Finance Assignment: Introduction to Accounting and Finance Analysis

This finance assignment solution for UGB163 – Introduction to Accounting and Finance presents a comprehensive analysis of Dexter Plc's financial performance. Part 1 focuses on profit and loss analysis, detailing the profit and loss statement for 2018, including sales, cost of sales, gross profit, expenses, and net profit. Part 2 delves into contribution margin, breakeven point calculations, and examines the impact of changes in sales volume and pricing on profitability. Part 3 addresses investment appraisal techniques, specifically net present value (NPV), payback period, and average rate of return (ARR), offering recommendations based on these evaluations. The assignment also provides an overview of the merits and limitations of each technique, providing a thorough understanding of financial analysis and investment decision-making.

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Introduction to Accounting and Finance
(Student Name)

Finance 1
Table of Contents
Part 1................................................................................................................................................2
Profit and Loss Analysis..............................................................................................................2
Financial Position Analysis..........................................................................................................2
Part 2................................................................................................................................................3
a....................................................................................................................................................3
b....................................................................................................................................................4
c....................................................................................................................................................4
d....................................................................................................................................................4
e....................................................................................................................................................5
Part 3................................................................................................................................................6
a....................................................................................................................................................6
b....................................................................................................................................................8
c..................................................................................................................................................11
References......................................................................................................................................14

Finance 2
Part 1
Profit and Loss Analysis
Profit and Loss Statement
Particulars 2018
Sales
Sale of goods/services £ 6,33,000.00
Total Sales £ 6,33,000.00
Cost of Sales
Opening Stock £ -
Add: purchases £ 5,25,000.00
Less Closing Stock £ 2,28,000.00
Total Cost of Sales £ 2,97,000.00
Gross Profit £ 3,36,000.00
Expenses
General & Administrative
Rent Paid £ 90,000.00
Bad Debt £ 1,500.00
Van Expenses £ 33,600.00
Depreciation £ 9,600.00
Tax Expenses £ 6,337.50
Total General & Administrative £ 1,41,037.50
Operating Expenses
Wages £ 1,19,175.00
Electricity Bill £ 7,725.00
Total Operating Expenses £ 1,26,900.00
Total Expenses £ 2,67,937.50
Net Profit / (Loss) £ 68,062.50
Total Year to Date Net Profit / (Loss) £ 68,062.50
Financial Position Analysis
Balance Sheet
Particulars 2018
Assets
Current Assets

Finance 3
Cash at Bank -£ 20,700.00
Total Inventory £ 2,28,000.00
Trade Receivable £ 64,500.00
prepaid rent £ 22,500.00
prepaid tax £ 562.50
Total current assets £ 2,94,862.50
Non-current assets
Van purchased £ 50,400.00
Total Assets £ 3,45,262.50
Liabilities
Creditors £ 93,000.00
outstanding Wages £ 2,175.00
outstanding Electricity Bill £ 2,025.00
Total liabilities £ 97,200.00
Net Assets £ 2,48,062.50
Shareholders’ Funds ( Equity)
Owners Funds £ 1,80,000.00
Current Year Profit £ 68,062.50
Total Shareholders’ Funds (Equity) £ 2,48,062.50
Part 2
a.
Calculation of Contribution
Per unit Total
Selling price
£
13.00 £ 689,000.00
Less:
Direct Material
£
5.25 £ 278,250.00
Direct Labour
£
2.95 £ 156,350.00
Variable cost
£
1.85 £ 98,050.00
Contribution (Sales - variable cost)
£
2.95 £ 156,350.00

Finance 4
b.
Calculation of breakeven point
Per unit Total
Total units 53000
Selling price £ 13.00 £ 6,89,000.00
Less:
Direct Material £ 5.25 £ 2,78,250.00
Direct Labour £ 2.95 £ 1,56,350.00
Variable cost £ 1.85 £ 98,050.00
Contribution (Sales - variable cost) £ 2.95 £ 1,56,350.00
Fixed cost £ 1,06,600.00
Breakeven point (Fixed cost /
contribution)
36135.59322 £ 4,69,762.71
Margin of safety 16864.40678 £ 2,19,237.29
c.
Calculation of New Profit
Per unit Total
Selling price £ 13.00 £ 6,24,000.00
Less:
Direct Material £ 5.25 £ 2,52,000.00
Direct Labour £ 2.95 £ 1,41,600.00
Variable cost £ 1.85 £ 88,800.00
Contribution (Sales - variable cost) £ 2.95 £ 1,41,600.00
Fixed cost £ 1,06,600.00
Profit £ 35,000.00
d.
Calculation of Profit

Finance 5
Per unit Total
Units 62010
Selling price £ 14.17 £ 8,78,681.70
Less: £ -
Direct Material £ 5.25 £ 3,25,552.50
Direct Labour £ 2.95 £ 1,82,929.50
Variable cost £ 1.85 £ 1,14,718.50
Contribution (Sales - variable cost) £ 4.12 £ 2,55,481.20
Fixed cost £ 1,51,600.00
Profits £ 1,03,881.20
This will be a good strategy for the business as the profitability of the company will be increased
and that will be beneficial for it. Due to this, the proposal shall be implemented and the
advantage of the same shall be availed.
e.
Breakeven analysis is the technique which is used by the business to determine the breakeven
point of the business. This is the point at which the company will be in the position of no profits
or loss (Chisholm-Burns et al., 2016). This is the unit's level which will be covering the fixed
cost of the company and of the production is carried above this level than the profits will be
made. The company has some of the fixed costs which are to be incurred at all the levels and that
shall be recovered in the initial stage. The point till which the same will be recovered is covered
under the breakeven point.
In the use of this model, there are certain assumptions which are taken into account and they are
as follows:
 The total cost which is involved in the business is considered as either the variable or
fixed cost. In this, the classification is made as to the two categories and then they are
considered in making further decisions (Lee et al., 2018). It is assumed that there will be
no other cost that will be involved in the business.

Finance 6
 It is assumed that the fixed cost which has been ascertained in the initial stage will remain
constant and there will be no change which will be taking place in the same. It will
remain the same at all levels.
 There is no fluctuation which is made for the sales price and it will be remaining the
same at all the levels of the outputs made by the company.
 The per-unit cost which is considered will remain the same and the change will be made
in the total amount as per the production but the per-unit cost will be constant.
 It is considered that the sales and cost are affected by the volume of sales only and there
is no other cost or factor which will be making the change in the same.
 It is considered that businesses will be using the same level of efficiency and technology.
It is assumed that there will be no change which will be incorporated in the business and
production at all the levels will be made with the same resources.
 The production which is made in any period is consumed in the same period and there
will be no opening or closing stock which will be available. The business considers that
there is no stock which is left unused and all will be used in the same time frame for
which it has been produced which is not a practical situation.
There are various businesses that are involved and they can use the breakeven analysis for
various purposes in a successful manner. There are various assumptions that are not possible
practically but then also the technique will be of benefit to the business (van Asseldonk et al.,
2017). In this, the pint is determined after which the business will be making the profit. This will
be helping the company in maintaining the production at the level so that the losses are not faced
and there is maintained profitability. This will help them in avoiding any adverse situation which
may arise and helps in keeping the margin of safety which is essential for all the businesses.
Part 3
a.
Analysis of NPV
Net present
value
Time Cash outflow Cash
inflow
Gross cash
flow
Discount
factor
Present
Value

Finance 7
£ Million 7% £'000
0 -40000000 -40000000 1.000 -
40000000.0
0
1 -6400000 17000000 10600000 0.935 9906542.06
2 -6400000 17000000 10600000 0.873 9258450.52
3 -6400000 17000000 10600000 0.816 8652757.50
4 -6400000 17000000 10600000 0.763 8086689.25
5 -6400000 17000000 10600000 0.713 7557653.50
5 5000000 5000000 0.713 3564930.90
NPV 7027023.72
Analysis of Pay Back Period
Payback period
Time Cash outflow Cash inflow Gross cash flow Cumulative Factor
£ Million
0 -40000000 -40000000 -40000000
1 -6400000 17000000 10600000 -29400000
2 -6400000 17000000 10600000 -18800000
3 -6400000 17000000 10600000 -8200000
4 -6400000 17000000 10600000 2400000
5 -6400000 17000000 10600000 13000000
5 5000000 5000000 18000000
Payback Period 3.77 Years
Analysis of Average Rate of Return
Average Rate of
Return
Year Cash outflow Cash inflow Gross cash
flow
£ Million
0 -40000000 -40000000
1 -6400000 17000000 10600000
2 -6400000 17000000 10600000
3 -6400000 17000000 10600000
4 -6400000 17000000 10600000
5 -6400000 17000000 10600000
5 5000000 5000000

Finance 8
18000000
Less
Depreciation
35000000
Profits -17000000
Depreciation (SLM) (Cost- Residual Value)/ No. of years of useful life
(40000000-5000000)/5
Depreciation per annum 7000000
Average accounting
profits
-3400000
ARR Average accounting profits
Average Investment
-9.71%
Recommendation
There is the use of the various techniques which are available and with that, the calculations have
been made that help in the evaluation of the proposal. There is the use of the net present value by
which the value which will be earned by the business is ascertained. It can be noted that there is a
positive NPV of 7027023.72 which is good. It will help in deciding that the project shall be
undertaken. With this, the payback period is calculated which shows the period in which all of
the costs will be recovered by the business. It has been ascertained that the payback period is
3.77 years which is within the life of the project and so the undertaking of the same will be
beneficial. The profits will start to flow after this level and there will be gain which will be made
in the life of the machine which is advantageous. The accounting rate of return is calculated and
it is derived to be negative. This shows that the company will be making the losses which are an
adverse condition. In spite of this, the machine shall be used as there is a positive outcome with
the help of other techniques.
b.
Introduction

Finance 9
In the business, there are various investments that are to be made and it is required that they all
shall be evaluated in an adequate manner. For this purpose, there are various investment
appraisal techniques that are available and have been used in the above section. By the use of
them, there will be certain merits and demerits which will be faced and the discussion of the
same will be made in this report.
Payback Period
This is the technique that is used to determine the period in which the cost of the project will be
earned back and the company will start to get the positive inflows. This helps in evaluating the
situation and whether the cost will be backed in the provided time is identified.
Merits
 The main merit of using this method is that it is simple and easy to be used as there is no
complex procedure that is involved in the calculations (Abor, 2017). This can be used by
all as they will be able to understand this in an easy manner.
 The risk which is involved in the investment is taken into account under this method. All
of the cash flows which will be arising in the latter period of the life of the asset are risky
and uncertain and so the early recovery is considered to be made. By this, the recovery
period is identified which also determines the risk level involved.
 The liquidity which will be maintained is ascertained with the help of this as this ensures
that the recovery will be made in the specified period and business will be having the
required money to maintain the level of liquidity.
Limitations
 Under this approach, all the amounts are taken as they are and no adjustment is made for
the change due to the time (Batkovskiy et al., 2017). It can be said that there is no
consideration of the time and so the time value of money is ignored in this which does
not assure the correct results.
 All of the cash flows which are made in the business till the payback time are covered
and no consideration is given to all the amounts which will be involved after this. By this,

Finance 10
the true position is not reflected as the period after the recovery is completely ignored
even though there may be some big flows that are involved.
Net Present Value
This is the technique in which the present value of the cash flows is identified and they tell about
the benefits which will be attained. There is the use of the cost of capital to make all the balances
on the same level and the impact of the time change is considered.
Merits
 The main merit is the consideration of the time value of money. In this, the value of time
and its impact is accounted for and for that the present value factors are taken into use
(Chittenden and Derregia, 2015). The amounts which will be available in the current
situation are accounted for and that represents the true picture.
 This is the best technique that can be used for the purpose of decision making in the
business. With the help of the results which are obtained, there will be ascertainment of
the final decision as the positive result will show that the project shall be undertaken
otherwise not.
Limitations
 There is the use of the required rate of return under this method for the calculation of
the present value. The rate is assumed and there is no set format by which the same
shall be identified. If there is an error in the identification of the same then the
complete results will be affected in an adverse manner.
 The process which is involved in the calculation of the same is complex and requires
proper knowledge. It will be difficult for all to use the same and they will be required
to gain complete information before making the use of it in business.
 In the case of the mutually exclusive projects, there is difficulty in using this tool as
the results may not be that accurate for the involved investments due to the deviation
in conditions (Gupta and Pradhan, 2017).
Average Rate of Return

Finance 11
This is the tool in which the accounting profits which are recorded in the books are taken into
account and then return is calculated by taking them into the account.
Merits
 In this method, the profits which are recorded are taken into use and the process which is
involved in the calculation is simple and easy to use which makes it a good tool.
 All of the aspects are covered in this including the tax and the depreciation (Robinson
and Burnett, 2016). By this, the actual profits which are made by the business are used
for the making of the calculations.
 With the help of this, it is easy to compare the two different investments as the net profits
are considered which covers all the important elements.
Limitations
 There is no consideration of the time in the same and all of the calculations are made with
the provided value which is not adjusted for the changes and so the same is ignored.
 Only the aspects which are accounted for are considered and there is no consideration of
the external factors which are also involved in the business and they are completed
ignored (Rubin and Patel, 2017).
Conclusion
The report has covered all of the major investment appraisal techniques and complete
information about them is taken into account. All the merits which will be available with the use
of them have been ascertained and also the demerits in relation to them are taken into account.
With the help of the complete understanding is made and that will be used in the undertaking of
the best decisions which are in the interest of the business.
c.
Introduction
In the business, there are various income and expenses which are made and it is required to keep
them in the limit. Budget is the technique that is used for the same in which the standards are set