3
QUESTION 3 – BIMBAGU PLC...................................................................................................3
a. Assessing the viability of new machine for Bimbagu Plc using investment appraisal tool....3
b. Analyzing the key merits and limitations of the differing investment appraisal techniques...5
c. Explaining the key benefits and limitations budgets as a strategic planning tool...................6
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Accounting may be defined as a process which is undertaken by manager for recording
transactions associated with business. With regards to business organization, accounting and
finance is highly significant as it furnishes information about company’s position as well as
performance. In order to meet information need of stakeholders every publicly listed firm
prepares and publish accounting statements at the end of year. For the purpose of effective
decision making and performance enhancement accounting team lays high level of emphasis on
evaluating each & every alternative available for investment purpose. The present report is based
on different case scenarios which will provide deeper insight about the concept of break-even
analysis and investment appraisal techniques. It highlights profitability and liabilities as well as
Tom & Jerry by preparing financial statements. Further, it entails the contribution of break-even
analysis in decision making pertaining to sales and production. Report also depicts the use of
capital budgeting technique in the selection of project which suitable for investment purpose.
Along with this, it also exhibits the strength and weakness related to each technique of
investment appraisal.
QUESTION 1 –TOM & JERRY LIMITED
Preparing statement of profitability and Financial Position by following the given transactions
Particulars Figures (in
£)
Figures (in
£)
Sales 633000
Less: cost of sales 297000
Wages paid 117,000
Add: Outstanding wages at the end of the year 2175 119175
GP 216825
Indirect expenses:
Depreciation on van 9600

Electricity Expenses 7725
Van running expenses 33600
Bad debts 1500
Rent paid (Less: prepaid rent at the end of the year)
(112500 – 22500) 90000
Total Operating Expenditure 142425
Net profit before tax 74400
Tax 5775
Net income after tax 68625
Statement of Financial Position for Tom & Jerry limited at 31 December 2020 is as follows:
Particulars Figures (in
£)
Figures (in
£)
Assets
Fixed assets: Delivery van 50400
Total fixed assets 50400
Current assets
Trade receivables 64500
Prepaid Rent 22500
Closing stock 228000
Cash 90000
Prepaid tax 1125
Total current assets 406125
Total assets 456525
Liabilities & shareholder’s equity
Current Liabilities
Trade Payables 93000

Bank O/D 110700
Outstanding Wages 2175
Outstanding Electricity Expenses 2025
Total current liabilities 207900
Shareholder's Equity
Share capital 180000
Add: Net profit 68625
Total shareholder's Equity 248625
Total liabilities and shareholder's Equity 456525
Working notes:
W.N. 1
Particulars Figures (in £)
credit sales 504,000
cash sales 129,000
Total Sales 633000
W.N. 2
Particulars Figures (in £)
Van’s purchase price 60000
scarp value 12000
Life of asset 5
Depreciation
(cost – scrap) / life 9600

W.N. 3
Particulars Figures (in £)
Expenses paid 5,700
Add: Outstanding expenses at the end of the year 2025
Sum of electricity expenses 7725
W.N. 4
Particulars Figures (in £)
Credit Purchases 486,000
Less: Trade Payables 393,000
Net Trade Payables 93000
W.N. 5
Particulars Figures (in £)
Annual Rent 90000
Rent Per month 7500
Prepaid rent of 3 months 22500
W.N. 6
Particulars Figures (in £)
Net profit after tax 68625
Reserves 68625
W.N. 7
Particulars Figures (in £)
COGS (Credit) 243000

COGS (Cash) 54000
Total Cost of sales 297000
Credit Purchases 486000
Cash Purchases 39000
Total Purchases 525000
Closing stock (525000 – 297000) 228000
W.N. 8
Particulars Figures (in £)
Issue of Equity 180000
Receipts from Trade Receivables 438000
Total Receipts 618000
Rent paid 112500
Tax paid
(2400+4500) 6900
Delivery van purchased 60000
Wages paid 117000
Electricity Expenses 5700
Payment to Trade Payables 393000
Van running expenses 33600
Total outflows 728700
Closing bank balance (Bank overdraft) (110700)
W.N. 9
Particulars Figures (in £)
Credit Sales 504,000

Less: Receipts from Trade Receivables 438,000
Closing Trade Receivables 66000
Less: Bad Debts 1500
Net Trade Receivables 64500
W.N. 10
Particulars Figures (in £)
Tax up to 31 march 2020 2,400
Add: Tax from 1st Jan 2020 to 31st march 2021 4,500
Less: Prepaid tax (from 1january 2020 to 31 march 2020) 1125
Net Tax 5775
W.N.11
Particulars Figures (in £)
Cash Sales 129000
Cash Purchases 39000
Net Cash Balance 90000
W.N.12
Particulars Figures (in £)
Delivery van purchased 60000
Depreciation 9600
Net asset value 50400

QUESTION 2 – FIDEL & ANA LIMITED
a. Assessing contribution that each electric kettle will make referring the given scenario
Variable Costs (per unit)
Particulars Figures (in £)
Materials 5.25
Labor 2.95
Variable overheads 1.85
Total VCPU 10.05
Fixed cost
Particulars Figures (in £)
Production 59000
Selling etc 47600
Total FC 106600
Particulars Figures (in £)
Selling price per unit 13
VCPU 10.05
Contribution per unit 2.95
b. Computing break-even point and margin of safety
Particulars Formula Figures
Fixed Cost 106600
Contribution per
unit
2.95
BEP (in units) FC / CPU 36136
BEP (in £) BEP (in units) * SPU 469763

Margin of Safety
units Current sales units – BEP units
53000 – 36136
= 16864
Margin of safety
in units Actual sales - Break even sales
689000 – 469763
= 219237
The above depicted table shows that Fidel & Ana Ltd need to sell 36136 units for
deriving the situation of no profit & loss. At this level, firm would become able to recoup all the
expenditure incurred.
c. Calculating profit which firm will make if it produces and sells 48,000 electric kettles
Particulars Units Figures (in £)
Figures (in £)
Sales 13 624000
Variable Cost
Materials 5.25 252000
Labor 2.95 141600
Variable overhead 1.85 88800
Total variable expenses
482400
Contribution 141600
Fixed Cost
Production 59000

Selling cost etc. 47600
Total FC 106600
Profit 35000
d. Analyzing whether proposed strategy for Stockstone Ltd is good or not
Particulars Unit price Figures (in £) Figures (in £)
Sales 14.17 878682
Variable Cost
Material 5.25 325553
Labor 2.95 182930
Variable overhead 1.85 114719
Less: Total variable expenses 623201
Contribution 255481
Less: Advertising 45000
Net contribution 210481
Fixed Cost
Production 59000
Selling cost etc. 47600
Total Fixed expenses 106600
Net profit 103881
According to above evaluation advertising strategy will prove be good for Stockstone Ltd
as it helps in attaining profit of £103881.
e. Explain the underpinning assumptions associated with the break-even model
BEP mode helps in examining margin of safety by referring revenues and cost associated
with particular product. Manager can determine the number of units which need to be sold for

covering both fixed and variable expenses (Tanco, Cat and Garat, 2019). Model or concept of
BEP is based on several assumption which mentioned below:
 Fixed cost, selling price, per employee productivity and product mix remains constant
which is not possible in the dynamic business arena.
 It focuses on dividing cost in terms of fixed and variable that associated with production
aspect (Kravchyk, Okur and Kovalenko, 2021). On the contrary to this, firm which
follows BEP model avoids semi-variable cost or expenses.
 According to this, Fidel & Ana assumes that no improvement will take place in
technology and efficiency of labor. On the other side, now technological advancements
are taking place more frequently (Fuksa, 2021). Companies make focus on adopting latest
advancement which contributes in effectual business operations.
 Cost and revenue shares linear relationship with each other which is also not true.
By doing evaluation it has assessed that BEP model is used by most of the firm with the
motive to assess sales unit and figures require to recover expenses (Sintha, 2020).
Specifically, manufacturing firms like Fidel & Ana undertakes BEP model for profit
planning and taking other strategic decision about business. However, there are some
limitations which affect the usage of BEP. The rationale behind this, all the assessment is
done considering past rather than future (Tannen, 2020). At the time of applying BEP model
accountant of Fide & Ana Ltd should refer limitations related to this model. Through this,
company would become able to make appropriate estimation ad thereby decisions as well.
QUESTION 3 – BIMBAGU PLC.
a. Assessing the viability of new machine for Bimbagu Plc using investment appraisal tool
According to the given case scenario, Bimbagu Plc, which manufactures motor parts,
wants to assess the extent to which proposed investment option in new machine will be good. In
this regard, several investment appraisal tools have been applied such as payback, net present
value and average rate of return.
Assessment of Cash inflows