Financial Statements, Funding Strategies, and Business Analysis Report

This report provides a detailed analysis of financial statements and various funding sources for businesses. It explores the purpose of financial statements, including balance sheets, profit and loss accounts, and cash flow statements, and their significance in assessing a company's financial performance. The report examines different types of capital, such as working capital and equity, and discusses the factors to consider when choosing funding sources, including time frame, purpose, and the form of business. It categorizes funding sources into own funds, retained earnings, and debt funds, outlining the advantages and disadvantages of each. The report also presents case studies on start-up companies, expanding companies, and buyouts of medium-sized businesses, illustrating how different funding sources are utilized at various stages of a business's life cycle. Furthermore, it explores the information requirements of different stakeholders, the impact of financing on financial statements, and the use of financial ratios to assess a firm's activity.

Contents
Introduction........................................................................................................................................1
Task 1A................................................................................................................................................ 2
Task 1B................................................................................................................................................ 8
1.1 Discuss the purpose of these financial statements......................................................................8
1.3 Examples of financial planning and significance of financial planning........................................10
1.4 Information requirements of different shareholders of the firm................................................11
1.5 Discuss how different forms of financing affects the format of the financial statements............12
1.6 Ratios and comment on the activit of the firm..........................................................................14
Task 2A.............................................................................................................................................. 21
Task 2B..............................................................................................................................................23
Task 2C..............................................................................................................................................25
Conclusion.........................................................................................................................................25
References.........................................................................................................................................27
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·Introduction

A humble attempt has been made through this paper to throw light on the requirements and the
usefulness of financial statements. Financial statements are used by a lot of interested parties
such as the government, creditors, stakeholders and board of directors. As a consequence
financial statements should portray the true and fair view of the organization.

Task 1A
Capital is not only required by a business at start up or at the expansion phase but a business
may require funds to fund its daily operations. The capitals can be of various shapes like
working capital, hire purchase, leasing etc.
The source of capital to be chosen depends upon a lot of conditions such as:
1.Time frame for which the funds are being borrowed: If the funds are required for a
very long time equity capital is chosen over other forms of finance. The money of the
shareholders can be repaid only after the winding up of the organization. However
issue of too many shares might dilute the control in the organization and also affects
the EPS (Earnings per Share).(Brigham & Houston, 1998)
2.The purpose of the funds: If the funds are required for normal day to day operations
i.e. for funding its working capital requirements the organization might resort to short
term or medium term debts.
3.The type and the form of business: The source of finance also depends on the form
of the organization. A partnership firm can never issue shares to the public whereas a
public limited company can issue shares to the public. Debt can be obtained by almost
all the forms of entities.
For investing its needs for fund, the firm may select resources such as:
l壱Capital market.
l壱Loan stock.

l壱Retained earnings.
l壱Loans from bank.
l壱It can knock into government resources.
l壱It may utilise the model of franchising.
However, sources of finance are basically categorized under three categories:
1.Own Funds: Money received from the issue of equity shares, preference shares,
stocks and owner’s contribution fall under this category. No interest is required to be
paid on such monies but an organization has to pay dividends on such amounts. The
leading benefit of utilising these capitals is that the firm does not require paying these
during its lifetime though, the firm cannot go on issuing these shares as that would
reduce the control in the association and also deteriorate the capital. The cost of equity
is the dividend paid on such shares and is denoted by Ke.(Brigham & Houston, 1998).
Advantages of own capital
It is basically a risk free fund.
Interest free.
No time period for return back.
Its own general saving money no obligation on debt security.
Disadvantages of own capital
Loss the opportunity cost for making own contribution.
No tax benefit.
1.Retained Earnings: Retained earnings are the past years profit. The organization can
use such funds to meet various requirements. Though these funds do not have a
specific cost but the opportunity cost can be considered to be the interest forgone had

the money been spent elsewhere. As per a few scholars the cost of retained earnings
may be considered to be same as cost of equity.
Advantages
l壱Cheaper source of financing for the organisation
l壱Financial stability
l壱Market value as compare to other company
l四Stable dividend for the shareholder
Disadvantage
l壱Over capitalization
l壱Low rate of dividend
l四Improper utilization of fund
1.Debt Funds: Debt funds are the reasonable source of finance since the interest is
given on such finance is tax deductible. For example if the rate of tax is 40% and the
organization has paid $100 as interest the cost of debt would be 100(1-40%)= $60.
Which means the organization was able to save $40 in the $100 paid as interest.
However the organization cannot resort to debt funding all the time as it impact the
capital structure and also the rate of interest keeps on increasing with an increase in the
amount of debt.

2.According to all these three cases mode of investment are different at the various stages of a
business from start up to business expansion. Various sources of fund should be uses at every
level of business. Different sources are to be used at different stages of business. As start-up it
is very hard for the organization to resort to equity funds as without an established track record
no one would be willing to invest in the organization. At the start-up phase an organization can
resort to venture capital and other sources of finance. For a business expansion the
organization can opt for a mix of both debt as well equity funds. The ideal ratio in this case is
considered to be 2:1.
Advantages
l壱Proper fulfilment of short term needs
l壱Tax advantages
l四Future impact forecasting.
Disadvantages
l壱Most lender provide server penalties for the late payment
l壱The amount of money small business may be able to obtain via debt is likely to nbr
limited.
Case 1 Start Up
For the start up the organisation need funds so as to manage operations. Funds are required to
set up assets required for the business. Employees are to appointed so as to manage business
operations. For the purpose of starting a business there are two major sources of finance

available with start up company i.e. bank loan. Banks are available with finance facility that is
available with start up company. They charge interest. Another source of funds can be own
funds or own savings that owner of business have. These are cost free finance that is available
with company’s owner. On more source of funds can be loan from friends and family that
charges some interest on loan amount.
1 Owner’s fund- It is a internal source of fund which are interest free and less risky in order to
effectively start up of business.
2 Bank loan- Bank provides loan for establishing the small business. It may be a kind of
personal loan with some security collateral against the loan amount. This fund can be used for
purchasing real estate, large equipment or inventory. It can used for further purpose as
working capital for daily routine operations. The main disadvantage for this source of fund is
to pay interest on loan.
3 Family and friends- It is one of the most common sources which are easy and early funds for
start up of enterprise because friends and family know very well about his financial status in
way to repayment their fund in a specified time period. they also give enough time to build his
own business.

l壱
l壱Case 2 Expanding Company
In order to expand company funds are required for effective management of business
operations that are to be expanded. There are any new costs or expense that is to be incurred
for new operations. For an existing company, many sources of finance are available with them
since they had stepped up in the funds market. Therefore many sources of finance are available
with them. Major source of finance are issue of debenture or issue of equity shares. Both
requires cost of capital i.e. interest cost of debenture and cost of capital for equity shares.
l壱Debenture

l壱Equity share capital
Cost required for the expansion of the company is £ 200000
1. Debenture- It is a type of debt instrument which are not secured against any physical assets
or collateral. Its value is on the basis creditworthiness and reputation of issuer company. In this
company must liable to pay specified amount with interest. It helps in to raised money by
debenture holders.
2. Equity shareholders- Equity shareholder are the real owner of the company. They have
voting rights to take part parts in meetings and conferences of a company. It is the main source
of finance for working capital. Companies paid dividends to equity shareholder according to
their contribution and profit earn by the company but they get dividend after paying to
preference shareholders.
Case3 A buy out of a medium sized business
Acquisition and mergers are management decisions that are to merger with or acquire existing
company for better management or expanding market share. Acquiring another company
requires funds in order to discharge consideration of the acquisition of company. For this
purpose there are many sources of funds available like preference shares issued to new
company’s shareholders, equity share to new company’s shareholders, debenture issues to new
company’s shareholders or cash payment by acquiring bank loan. These all sources of funds
requires cost or financial implication.
l壱Preference share

l壱Equity share
l壱Debenture
l壱Bank loan
1. Preference share- It have both the characteristics equity shares and debentures. These type
of shareholders have certain rights and firstly dividend is paid to the preference shareholders at
a fixed rate. Second major advantage are at the time of winding up of company shareholders
capital is prior to paid preference shareholders after that equity shareholders.
2. Bank loan- Bank also provides a loan to small scale business and modernization of business
and at the time of merger and acquisition that huge amount of money is required for expansion
of business. It can be taken on basis of existing business inventory and assets or may be taken
on personal loan. Bank loan is always paid with interest.
Cost required for the buyout of a medium sized business£ 60000
·Task 1B
1.1Discuss the purpose of these financial statements.
As per International accounting standard, financial statement is the main tool to analyse the
financial performance of the company. It conducts total business operations as well as
financial management. The financial management groups prepare the financial statement
analysis. There are four steps to calculate financial statement and those are balance sheet,
profit and loss account, cash flow statement and statement of equity. Generally a set of
financial statements include profit and loss statement, balance sheet and cash flow statement.

The mirror of the firm’s performance is financial statement. Financial statements are the
mirror of the company’s performance. Without the financial statements it would be very hard
to gauge the financial performance and health of the organization. Financial statements are
made within the accounting framework of the nation within which the organization operates.
Any deviations from the same which have a material effect on the financial statements should
be properly disclosed and the effect has to be quantified. Financial statements are used by the
board of directors, investors, government and other interested parties. Considering the same it
is of paramount importance that the financial statements are disseminated in a timely and
efficient manner. The financial statement requirements for different forms of entity are
different. For example a partnership concern might or might not have to prepare a cash flow
statement. On the other hand a non-profit organization only prepares an income and
expenditure account and balance sheet. (Lumby, 1994)
1.2 Factors need to consider by the boards while taking decisions relating to the
source of finance.
There are various modes of finance available to an organization. The two basic categories are:
1.Loan Funds: These are the funds that have been procured from sources outside the
organization. Debentures, Short Term loans, Medium Term loans and Trade Credit fall
within the ambit of loan funds. Generally interest is paid at a fixed rate on the sum
borrowed. The loan is repaid as per the terms of the loans i.e. in X number of
instalments. However this basis of finance is cheaper as the interest payable on these
loan is a tax deductible cost. So if the rate of taxation is 40% the cost of debt would be
Kd=Interest Paid (1-40%).

2.Own Funds: Own funds are those funds that have been procured from within the
organization. Money raised from the issue of equity is considered as own funds as
shareholders are considered as the owners of the organization. Retained profits also fall
within the scope of own funds. Generally dividends are paid to the shareholders
against the money that they have invested and that is considered to be cost of equity.
According to the conventional theories, cost of retained earnings is equal to the cost of
equity however; some scholars consider that the cost of retained earnings is the interest
forgone had they been invested some place.(Brigham & Houston, 1998)
l四1.3 Examples of financial planning and significance of financial planning.
For every organisation, financial planning is one of the most important techniques to
increase financial growth. Without financial planning the organisation cannot meet his
goal. It is very important for an organization and the main purpose of the financial
planner is to increase the capital of the organization. The increasing of wealth is a wider
theory than maximization of incomes as wealth takes into the dividend policies and the time
value of money. Correct financial plan can work wonders for the organization. Various
financial plans have different implications. Too much debt can affect the leverage position of
the firm and too much equity can dilute the control of the organization. Hence the financial
plans have to devise very carefully. Finally, financial planning mainly ensures the investors
to invest in this organisation and this is the most important features of the organisation.
Importance of financial planning
l四Financial planning mainly decreases the uncertainty and increase profitability
of the company.