Analysis of Financial Resources: Planning, Budgeting & Statements

This report provides a detailed analysis of managing financial resources and making informed financial decisions. It begins by examining the advantages and disadvantages of obtaining a listing on the London Stock Exchange, along with the methods for achieving such a listing and raising capital. The report then delves into the calculation of the cost of share capital, the importance of financial planning, and the information needs of different management levels, highlighting the impact of finance on financial statements. Furthermore, it incorporates absorption costing and the creation of financial statements, including project evaluation using various techniques to facilitate sound decision-making. Finally, the report concludes with a ratio analysis and a discussion of the format of financial statements. The document is available on Desklib, where students can find a wealth of past papers and solved assignments.

Managing financial resources and
decisions
1

Table of Contents
Introduction................................................................................................................................4
Task 1.........................................................................................................................................5
1.1 Explain the advantages and disadvantages of obtaining a listing in a stock exchange like
the London stock exchange.........................................................................................................5
1.2 Describe the methods of obtaining a listing on the London Stock Exchange.......................7
1.3 Determine the methods of raising capital on the London Stock exchange............................8
Task 2.......................................................................................................................................10
2.1 Calculation of cost of share capital......................................................................................10
2.2 Importance of financial planning.........................................................................................12
2.3 Information needs of Director, senior manager and junior managers.................................13
2.4 Impact of finance on financial statements...........................................................................14
Task 3.......................................................................................................................................15
3.2 Calculations in respect of overheads...................................................................................15
3.1 Preparation of budgeted statements.....................................................................................17
3.3 Project evaluation................................................................................................................19
Task 4.......................................................................................................................................23
4.1 Types of financial statements..............................................................................................23
4.2 Income statements in various organizations........................................................................24
4.3 Ratio analysis.......................................................................................................................26
2

Conclusion...............................................................................................................................30
References................................................................................................................................31
3

Introduction
In any business, it is very important that all the resources which are there shall be managed in
such manner by which benefits are attained and this also involves making best decisions. In
this report, all of these aspects will be taken into use. The first part will be involving the
methods of listing and its benefits. Then in the next part calculations in respect of share
capital valuation will be made and together with this financial planning and information
needs will also be considered by which financial statements are affected. The third task
incorporates the absorption costing and making of financial statements. Also, the project
evaluation will be carried out under this by use of various techniques so that proper decision
can be made. Lastly, ratio analysis will be performed and also the format of statements will
be discussed.
4

Task 1
Introduction
In this report, all the components which are involved in the listing of the company on the
stock exchange will be taken into consideration. All the methods which are involved and
their merits and demerits will be discussed.
1.1 Explain the advantages and disadvantages of obtaining a listing in a stock exchange
like the London stock exchange.
Listing of business in stock exchange has various pros and cons. Listed shares provide
transparency in the transactions.
Advantages of Listing in Stock Exchange: The important advantages are-
Ability to raise further capital: Listing of the business in the stock exchange increases the
ability to raise the further capital through rights issued and this process attracts the wide
range of investors.
Benefits to the Public: Public is also benefited through the listing of the business in stock
exchange as various investors and financial institutions can take a decision before investing
in the business (Kowalewska and Di Meo, 2015). The daily data provided by the stock
exchange in the form of price quotation helps the public for research purposes.
Timely disclosure of Corporate Information: The listing of business with the exchange
provides timely disclosure related to the stocks, bonds, dividend, and rights issued which in
turn gathers investor’s confidence and create transparency.
Collateral Value of Securities: Listed securities also act as a collateral security for
financers. For the need of finance, the company is liable to take credit by keeping capital as a
collateral security.
Heightened Profile: The companies whose stock is listed are more prominent and noticeable
as these are of the more high profile as compared to the privately owned companies (Doukas
5

and Zhang, 2013). With this status, the company attracts more clients, customers, and the
investors.
Disadvantages of Listing in Stock Exchange: The disadvantages are:
Loss of control: Company can be started by a single person or few people but once the
company is listed under the stock exchange, the company now belongs to the one willing to
pay for the stock. This may lead to the loss of control of other members.
Undervaluation Risk: There can be lack of liquidity in the business due to less demand for
shares. With the less demand for shares, the prices of the shares will decrease and which in
turn will lose the adequate investors.
Accountability and Scrutiny: Companies listed on the London Stock Exchange have to
comply with the rules and regulations of the market they populate (Glavina, 2013). Public
companies are public property which acts as a regulator and ensure ongoing compliance.
Cost and Time Consuming: Listing the shares of the public company under the stock
exchange involves various floating cost so it is not suitable for every business. The process of
floating is very time-consuming as it takes many months to complete. So, it is difficult for the
business to manage.
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1.2 Describe the methods of obtaining a listing on the London Stock Exchange.
There are various steps which need to be considered while listing the business on the stock
exchange.
The detail of methods is explained below:
Appointing Advisors: To get listed in stock exchange it is necessary to have certain advisors
who are of relevant market experience these can be broker, sponsor or a reporting accountant.
A broker is appointed to help in marketing when the company is ready to trade and to help
with the stock prices. Sponsor or a corporate advisor is appointed to carry out admission
process and to guide for legal requirements. Reporting accountants reviews or evaluate the
financial position of the company to meet the obligations. They are appointed to enhance or
increase the performance of the company.
Preparing the Company: Various aspects need to be considered before starting the listing
process which includes evaluation of assets and liabilities, share capital, contracts, and
insurance. Assets are evaluated so as to check the control of the business to meets its
liabilities in case of the unforeseen situation (Kostas, 2014). The share capital means how to
allocate or organize the current capital. Formulation of the contracts should be done with
subcontractors and suppliers. Insurance is reviewed so as to check that all the insurances are
up to date and under the proper cover.
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Step 1: Appointing Advisors
Step 2: Preparing the Company
Step 3: Joining Market

Joining Market: Time taken to join the market depends upon the route chosen by the
advisor. Once the advisor is appointed than various other steps are also to be considered such
as the creation of the prospectus, apply for admission to trade and complete the underwriting
agreement. Formulation of the prospectus is important so as to attract investors (Pocius, et.
al., 2014). It should contain all the information for investors to decide whether to invest or
not. All the requirements must be met so as to apply for both London stock exchange and
UKLA. The agreement must be signed between the business and the parties such as selling
shareholders, brokers and the director.
Once this process has been successfully done, then the company is ready to trade their shares
in the main market.
1.3 Determine the methods of raising capital on the London Stock exchange.
A company may raise funds for various purposes through different methods. The sources of
raising funds depend upon the requirement of the business. Companies can raise funds
through the short term as well as long-term capital.
Methods to raise long-term capital:
An issue of Debentures: Debentures are mostly issued to finance the long-term sources of
the business. Companies have rights to raise funds through the issue of debentures. The rate
of interest is payable at fixed rates even if the business is incurring losses.
An issue of Shares: Issue of shares is the liability of the business. The liability of the
shareholders is limited to its face value. Public companies can invite the general public
whereas the private companies have no such restrictions. Shares are of two types: Equity and
preference shares (Pour and Lasfer, 2013). The rate of dividend in equity share is based on
the profit earned while in preference shares it is payable at the fixed rate. Everyone has the
voting rights in equity share but preference share does not enjoy the voting rights.
Loans from Financial Institutions: Financial institutions grant the loan to the business for
particular scheme or project against collateral security. These loans are secured by various
financial institutions. Loans are provided for a period of 25 years for the particular project.
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Reinvestment of Profits: Reinvestment of profit means after earning the profit many
companies reinvest their profit so as to earn more profits. Companies do not distribute their
whole profit as dividend but reinvest the amount reserved. This technique is adopted by the
firm for many purposes some of which are for expansion and redemption of old debts.
Methods to raise short-term capital:
Discounting Bills Of Exchange: This is a short-term document prepared by the buyer when
the goods are sold on credit. Bill of exchange is discounted by the bank before the date of
maturity and the bank charges are deducted from the initial amount offered. This is the most
widespread technique used for raising the capital.
Trade Credit: Trade credit is the document prepared for short-term financing to the
business. This is prepared when companies buy spare parts and raw materials from suppliers
on credit for the shorter period (Mrzygłód and Nowak, 2013). If the quantity of the purchases
is increased the more credit is provided.
Bank Overdraft: Overdraft means that the bank allows the company to withdraw the
amount from the bank up to certain limit. The rate of interest charged on the bank overdraft is
higher than that of any other short-term sources.
Cash Credit: Cash credit is provided by the commercial bank against certain securities such
as Government bonds, promissory notes, and goods in stock. The rate of interest on bank
deposits is lower than that of cash credit. So, it is less used by the organizations to raise
capital.
Conclusion
From the discussion throughout the report, it can be concluded that appropriate decisions
must be taken regarding the sources of finance. Whether its manufacturing industry or
service based the selection of finance reflects the profitability of the company. Besides, the
report also deals with the listing of the business on the London Stock Exchange and the
methods of raising the funds. This proper procedure for listing the business must be followed
by every organization. Listing of business in the stock exchange is very important as it
9

benefits the general public by attracting new investors. So, it can be concluded that Milner
Chemicals plc should consider all the highlighted factors to attain the financial strength.
Task 2
Introduction
In this report, all the aspects which are related to the capital of the company will be discussed
and for this calculation of the cost of capital will be made. Then the financial planning and
information requirements will be explained. The impact which is borne by the financial
statement due to finance will also be included.
2.1 Calculation of cost of share capital
a) Calculation of cost of ordinary share capital
Dividend yield method
Ke = DPS/MPS + Growth
Particulars Value
DPS 0.1
MPS 2
Growth 8%
Ke 13.00%
b) Calculation of cost of preference share capital
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Kp = Dividend/ price of share
Particulars Value
Dividend 0.12
Price of share 1.2
Kp 10%
c) Cost of debenture after tax
kd = I/Market price (1-Tax rate)
Particulars Value
Interest 10
Market price 125
Tax rate 20%
Kd 6.4
d) Calculation of weighted average cost of capital
11

Particul
ars
Mar
ket
Valu
e
Cos
t of
fun
d
Amou
nt
Ordinar
y shares
4000 13
%
520
Debentu
res
1250 6.40
%
80
Total 5250 11.4
3
600
Working Note: In this, the number of preference shares was not available and therefore cost
is calculated by excluding it and is determined to be 11.43%.
2.2 Importance of financial planning
Financial planning is the tool in which there is the formulation of various policies and
procedures which are to be undertaken in the company so that all the financial activities are
performed in the best possible manner (Masilo, 2014). The importance of this is explained
hereunder:
 By the help of this best capital structure will be set. All the sources will be evaluated by
the use of planning and best among them will be selected so that funds are available at
least cost.
 The requirements in terms of funds will be identified and by that, they will be collected
on time.
 All the funds will be invested in an appropriate manner as a proper comparison will be
made by the use of the plan.
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 Operations will be carried out in an effective manner as proper decisions will be made in
respect of them.
2.3 Information needs of Director, senior manager, and junior managers
In any company, there are various decisions which are required to be made and in that
process, various persons are involved. They all will be requiring several types of information
so that all the conduction of activities can be done in proper manner. Directors are the main
body of an organization and most of the decisions are made by them only. They will be
requiring information about all the aspects which are present in business. They are required
to be available with all the records of the company and the financial statements which are
prepared for any particular year. The laws which are applicable and are to be complied with
shall also be in knowledge of them. By the use of this, they will be able to determine that
whether all the requirements are fulfilled or not (Fung, 2014). All the data about the shares
and the manner in which dividend is being paid to shareholders shall also be provided to
them. This all the will be discussed by them in the meetings and then proper decisions and
the modifications which are required to be made will also be identified. As the company is a
growing company so this will be necessary that such plans are made by which growth and
development will be made possible and for this, all the reports which are made by managers
will be required by them.
Senior managers in business are responsible for the monitoring and controlling of the entity
and they will be requiring the information in this respect. They shall be having all the reports
which are made and also the plans which have been made in the company. They will be
evaluating the financial statements to know the incomes and expenses which are made and by
that they will ensure that targets are met or not and if the company is following all the
policies and plans. For this, they will be required to have all the plans.
Junior managers are required to ensure the implementation and for this, they will be required
to have information about the employees and the skills which are possessed by them so that
they can allocate the work in accordance with that. All the information which is required to
complete any task will also be required by them so that it can be performed in a proper
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manner. the basic information about inventory and other requirements will also be needed so
that they can ensure their availability.
2.4 Impact of finance on financial statements
In the business, there are various sources from which finance can be obtained and it is
necessary that proper capital structure is maintained as by that various another aspect of the
business will be affected. If the company is going for debts that it will be required to pay
interest on them and by these profits of the entity will be affected. If the interest cost will be
more than the profits which will be made are reduced and this will be affecting financial
statements as they are required to be reported in them by which all the statements will be
modified. If the company will be making a proper investment of the funds then this will lead
to more returns and this will be beneficial for the investors as their return will also be
increasing. There will be the need to make proper inclusion of the tax requirements in the
making of the financial statements and this will be affected by finance as of the interest will
be there then tax benefit will be received on the issue of the shares company will not be
receiving any kind of tax deduction (Jonada and Aliaj, 2014). In this company will also be
required to comply with all the laws which have been made in this regard by which proper
listing is made. Also, some of the formats require proper disclosure which will have to be
made. This will also be having an impact on the financial statements and then they will be
used by all for various processes by which benefits will be attained.
Conclusion
From the report, it can be concluded that in order to maintain the business in a successful
manner it is required that proper sources of funds shall be chosen and for this planning will
be undertaken. The calculation of the cost of capital for various sources is also made and the
impact which will be there on financial statements are also identified.
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Task 3
3.2 Calculations in respect of overheads
i) Calculation of fixed overhead absorption rate per direct labor hour
Particulars Value
Total Fixed overheads 80000
Total direct labor hours 20000
overhead absorption rate per hour 4
ii) Calculation of fixed overhead cost for each unit
Particulars Gold
Tap
Silver
Tap
Hours required per unit 5 2.5
Cost per hour 4 4
Overhead cost per unit 20 10
iii) Calculation of budgeted production cost per unit
15

Particulars Gold
Tap
Silver
Tap
Direct material 20 15
Direct labor 50 25
Variable overhead 10 10
Fixed overhead 20 10
Budgeted production cost per
unit
100 60
iv) Calculation of budgeted selling price
Particulars Gold
Tap
Silver
Tap
Budgeted production cost per
unit
100 60
Profit @ 25% 25 15
Selling price 125 75
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3.1 Preparation of budgeted statements
i) Production budget
Particulars Gold
Tap
Silver
Tap
Total
Budgeted units 2000 4000 6000
Add: Closing stock 0 0 0
Less: Opening stock 0 0 0
Production units 2000 4000 6000
Production cost per unit 100 60
Total production cost 20000
0
24000
0
44000
0
ii) Budgeted Profit and loss account
Particulars Gold
Tap
Silver
Tap
Budgeted units 2000 4000
Selling price 125 75
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Total sales value 250000 300000
Total production cost 200000 240000
Profits 50000 60000
iii) Calculation of the desired level of sales
Particulars Amount
Fixed cost 40000
Required profit by Gold tap 65000
Total contribution 105000
Contribution per unit 45
Sales Units of Gold tap 2333.33
Sales units of silver tap 4000
Total sales units 6333.33
Working notes:
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Desired profit 12500
0
Profit made by Silver Tap 60000
Profits to be made by Gold
tap
65000
The fixed overhead required
by silver tap
40000
Remaining fixed cost 40000
Calculation of contribution per unit for the gold tap
Particulars Amou
nt
Sales price 125
Variable cost (20+50+10) 80
Contribution per unit 45
3.3 Project evaluation
a) Calculations using invest appraisal techniques
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i) Payback period
Particulars Cash
flow
Cumulativ
e cash
flow
Year 1 24000
0
240000
Year 2 20000
0
440000
Year 3 28000
0
720000
Year 4 32000
0
1040000
Year 5 16000
0
1200000
Year 5 (Scrap value) 20000
0
1400000
Payback period = 3 + 1000000-720000/320000
= 3.875 Years
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ii) Accounting rate of return
Particulars Cash flow
Initial investment 1000000
Year 1 240000
Year 2 200000
Year 3 280000
Year 4 320000
Year 5 160000
Year 5 (Scrap value) 200000
Total Inflows 1400000
Average annual income 280000
Annual depreciation 160000
Average net annual income 120000
Accounting rate of return 12%
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iii) Net present value
Particulars Cash
flow
PVF @
10%
PV @
10%
Initial investment 100000
0
1 100000
0
Year 1 240000 0.909 218182
Year 2 200000 0.826 165289
Year 3 280000 0.751 210368
Year 4 320000 0.683 218564
Year 5 160000 0.621 99347.4
Year 5 (Scrap value) 200000 0.621 124184
Total PV of inflows 103593
5
Net present value 35935
b) Evaluation of viability of the project
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In this company has set the criteria and it has been met. There is the target of 4 years for the
payback and the period which is identified in the given case is 3.875 which is less than this
and also there is positive NPV which ensured that company will be making profits by buying
the machine and the proposal is acceptable.
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Task 4
4.1 Types of financial statements
Financial statements are the documents which are required to be made in all the companies
and in them there are various types and they are as follows:
Balance sheet: This is the document in which all the information in respect of the assets and
liabilities which are present are involved and by that various decisions are made (Cascino, et.
al., 2014). The main items which are involved are the fixed assets, inventories, share capital
and debts.
Income statements: In this, all the expenses which are made and the incomes which are
made by the use of them are described. This helps in knowing the profits which are earned.
In this the sales, purchases, all the expenses are included.
Cash flow statement: This will be including the information about all the cash activities
which are undertaken. In this, there is the need to categorize them in cash flow from
operations, investment and financial tasks.
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4.2 Income statements in various organizations
Manufacturing company
25

Trading organization
26

Clubs
All the formats which are used are appropriate for them as in case of manufacturing business
it is necessary that costs which are related to production shall be represented. In case of
trading, all the expense and incomes which are to be shown with the tax treatment which is
possible by the use of the above shown format. Then in case of clubs, there is the need to
include the fees which are charged from the members and the expenses which are made in
this respect will be involved.
4.3 Ratio analysis
a) Calculation of ratios
Information required for calculations
Particulars 2015 2016
Current assets 12654 8928
Quick assets 7568 5428
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Current liabilities 8878 7060
Gross profit 4312 2163
Net sales 15712 6375
EBT 22 348
Net profit 12 178
Total assets 22904 20328
Inventory 5086 3500
Receivables 7568 5428
Credit sales 15712 6375
EBIT 72 388
Interest expense 50 40
Long-term loans 970 200
Equity 13056 13068
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Formula 2015 2016
Current
ratio
Current Assets/Current Liabilities 1.4253
2
1.2645
9
Quick ratio Liquid Assets/Current Liabilities 0.8524
4
0.7688
4
Gross profit
margin
Gross Profit/Net Sales X 100 27% 34%
Profit
margin (on
EBT)
EBT/Net Sales X 100 0% 5%
Return on
total assets
Net profit/sales X 100 0% 1%
Inventory
Turnover
Net Sales / Inventory 3.0892
6
1.8214
3
29

Average
collection
period
Receivables x Months or days in a year / Net
Credit Sales for the year
175.81 310.78
Times
interest
earned
EBIT/Interest expense 1.44 9.7
Gearing
ratio
Long-term loans/Equity 0.0743 0.0153
From the ratios which are calculated above, it can be seen that all the below the level which
is set by the industry. The current ratio is less than 1.85 in both cases which shows that less
amount is invested in current assets. The in case of quick ratio also the receivables are less
than the required level. The gross profit and earnings ratios are less which shows that they
are at lower level and by this shareholders will be dissatisfied as there is will be less amount
which will be available for them. The return which is earned on assets is not acceptable and
this represents that they are not utilized in proper manner and company is not working in an
efficient manner. The inventory turnover which is average for the industry is more and
company is not maintaining the adequate level of the stock which is not good as the problem
of shortage will be faced. Collection duration is more which means that there will be
blockage of funds and the interest turnover is less which means that earnings are less and so
the time's interest should have been covered is not done. This will lead to a decline in the
profits which is not in the favor of both company and investors.
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Conclusion
From the report which is prepared above, it can be concluded that management in respect of
financial aspects is very important for the company and there are various decisions which
have been made in this. The calculation of the cost of capital is made by which the expense
which will be made for this is identified. The manner in which is listing is made on the stock
exchange and other factors which are related to this have been discussed. There are various
proposals and in order to evaluate then techniques have been used and all the calculation in
respect of them have been represented above. Lastly, the ratios have been calculated to know
the position of the business and the financial statements which are to be made are also
explained.
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References
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governance. Universal Journal of Management, 2(2), pp.72-80.
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EFFECTS IN THE FINANCIAL STATEMENTS OF ALBANIAN ENTITIES.
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disclosure of companies.
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stock exchange. Journal of International Studies, 6(2), pp.111-123.
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