Part 1
Assignment
1
Task
1
Sources
of finance for different businesses
Different
sources of finance are given for, old, large small etc organizations.
Type
|
Cost
|
Payback Terms
|
Sizes
|
Advantages
|
Disadvantages
|
Personal Savings
|
No cost
|
None
|
Easy, cheap
|
Risk of Loss
|
|
Friends & Family
|
Usually good rate or none
|
Very flexible
|
Flexible, best value
|
Can create friction
|
|
Home Mortgages - Traditional or
Seconds
|
7-9%
8-14% on equity loans
|
Very long and flexible
|
80-100% + of home equity value
|
Cheapest, longest term
|
Your house is at risk in the event
of non-payment
|
Suppliers
|
Free
|
30 days +/-
|
Inexpensive, unsecured
|
Short term
|
|
Venture capital
|
25-40%
|
5-7 years
|
$500,000+
|
Can get large amounts
|
Very hard to get; share ownership
|
Leasing companies
|
12-18%
|
5-7 years
|
Varies
|
Same as above; also 100% financing
|
|
Banks
|
6-9%
|
1-5 years
|
$50,000+
|
Generally least expensive
|
Generally hardest to qualify for
|
Task
2:
a) Importance of financial planning
for Barlett Company
Some
important factors are given below for the company: -
·
It helps in managing income more
effectively through planning.
·
Increasing cash flows by carefully
monitoring company’s spending patterns and expenditures.
·
Allowing
the company to consider investments to improve its overall financial matters.
b) Information needs of the different
decision makers
In
the below table briefly has been defined the topic.
S. No.
|
Decision makers
|
Information needs
|
1
|
Top
management; CEO, BOD
|
For
formulation of long-term strategies for the company.
|
2
|
Middle
management; managers (finance, HR, marketing)
|
For
formulation of short-term strategies in order to achieve long-term goals.
|
3
|
Lower
management; line managers, supervisor etc
|
For
measuring their performance and reconciling with formulated short-term goals.
|
c) Profit & Loss account and
balance sheet
Bartlett
Company Income Statement
2012
|
2011
|
|
Sales
Revenue
Less:
Cost of goods sold
Gross
profits
Selling
expenses
General
and administrations expenses
Depreciation
expense
Less:
interest expense
EBIT
Less:
taxes
NPAT
Earnings
available for common stockholders
|
3,074
__2,088
___986
100
194
239
___128
325
94
231
____231
|
2,567
__1711
___856
108
187
223
____126
212
64
148
___148
|
Key
item of P & L Account
·
Gross
profit
Cost
of the goods sold is deducted from sales.
·
EBIT
All
the expenses are deducted from gross profit except interest and tax
·
EBT
Interest
is deducted from EBIT
·
NEAT
It
is the amount that comes after tax is deducted from EBT.
Bartlett
Company Balance Sheet
Assets
|
2012
|
2011
|
Cash
Marketable
securities
Accounts
receivable
Inventories
Total
current assets
Land
and buildings
Machinery
and equipment
Furniture
and fixtures
Vehicles
Other
Total
gross fixed assets
Less:
accumulated depreciation
Net
fixed assets
Total
assets
|
363
68
503
289
1,223
2,072
1,866
358
275
98
4,669
2,295
2,374
3,597
|
288
51
365
300
1,004
1,903
1,693
316
314
96
4,322
2,056
2,266
3,270
|
Liabilities
and shareholders’ equity
|
||
Accounts
payable
Notes
payable
Accruals
Total
current liabilities
Long-term
debt
Total
liabilities
Authorized,
issued capital
Paid-in
capital in excess
Retained
earnings
total
shareholder’s equity
total
liabilities and stockholder’s equity
|
382
79
159
620
1,023
1,643
391
428
1,135
1,954
3,597
|
270
99
114
483
967
1,450
390
418
1,012
1,820
3,270
|
Key
item of Balance Sheet
·
Current
asset
These
assets are operating in nature. Their useful life is about one year.
·
Fixed
assets
These
assets are capital in nature. Their benefits are derived more than a year.
·
Current
liabilities
These
are the liabilities which are payable within a year.
·
Long-term
liabilities
Their
due payment period is after one year.
Assignment No. 2
Task 1
Purpose of main
financial statements
The
objective of main financial statements is shortly described below: -
·
Balance
sheet
It
is a statement that describes a company's assets, liabilities and shareholders'
equity at a specifics point in time.
·
Profit
& Loss account
It
is a statement that shows the revenues, costs and expenses incurred throughout
a selected amount of time - typically a business enterprise year or quarter.
·
Statement
of cash flows
The
cash flow statement produces data about a company's gross receipts and gross
payments for a specific period of your time.
Difference between
formats of financial statements for different types of business
There
is no distinction as formats of the financial statements of sole trader,
partnership and private Ltd. The difference is profit & loss account. The
profit and loss account is bothered; a business (sole trader, partnership or a
personal restricted company) will claim any expense subject to the higher than
criteria. However the record could be a bit completely different. The sole
trader and partnership does not have to be compelled to give a balance sheet;
it's elective whereas this is necessary for private restricted companies according
to the Companies’ Act with notes and statements. The record is comprehensive in
describing all the assets and liabilities of the corporate.
Task 2
(a)
S.
No.
|
Ratio
|
Formula
|
Last
Year Ratio
|
This
Year Ratio
|
1
|
Return on capital employed
|
EBIT / Capital employed
|
15%
|
12.8%
|
2
|
Return on ordinary shareholder’s
funds
|
Net tax / shareholder’s equity
|
14%
|
4%
|
3
|
Gross profit margin
|
Gross profit / sales
|
20%
|
26.29%
|
4
|
Net profit margin
|
NPAT/ sales
|
3.41%
|
0.99%
|
5
|
Current ration
|
Current assets / Current
liabilities
|
1.40
|
1.00
|
6
|
Acid test
|
(Current assets-Invent) / C.
Liabi.
|
1.20
|
0.81
|
7
|
Average stock turnover ratio
|
CGS/Inventory
|
66.67
|
92.5
|
(b) Company’s
performance
I
will analyze the performance of the company by discussing each ratio calculated
in part one.
·
Return
on Capital employed
It
measures the return earned on the total capital invested in the company
excluding current liabilities.
Management
has to work for its improvement.
·
Return
on ordinary shareholder’s funds
ROE
measures the return earned on the common stockholder’s investment in the firm.
Another
matter to look in seriously, this ration has fallen 14% to 4%.
·
Current
Ration
It
measures the firm’s ability to meet its short-term obligations.
Company’s
current ratio has decreased from 1.4 to 1.0; it should be worrying moments for
the company.
·
Acid
test
It
is calculated as current ratio by excluding inventory. It provides more a
better measure of overall liquidity.
It
has also decreased from 1.20 to 0.81. It is below the standards, company has to
take measure in order to encounter the issue.
·
Average
stock turnover ratio
It
measures the activity, or liquidity of a firm’s inventory. This ration has also
fallen from 66 days to about 92 days, lot of work to do for management.
·
Gross
profit margin
It
measures the percentage of each sales remaining after the firm has paid for its
goods. Gross profit margin has increased from 20 % to 26 %. It is good sign.
·
Net
profit margin
It
measures the percentage of sales dollar remaining after all costs and expenses,
including interest, taxes, and preferred stocks dividend.
It
has decreased below 1%. Measures have to be taken for its improvement.
Part 3
Task 1
To Board of
Directors Northfield Components
From ___________________________
Re Analysis of Cash Flow forecast and Sales
Budget
Date
___________________________
After going
through the contents and figures of the subject items, I have found following
problems: -
1. Sales
2. Wages
3. Light
& heat expenses
4. Motor
expenses
Calculations about the
figures presented in the said statements
1.
Sales
Total
budgeted sales from July 2010 to December 2010 1,560,000
Actual 1,422,000
%
variance (8.8)
Total
expected sales from Jan 2011 to Dec 2011 3,325,000
Causes of the problems
1.
Sales
a)
Customer’s area unit
discontent with aspects of company’s client service. Quotes take too long;
communications are poor; frequent production errors; incomprehensible shipping
deadlines; inability to satisfy client.
b)
Customer wants/needs has
modified and also the company doesn't understand these changes and are unable
to supply new client wants/needs. This includes the economy.
2.
Other
problems
a) Most
of the labor is semi skilled.
b) Utilities
expenses.
c) Old
vehicles need more repair work
Recommendations
1.
Sales
Some
recommendations to improve sales are: -
Ø We can offer a short discount to
encourage existing users to shop for additional or to draw in new customers.
Once we've them shopping for, we will then use totally different approaches to
retain them.
Ø We can encourage existing users or
offer them incentives to extend their usage by any advertising or promotional
campaign.
Ø We can persuade customers for our
any other product to adopt the product wherever we are not experiencing a
deficit. It’ll require sales calls or some promotional activity.
2.
Other problems
Ø To decrease labor expenses, we've
got to stress on high worker performance. It needs coaching our workers
totally, hiring candidates that are best suitable the duty, and reviewing
worker performance systematically.
Ø Cut down on utility expenses by
implementing cost-saving instrumentation, like CFL bulbs and Energy Star
merchandise. Close up lights and computers once the workday ends, and ensure
we’re consuming as very little energy as feasible.
Ø It
is better to replace our old vehicles with used ones with better conditions, it
will decrease repair expenses.
Task 2
To Board of
Directors North Seaton Engineering Company
From ___________________________
Re Investment appraisal of Projects ‘A’
& ‘B’
Date
___________________________
Basic data
given about the projects
1.
Project ‘A’
Cash outflow
= 450,000
Year
|
Cash inflow
|
1
|
180,000
|
2
|
230,000
|
3
|
280,000
|
4
|
120,000
|
Total
|
810,000
|
2.
Project ‘B’
Cash outflow
= 450,000
Year
|
Cash inflow
|
1
|
60,000
|
2
|
120,000
|
3
|
250,000
|
4
|
250,000
|
Total
|
680,000
|
Ø Payback
1.
Project ‘A’
Cash inflow 410,000
requires = 2 years
Remaining cash inflow 40,000 (450,000-410,000) requires = (40,000/280,000)*100
= 14.29% of 3rd year
= 14.29 *(365/100)
= 52 days
So,
Project payback period = 2 years
and 52 days
2.
Project
‘B’
Cash inflow 430,000 requires = 3 years
Remaining cash inflow 20,000
(450,000-430,000) requires = (20,000/250,000)*100
= 8% of 3rd year
= 14.29 *(365/100)
= 29 days
So,
Project payback period = 3 years
and 29 days
Ø Accounting rate of return
1.
Project
‘A’
Annual
depreciation =
450,000/4
=
75,000
Average
accounting income = 810,000/4
=
202,500
Accounting
rate of return = [(202,500-75,000)/450,000]*100
=28.33%
2.
Project
‘B’
Annual
depreciation =
450,000/4
=
75,000
Average
accounting income = 680,000/4
=
170,000
Accounting
rate of return = [(170,000-75,000)/450,000]*100
=21.11%
Ø Net present value
1.
Project
‘A’
NPV=[180,000/(1+.06)p1]+[230,000/(1+.06)p2]+[280,000/(1+.06)p3]+[120,000/(1+.06)p4]-450,000
= 169,811+204,699+235,097+95,050-450,000
= 254,657
2.
Project
‘B’
NPV=[60,000/(1+.06)p1]+[120,000/(1+.06)p2]+[250,000/(1+.06)p3]+[250,000/(1+.06)p4]-450,000
= 56,603+106,800+209,908+198,020-450,000
=121,331
Ø Internal rate of return
1.
Project
‘A’
Let’s
take Rate @ 25%
=[180,000)/(1.25)p1]+[230,000)/(1.25)p2]+[280,000)/(1.25)p3]+
[120,000)/(1.25)p4]
=
144,000+147,153+143,369+49,160
=
483,682
As
it is above 450,000, we have to increase rate @ 30%
=[180,000)/(1.30)p1]+[230,000)/(1.30)p2]+[280,000)/(1.30)p3]+
[120,000)/(1.30)p4]
=
138,462+136,095+127,447+42,017
=
444,021
IRR
= 25+ [{(30-25)*(483,682-450,000)} / (483,682-444,021)]
= 29.24%
2.
Project ‘B’
Let’s
take Rate @ 20%
=
[60,000)/(1.20)p1]+[120,000)/(1.20)p2]+[250,000)/(1.20)p3]+ [250,000)/(1.20)p4]
=
72,000+83,333+144,676+120,540
=
420,549
As
it is less than 450,000, we have to decrease rate @ 15%
=
[60,000)/(1.15)p1]+[120,000)/(1.15)p2]+[250,000)/(1.15)p3]+ [250,000)/(1.15)p4]
=
52,174+90,737+164,376+142,939
=
450,226
IRR
= 15+ [{(20-15)*(450,226-450,000)} / (450,226-420,549)]
=
15.04%
Conclusion
If we summarize the results of the
above calculations: -
1. Project ‘A’
Payback
= 2years
and 52 days
Accounting
rate of return = 28.33%
Net
present value = 254,657
Internal
rate of return = 29.54%
2. Project ‘B’
Payback
= 3years
and 29 days
Accounting
rate of return = 21.11%
Net
present value = 121,331
Internal
rate of return = 15.04%
Recommendations
Keeping in view all of the
calculations done and considering there pros and cons, I will recommend project
‘A’ should be initiated.
Task
3:
Mechanics and pros and cons of the
method used above are given below: -
·
Payback
The
payback amount of a given investment or project is a vital determinant of
whether or not to undertake the position or project, as longer payback periods
are usually not favorable for investment positions. All alternative things
being equal, the higher investment is that the one with the shorter payback
time. There are 2 main issues with the payback time method:
o
It ignores any advantages that occur
when the payback time period and, therefore, doesn't take into account gain.
o
It ignores the value of cash.
·
Accounting
rate of return
Accounting rate of return, conjointly called the
typical rate of return, or ARR could be a monetary percentage utilized in
capital budgeting. The percentage doesn't take under consideration the
conception of your time worth of cash. ARR calculates the income, generated
from net of the projected capital investment.
·
Net
present value
The distinction between present
worth of the longer term money flows from any investment and also the quantity
of investment. Present worth of the expected money flows is computed by
discounting them at the desired rate of return.
·
Internal rate of return
A zero net
present value means that the project repays original investment and the desired rate of return. A positive
net present value means that a more robust return and a negative net present
worth means that a worse return, than the return from zero net present value.
Task
4 (a)
S.
No.
|
Particulars
|
Amount
(Pounds)
|
1
|
Material Costs
|
52.50
|
2
|
Labour Costs
|
35.75
|
3
|
Variable overheads
|
10.20
|
4
|
Fixed cost
|
120,000
|
5
|
Price per unit
|
120
|
6
|
Total Variable Cost
|
98.45
|
Ø Contribution
per unit = Price-variable cost
= 120-98.45
= 21.55 pounds
Each unit sale of ACE Convertor
contributes 21.55 to net revenues of the company.
Ø Contribution/sales
ratio = 21.55/120
= .18 pounds
Each sale of pound 1 contributes
net .18 pounds to the revenues of the company.
Ø Break-even
point in unit = Fixed costs /contribution per unit
= 120,000/21.55
= 5,568 units
Ø Break-even
point in sales = 5,568 * 120
= 668,213
Company need sales of 5,568 units
of ACE Converter and sales amount 668,213 pounds per year in order to meet its
fixed and variable expenses.
Ø Margin
of safety in units = (Budgeted unit sales – Break even sales in units)/
budgeted
Unit
sales
= (7,500- 5,568)/7,500
= 25.76 %
Ø Margin
of safety in sales = (Budgeted sales – break-even sales)/ budgeted sales
= (900,000-668,213)/900,000
= 25.76 %
It is a measure of risk. It
indicates that the company can tolerate a 25.76 % change in sales.
Ø Profit
& Loss at 5,000 units sales
Sales
(5,000 * 120) 600,000
V.
cost (5,000 * 98.45) 492,250
F.
Cost 120,000
Profit / (Loss) (12,250)
Ø Profit
& Loss at 8,000 units sales
Sales
(8,000 * 120) 960,000
V.
cost (8,000 * 98.45) 787,600
F.
Cost 120,000
Profit / (Loss) 52,400
Ø Profit
& Loss at 10,000 units sales
Sales
(10,000 * 120) 1200,000
V.
cost (10,000 * 98.45) 984,500
F.
Cost
120,000
Profit / (Loss) 95,500
Effect
on break-even point
Company break-even point is 5,568
units.
Ø A
5 pounds increase in selling price = Fixed costs / (Price-variable cost)
= 120,000 / (125-98.45)
= 4,520 units
Ø A
5 pounds decrease in selling price = Fixed costs / (Price-variable cost)
= 120,000 / (115-98.45)
= 7,251 units
Ø 5,000
pounds increase in fixed costs = Fixed costs / (Price-variable cost)
= 126,000 / (120-98.45)
=
5,847 units
Ø 5,000
pounds decrease in fixed costs = Fixed costs / (Price-variable cost)
= 115,000 / (120-98.45)
= 5,336 units
Ø 5
% increase in material and labour costs = Fixed costs / (Price-variable cost)
= 120,000 / (120-102.86)
= 7,001 units
Ø 5
% decrease in material and labour costs = Fixed costs / (Price-variable cost)
= 120,000 / (120-94.04)
= 4,692 units
This could be sum up in a table
S.
No
|
Change
|
Effect
on break-even point
|
5 pounds increase in
selling price
|
Decreased
|
|
5 pounds decrease in
selling price
|
Increased
|
|
5,000 pounds increase
in fixed costs
|
Increased
|
|
5,000 pounds decrease
in fixed costs
|
Decreased
|
|
5 % increase in
material and labour costs
|
Increased
|
|
5 % increase in material
and labour costs
|
Decreased
|
Task
4 (b)
·
Company’s
profit / loss at expected sales of 7,500 units
Sales
(7,500 * 120) 900,000
V.
cost (7,500 * 98.45) 738,375
F.
Cost 120,000
Profit / (Loss) 41,625
Company is earning a profit of
41,625 pounds at expected 7,500 units of sales.
Let’s see the affects of 2 large
orders.
1. Southwood Electronics – 500 units
at 15 % discount on selling price
Discounted
selling price = 102 pounds
Sales (500 *
102) 51,000
V. cost (500 * 98.45) 49,225
Profit
/ (Loss) 1,775
This order will add 1,755 pounds to the
profit of the company.
Let’s see the other one.
2. Westbrook Engineering - 1000 units at 25 % on selling price
Discounted
selling price = 90 pounds
Sales (1,000 *
90) 90,000
V. cost (1,000 * 98.45) 98,450
Profit
/ (Loss) (8,450)
Recommendation
As it is visible from above
analysis that order from Southwood Electronics will add 1,755 pounds to the
profit of the company, so in my opinion it has to be fulfilled. On the other
hand Westbrook Engineering order will bring down companies profit, so it is
obvious to reject it as per my financial analysis is concerned. If we want to
increase our sales level and broaden our marketed area, the order may be
accepted.
Task
5:
Costing Methods
·
Fixed
Costs
Fixed costs
are expenses that are independent of output. These stay constant. Fixed
expenses usually comprise rent, buildings, machinery, etc.
·
Variable
Costs
Variable
expenses are expenses that adjust with output. Typically variable expenses
increase at a relentless rate relative to labor and capital. Variable costs
might comprise wages, utilities, materials utilized in production, etc
·
Break
–even analysis
An
analysis to work out the point at that revenue received equals expenses related
to receiving the revenue. This is often being the quantity that revenues can
fall whereas still staying higher than the break-even point.
·
Marginal
Costing
The
increase or decrease within the total expense of a production runs creating one
further unit of an item. It’s computed in circumstances wherever the breakeven
point has been reached: the fixed expenses have already been absorbed by the
already made things and solely the direct (variable) prices got to be accounted
for.
·
Absorption
costing
A managerial
accounting pricing technique of expensing all prices related to producing a
selected product. Absorption cost accounting uses the overall direct prices and
overhead prices related to producing a product.
·
Activity-based
costing
An
accounting technique that identifies activities that a firm performs and so
assigns indirect expenses to a product, an activity primarily based cost
accounting (ABC) system acknowledges the link between costs, activities and
product, by this relationship assigns indirect costs to product less
haphazardly than ancient ways.
·
Standard
costing
Standard
cost accounting is that the applying of an associate degree expected expense
for an actual expense within the accounting records, and so periodically
recording variances that expenses the distinction between the expected and
actual prices.
Pricing Methods
·
Market-led
pricing
A
firm accepts the price that competitors are charging for a product so costs its
product at identical level or slightly lowers so as to realize some advantage
over its competitors.
·
Full-cost
pricing
Selling
price came across by adding overheads and profit margin to the direct expense
per unit of a product. During a manufacturer's overheads computation, less than
full capability utilization of the plant is factored in to permit for
fluctuations within the output. The profit margin is computed as a fixed share
of the average total value of the merchandise.
·
Marginal cost pricing
The
process of setting an item's worth at constant level because the further
expense concerned in manufacturing another item. By using marginal cost
evaluation, a business helps keep their sales price down so as to encourage
sales throughout slow periods or to achieve market share.
·
Opportunity cost
approach to pricing
In
this pricing strategy, opportunity cost approach is used during the course of
setting prices for different products.
Recommendation
1. Costing method
In
my opinion, standard cost accounting technique is extremely helpful for the
organization. Standard cost accounting is understood as a control mechanism;
however it's additionally a helpful decision-making tool. Standard prices will
allow price setting for the expenses the prices of projects once actual cost
data isn't obtainable. Since standard costs will use historical knowledge and
environmental factors, standard cost accounting is often a reliable
decision-making aid. Recording actual costs will take lots of our time or it'd
be troublesome to consider immaterial changes in costs
2.
Pricing
method
According
to me marginal cost pricing is a lot appropriate. There’ll be customers who are
extraordinarily sensitive to prices. This cluster won't otherwise be got. We
will earn some progressive profits from these customers. If we are willing to let
go profits within the short term; it will be useful to use marginal cost pricing
to realize entry into market. We can earn profit from our so earn profits from
our later sales.