Assignment Guide Title Page

Course: HND Business Level 4 Subject Learners Name(s) Student Number

Lecturer: Olumide Olo an

Table of Contents
Analysing the Cash Budget.................................................................................................11

Task One
1 Explore the sources of finance available to a business P1.1 identify the sources of finance available to a business

Atrill and McLaney (2008) broadly classified the sources of finance for a business in two internal and e!ternal sources of finance. According to the authors" internal sources are those sources #that do not re$uire the agree%ent of anyone beyond the directors and %anagers of the business& ('.()1). *hese include +wner,s in-est%ent .etained 'rofits /ale of stoc0 /ale of fi!ed assets 1ebt collection +n the other hand" e!ternal sources of finance are those that re$uire the agree%ent of so%eone beyond the directors and %anagers of the business. *hese include Loans (fro% a ban0 or other financial institution) *rade credit +rdinary shares 2reference shares 3inance leases" including sale and lease bac0 arrange%ents 4ire 'urchase 5rants (go-ern%ent sources of 6ithin each category described" we can further distinguish between long7ter% and short7ter% sources of finance" de'ending on the length of 'eriod for which it is needed. /hort ter% sources of finance
o

Ban0 o-erdraft 1

o o o o

*rade Credit Leasing Ban0 loans Credit cards

Long ter% sources of finance

o o o o o o o o

Ban0 loans /hare ca'ital 1ebentures Asset sales 8enture ca'ital .etained 'rofit +wners9 ca'ital 5o-ern%ent" local authority or :; grants

P1.

! assess the implications of the different sources 2lease" e!'lain the 'ros and cons of using each of the different sources you ha-e been able to identify<<<<<.

P1."

! select appropriate sources of finance for a business pro#ect

*here are se-eral loan o'tions

Secured loan (with collateral) Unsecured loan (no collateral)

+wner,s in-est%ent=ca'ital .etained 'rofits /ale of fi!ed assets (!e could sell !is !ouse to "inance t!e #roject) /ecured loan (!e could obtain a secured loan a ainst t!e !ouse at $%) *rade credit (!e could use trade credit to stoc& t!e rocer' store a"ter #urc!ase). +rdinary shares (!e could decide to invite more investors (!o (ould )inject "inance into t!e business* enablin !im to bu' t!e ne( rocer' store).
Combination of any of the above options i.e. he could part-fund the project with his own funds, retained profits, sale of some assets, secured or unsecured loans as well as the issuance of ordinary shares.

Assignment Guidelines: Use a standard report structure, Word-process the report and use Normal script of a proper font size 12. Produce an academic report, detailing the above issues ith a ord limit of !""" to !#"" ords. 2

 $omplete the title page and sign the statement of authenticit%. &he 'ssignment sheet should be attached in the front. Submit the document in a folder in the form of a file as ell as a soft cop% on the submission date. (t should be uploaded on )-*earning platform before the deadline and submitted to -------- and sign the submission form of the college. 'ssignments submitted after the deadline ill not be accepted unless mitigating and ma% be entitled for a late fee. $ollusion and Plagiarism must be avoided. Start each ans er on a ne page and pages should be numbered. +ighlight each ,uestion clearl%. (nclude a -ibliograph% at the end of the assignment and use the +arvard referencing s%stem. 'll or. should be comprehensivel% referenced and all sources must be full% ac.no ledged, such as boo.s and /ournals, ebsites 0include the date of visit1, etc. &r% to give the page numbers, publishers2 details and the %ear of publication (n order to pass %ou need to address all the *3 (n order to get a merit %ou need to address the characteristics of Pass and then 41, 42,45 (n order to get a 6istinction %ou need to address the characteristics of Pass, 4erit and then 61, 62 and 65. Use a common format for the ,uestions, for e7ample8 (ntroduction 0anal%ze the ,uestion.1 Underpinning 9no ledge 0 rite about the relevant theor%:points1 'pplied .no ledge06ata 'nal%sis1 $onclusions and ;ecommendations 0summarizing the hole scenario .eeping in vie pass, merit, distinction criteria.1

Task Two
2 Understand the implications of finance as a resource within a business P2.1- Anal se the costs of different sources of finance (tangible costs e.g. interest, dividends; opportunity costs e.g. loss of alternative projects when using retained earnings; tax effects). 'trill 02""#1 e7presses the vie that different sources of finance attract different costs. (t is al a%s good

for a business to see. and obtain cheaper sources of finance although time constrains do not al a%s permit organizations to loo. for cheaper sources of funds. +o ever, it is ver% clear that internal sources of finance are al a%s cheaper than e7ternal sources of finance. 3 ner<s investment:capital attracts no additional costs since it signifies %our o n level of financial investment in the business. ;etained profits attract no additional cost. +o ever, %ou have not traded= being a ne business. $onse,uentl%, there are no retained profits for %ou to use. (

Sale of fi7ed assets ould not attract an% additional fees in the form of interest rates. >ou onl% dispose assets initiall% o ned Secured loan (you could obtain a secured loan against your property at a lower interest rate; while an unsecured loan would cost more) 3rdinar% shares (inviting more investors means sharing any profits derived from the business with the new shareholder(s) at agreed ratios e.g. 50 50, !0 "0, #0 $0, %0 &0, '0 (0. -an. overdraft<s interest is calculated on a dail% basis. So, it depends on ho long %ou need the funds for. +ire purchase8 the pa%ment made in affordable e7penditure. &he business finish it ith pa%ing more than the real cost of the asset for its purchase. ?rant from the government ould not attract an% cost0s1. @enture capital is fle7ible, depending on the agreed profit sharing ratios.

P2.2- !"plain the importance of financial planning Ainancial planning allocates a firm<s resources to achieve its investment ob/ectives. Aabozzi et al. 02""B1 highlighted the importance of financial planning as follo s8 Ainancial planning helps managers to assess the impact of a particular strateg% on their firm<s financial position, its cash flo s, its reported earnings and its need for e7ternal financing= -% formulating financial plans, management is in a better position to react to an% changes in mar.et conditions, such as slo er than e7pected sales or une7pected problems, such as a reduction in the suppl% of ra materials= -% constructing a financial plan, management becomes more familiar ith the sensitivit% of the firm<s cash flo s and its financing needs to changes in sales or some other factor= $reating a financial plan helps management understand the trade-offs inherent in its investment and financing plans. Aor e7ample, b% developing a financial plan, management is better able to understand the trade-off that e7ists bet een having sufficient inventor% to satisf% customer demands and the need to finance the investment in inventor%. Ainancial planning consists of the compan%<s investment and financing plans. 3nce e .no the firm<s investment plan, management needs to figure out hen funds are needed and here the% ill come from. &his is accomplished b% developing a budget, hich is basicall% the compan%<s investment and financing plans e7pressed in monetar% terms. P2.#$ Assess the information needs of different decision makers Ainancial statements form part of the process of financial reporting. ' complete set of financial statements normall% includes a balance sheet, an income statement, a cash flow statement, and those notes and other statements and e7planator% material that are an integral part of the financial statements. &he% ma% also include supplementar% schedules and information based on or derived from, and e7pected to be read ith, such statements. Such schedules and supplementar% information ma% deal, for e7ample, ith financial information about industrial and geographical segments and disclosures about the effects of changing prices. Ainancial statements do not, ho ever, include such items as reports b% directors, statements b% the chairman, discussion and anal%sis b% management and similar items that ma% be included in a financial or annual report. &hese statements are useful to different users for different reasons. Users and Their %nformation &eeds &he users of financial statements include present and potential investors, emplo%ees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public. &he% use financial >

statements in order to satisf% some of their different needs for information. &hese needs include the follo ing8 0a1 (nvestors. &he providers of ris. capital and their advisers are concerned ith the ris. inherent in, and return provided b%, their investments. &he% need information to help them determine hether the% should bu%, hold or sell. Shareholders are also interested in information hich enables them to assess the abilit% of the enterprise to pa% dividends. 0b1 )mplo%ees. )mplo%ees and their representative groups are interested in information about the stabilit% and profitabilit% of their emplo%ers. &he% are also interested in information hich enables them to assess the abilit% of the enterprise to provide remuneration, retirement benefits and emplo%ment opportunities. 0c1 *enders. *enders are interested in information that enables them to determine and the interest attaching to them, ill be paid hen due. hether their loans,

0d1 Suppliers and other trade creditors. Suppliers and other creditors are interested in information that enables them to determine hether amounts o ing to them ill be paid hen due. &rade creditors are li.el% to be interested in an enterprise over a shorter period than lenders unless the% are dependent upon the continuation of the enterprise as a ma/or customer. 0e1 $ustomers. $ustomers have an interest in information about the continuance of an enterprise, especiall% hen the% have a long-term involvement ith, or are dependent on, the enterprise. 0f1 ?overnments and their agencies. ?overnments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. &he% also re,uire information in order to regulate the activities of enterprises, determine ta7ation policies and as the basis for national income and similar statistics. 0g1 Public. )nterprises affect members of the public in a variet% of a%s. Aor e7ample, enterprises ma% ma.e a substantial contribution to the local econom% in man% a%s including the number of people the% emplo% and their patronage of local suppliers. Ainancial statements ma% assist the public b% providing information about the trends and recent developments in the prosperit% of the enterprise and the range of its activities. While all of the information needs of these users cannot be met b% financial statements, there are needs hich are common to all users. 's investors are providers of ris. capital to the enterprise, the provision of financial statements that meet their needs ill also meet most of the needs of other users. &he management of an enterprise has the primar% responsibilit% for the preparation and presentation of the financial statements of the enterprise. 4anagement is also interested in the information contained in the financial statements even though it has access to additional management and financial information that helps it carr% out its planning, decision-ma.ing and control responsibilities. 4anagement has the abilit% to determine the form and content of such additional information in order to meet its o n needs. &he reporting of such information, ho ever, is be%ond the scope of this frame or.. Nevertheless, published financial statements are based on the information used b% management about the financial position, performance and changes in financial position of the enterprise. The 'b(ecti)e of *inancial +tatements

&he ob/ective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a ide range of users in ma.ing economic decisions. Ainancial statements prepared for this purpose meet the common needs of most users. +o ever, financial statements do not provide all the information that users ma% need to ma.e economic decisions since the% largel% portra% the financial effects of past events and do not necessaril% provide non-financial information. Ainancial statements also sho the results of the ste ardship of management, or the accountabilit% of management for the resources entrusted to it. &hose users ho ish to assess the ste ardship or accountabilit% of management do so in order that the% ma% ma.e economic decisions= these decisions ma% include, for e7ample, hether to hold or sell their investment in the enterprise or hether to reappoint or replace the management

+ource,s-: http8::

.ccdg.gov.sg:frs:attachments:2C

P2..- !"plain the impact of finance on the financial statements &here are three main financial statements8 11 -alance Sheet= 21 &he (ncome Statement 51 $ash flo Statements )alance *heet &he balance sheet presents a compan%2s financial position at the end of a specified date. Some describe the balance sheet as a DsnapshotD of the compan%2s financial position at a point 0a moment or an instant1 in time. Aor e7ample, the amounts reported on a balance sheet dated 6ecember 51, 2"11 reflect that instant hen all the transactions through 6ecember 51 have been recorded. -ecause the balance sheet informs the reader of a compan%2s financial position as of one moment in time, it allo s someoneEli.e a creditorEto see hat a compan% o ns as ell as hat it o es to other parties as of the date indicated in the heading. &his is valuable information to the ban.er ho ants to determine hether or not a compan% ,ualifies for additional credit or loans. 3thers ho ould be interested in the balance sheet include current investors, potential investors, compan% management, suppliers, some customers, competitors, government agencies, and labour unions 'n e7pense ill decrease the amount of assets or increase the amount of liabilities, and amount of o ner<s or stoc.holders< e,uit%. Aor e7ample an e7pense might8 a1 reduce a compan%<s assets such as $ash, Prepaid )7penses, or (nventor%, b1 increase the credit balance in a contra-asset account such as 'llo ance for 6oubtful 'ccounts or 'ccumulated 6epreciation or c1 increase the balance in the liabilit% account 'ccounts Pa%able, or increase the amount of accrued e7penses pa%able such as Wages Pa%able, (nterest Pa%able, and so on. @ ill reduce the

(n addition to the change in the assets or liabilities, an e7pense ill reduce the credit balance in the 3 ner $apital account of a sole proprietorship, or ill reduce the credit balance in the ;etained )arnings account of a corporation. +he ,ncome *tatement &he primar% purpose of the income statement is to report a compan%2s earnings to investors over a specific period of time. >ears ago, the income statement as referred to as the Profit and *oss 0or PF*1 statement, and has since evolved into the most ell-.no n and idel% used financial report on Wall Street. 4an% times, investors ma.e decisions based entirel% on the reported earnings from the income statement ithout consulting the balance sheet or cash flo statements (which, while a mista-e, is a testament to how influential it is). $ash does not go on the (ncome Statement. &he (ncome Statement is /ust a statement to sho the compan%2s Net Profit or Net *oss. &he accounts used on the (ncome Statement are ;evenue 0(ncome1 and )7penses. Aor e7ample, if e are a compan% and e have sales of G#,""" for the period ending 0usuall% monthl%1, this goes in our ;evenue 'ccount 0(ncome1 and is listed on the (ncome Statement. We then *ist all e7pense, these include such e7penses as ;ent )7pense, (ncome &a7 )7pense, Wage )7pense 0salaries1, and so on. ;evenue minus these e7penses gives us our Net Profit 0Net *oss if e7pense are more than ;evenue1 &he cash account does not affect the (ncome Statement. $ash is listed on all &rial -alance Sheets, &he -alance Sheet. (t is not used on either the (ncome Statement or Statement of ;etained )arnings. .ash /low *tatement ' firm2s cash flo statement tells the tale of corporate li,uidit% inflo s and outflo s over a specific period of time, such as a fiscal %ear. 'lso .no n as a li,uidit% report, this accounting summar% indicates the firm2s cash flo s from operating, investing and financing activities. $orporate cash flo s also affect the balance sheet, of hich cash is a component 0Wahlen, 2"111

P#.1- Anal se budgets and make appropriate decisions. Ward 01BB!1 defines a budget as Ha detailed plan sho ing ho resources ill be ac,uired and used during a specific time periodI 0p.#J1. (t represents a plan for the future, e7pressed in formal measurable terms. &he +arvard -usiness School 02""B1 defines a budget as Hthe financial blueprint or action plan for a department or organisationI 0p.!1. 's a financial blueprint or action plan, it is able to translate strategic plans into measurable e7penditures and anticipated returns over a certain period of time. -udgeting activities include8 A

forecasting future business results, such as sales volume, revenues, capita= investments and e7penses reconciling those forecasts to organisational goals and financial constraints obtaining organisational support for %our proposed budget managing subse,uent business activities to achieve budgeted results.

&here are different t%pes of budgets for different purposes. Some of the main t%pes of budgets include the follo ing8 'perating budgets 3perating budgets reflect da%-to-da% e7penses and depreciation (the current portion of capitalised expenses). &he% t%picall% cover a one-%ear period. /apital budgets $apital budgets sho planned outla%s for investments in plant, e,uipment and product development. $apital budgets ma% cover periods of three, five or even ten %ears. /ash budgets $ash budgets plot the e7pected cash balances the organisation ill e7perience during the forecast period, based on information provided in operating and capital budgets. $ash budgets are usuall% prepared b% an organisation<s finance department an d are critical to ensuring that the compan% has sufficient li,uidit% (cash and credit) available to meet e7pected cash disbursements. 0aster budgets &his is the overall budget for the entire enterprise. 04aster budgets reflect the aggregation of department, division, and business unit budgets.

6epartmental operating and capital budgets are coordinated to create financial budgets including the cash budget, the budgeted balance sheet and the budgeted statement of cash flo s. 'll of these budgets together are then Hrolled up intoI the master budget, summarising the financial pro/ections ithin an organisation for a given period of time. *unctions of budgets Planning -udgeting forces managers to plan, and therefore consider, alternative future courses of action, to evaluate them properl% and to decide on the best alternative. (t also encourages managers to anticipate problems before the% arise, thus giving themselves time to consider alternative a%s of overcoming them hen the% do happen, and to prepare for circumstances 0even simple course of action such as prearranging a ban. overdraft ill be possible as part of the budgeting process1. -udgeting tends to produce better results than decisions made 2on the spot2. /o-ordination Without a full s%stem of budgetar% control, managers of different functions ithin the firm 0i.e. sales, production, finance, etc1 ma% ma.e decisions about the future hich are in conflict ith other departments. Aor e7ample, the sales department ma% plan an advertising campaign to boost sales to a point be%ond the productive capacit% of the firm, or ithout the necessar% finance ' coordinated budgetar% s%stem ill help ensure that actions b% the different departments and the different people involved 0budget holders or budget managers1 ill not be ta.en ithout ensuring that it fits in ith other plans. 8

/ontrol $omparisons of budgeted data and the actual data 0 hen it occurs1 is a procedure .no n as variance anal%sis. $omparing hat as e7pected 0the budget1 ith hat actuall% happened can help mangers to control the finances in a more direct manner. (f an area of the business is continuall% overspending, then investigative action can be ta.en to see h% this happening. (t ma% not be a fault of an% one in particular but at least the areas of the business hich is concerned can be identified, hich ill save time. (t ill be harder for managers and other personnel to spend mone% hich is not /ustified if there is a s%stem of dra ing up e7pected outflo s of cash in advance of these happening. (ndividual departments can be anal%sed b% e7amining hat mone% has been either generated or spent b% each department. &his helps ith overall performance evaluation.

0oti)ation (nvolving people throughout the organisation in the process of budgeting ill help to bring the staff closer together. -% setting targets, staff are more li.el% to feel involved ithin the organisation and therefore are li.el% to be more highl% motivated. &his should help boost productivit% and also reduce absenteeism and labour turnover. -% delegating the budgetar% control do n the chain of command 0from the senior management to the /unior manages and other staff1, this should help boost motivation.

4ost importantl%, budgets are an earl% appropriate corrective action is necessar%. 1udget anal sis

arning s%stem. &he% highlight

here investigation and

'nal%sing %our budgets gives %ou the chance to deal ith potential problems before the% occur. >our cash budget pro/ects %our future cash position month b% month.

(f %our overdraft is pro/ected to be close to or over %our limit, %ou need to ta.e appropriate action. (f %ou cannot, %ou ma% need to increase prices or ration sales to avoid the ris. of ban.ruptc% through overtrading.

(f %our cash position is e7tremel% variable, %ou ma% need to anal%se %our cash-flo shorter time periods to see if a problem is li.el% at an% point during a month. Profit and loss budgets let %ou anal%se pro/ected margins and other .e% ratios.

into

(f margins are unsatisfactor%, %ou ma% need to increase prices, reduce costs or focus on %our most profitable lines. ?ro ing businesses that are not %et profitable ma% find it useful to calculate the brea.even level of turnover.

>our pro/ected balance sheet allo s %ou to anal%se stoc. turnover and other .e% figures.

(f or.ing capital is gro ing faster than sales, %ou need to control it. $hec. ho easil% %ou can meet %our financing pa%ments.

/ompare pro/ected figures ith previous %ears to see here performance is improving or deteriorating. )

>ou can also compare figures for pro/ected margins and gro th companies, or across different parts of %our business.

ith those of other

$onduct sensiti)it anal ses to see ho different outcomes affect performance.

's long as %ou prepare forecasts for the relevant information, %ou can budget for and anal%se an% of %our .e% performance indicators. 0onitoring and 0anaging our Profit and 2oss 1udget Where the profit and loss statement is prepared on a monthl% basis, the budget ill need to be separated into months for the budget period. 't the end of each month, the actual results from the profit and loss statement are compared ith the budgeted results and an% variances noted and anal%sed. Such variances should be noted on the reports and e7planations provided. 'll variances should be categorised as either a 2timing2 or 2permanent2 variance. ' timing )ariance is here the estimated result did not occur but is still e7pected to happen at some point in the future. ' permanent )ariance is here the e7pected event is not li.el% to occur at all. &he po er of this anal%sis is that each variance is documented for future reference and, here re,uired, action can be ta.en to counteract future variances or implement ne or improved activities to ensure the strategic goals that underlie the budget can still be achieved. http8:: .business.vic.gov.au:operating-a-business:managing-finances-and-ta7:finance-basics:budgeting

/ase +tud )as% electronics *td. has been trading for man% months, producing (-4 compatible motherboards or main boards hich are sold to its o n e,uipment manufacturers, )as% personal and computer hard are sellers. -udgeted Profit and *oss 'ccount and $ash -udget for the si7 months period ending 51:6ecember 2"15 is given belo 8 -udgeted profit and loss account is a budget that illustrates the difference bet een gross profit and net profit and that also illustrates an% revenues over and above net sales. &he profit and loss budget is a summar% of e7pected income and e7penses set against the business operating plans for the budget period. &his is usuall% one %ear, although, in some cases, the period can be shorter or longer, depending on hat %ou are going to use the budget for. Profit and loss budgets let %ou anal%se pro/ected margins and other .e% ratios8
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(f margins are unsatisfactor%, %ou ma% need to increase prices, reduce costs or focus on %our most profitable lines. ?ro ing businesses that are not %et profitable ma% find it useful to calculate the brea.even level of turnover. .bized.co.u.:learn:sheets:glossar%.htm1.

*ocus of anal sis:

o

0xpected income (*ales) 10

G5#,K5"

o o o o o o o o o o o

.ost of sales (direct material, direct labour, and factory overheads) G1K,KJK 1ross profit (sales 2 cost of sales) 3evenues over and above net sales (disposal of e4uipment) 0xpenses (5dministration cost, 6istribution cost) 7rofit before interest and tax (0),+) 8oan interest (cost of finance) 7rofit before tax .orporation tax 9 %#: ;et profit (profit after tax) 7rojected margins <ther -ey ratios (relevant financial ratios) G1L,B#2 G 1"" G L,##L G1",!BL G #"" G B,BBL G 2,2BB G J,LBJ MMMMMMM MMMMMMM

$ost of sales N G1K,KJK is not too high, but could be further reduced in order to increase income and profit. ?ross profit loo.s good N G1L,B#2 i.e. ;evenues over and above net sales N G1"" O company needs to see- additional sources of income. <ther e4uipment not currently being used could also be disposed off. )7penses are not too high N GL,##L, but the compan% could aim more at reducing administrative and distribution costs e.g. doing more of online transactions li-e. &he loan interest of G#"" over a si7-month period does not seem high, although e do not have an idea of ho much as actuall% borro ed for us to be able to find out the percentage at hich it as borro ed. 'll the same, the compan% can aim to have ;)&'(N)6 profits so that it does not have to pa% interest. &hereb%, indirectl% increasing its profits. $orporation ta7 N 25P seems a bit high. &he compan% could see. a%s b% hich it could *)?'**> reduce corporation ta7 or loo. else here 0another countr%1 for the e7pansion of our ventures.

Anal sing the /ash 1udget $ash budget is the budget that illustrates total cash to be received and spent and the balance left at the end of each period 0 .bized.co.u.:learn:sheets:glossar%.htm1. ' cash budget is also .no n as a cash flo forecast. (t is a prediction of future cash inflo s and cash outflo s over a period of time 0http8:: .thestudentroom.co.u.: i.i:;evision8'Q*evelQ'ccountsQ4oduleQ!QQ-udgetingQandQbudgetar%QcontrolRAunctionsQofQbudgets1. *ocus of anal sis:
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What is happening to the estimated cash flo M What do %ou thin. is the main cause of the changes in the cash flo M 11

Suppliers as. for their pa%ments at the end of each month. What difference the% insist on being paid in advanceM (n hich month0s1 does the compan% face cash flo problemsM

ould it ma.e if

What do %ou thin. that )as% )lectronics might be able to do to deal ith these problemsM

P#.2- !"plain the calculation of unit costs and make pricing decisions using rele)ant information. Unit cost is the cost incurred b% a compan% to produce, store and sell one unit of a particular product. Unit costs include all fi7ed costs and all variable costs involved in production. (t can also be described as e7penditure incurred in producing one unit of a good or service, computed usuall% as average cost. &he cost per unit or unit cost is derived from the variable costs and fi7ed costs incurred b% a production process, divided b% the number of units produced. @ariable costs, such as direct materials, var% roughl% in proportion to the number of units produced, though this cost should decline some hat as unit volumes increase, due to greater purchasing discounts. Ai7ed costs, such as building rent, should remain unchanged no matter ho man% units are produced, though the% can increase as the result of additional capacit% being needed (-nown as a step cost, where the cost suddenly steps up to a higher level once a specific unit volume is reached) . )7amples of step costs are adding ne production facilit% or production e,uipment, adding a for.lift, or adding a second or third shift. When a step cost is incurred, the total fi7ed cost ill no incorporate the ne step cost, hich ill increase the cost per unit. 6epending on the size of the step cost increase, a manager ma% ant to leave capacit% here it is and instead outsource additional production, thereb% avoiding the additional fi7ed cost. &his is a prudent choice hen the need for increased capacit% is not clear. Within these restrictions, then, the cost per unit calculation is8 ,Total fi"ed costs 3 Total )ariable costs- 4 Total units produced &he cost per unit should decline as the number of units produced increases, primaril% because the total fi7ed costs ill be spread over a larger number of units (subject to the step costing issue noted above) . &hus, the cost per unit is not constant. /ase +tud >ou are re,uired to use the budgeted profit and loss account to e7plain ho unit costs are calculated. (t is estimated that )as% )lectronics *td. ill manufacture and sell L#","5L mother boards for the si7 months period ending 51st 6ecember 2"15. &he finance director of )as% )lectronics *td. has as.ed %ou to evaluate a proposal to reduce the selling price b% 1"P from the current price of G##.12 per unit and as a result, sales are e7pected to increase b% 2"P. $ost of sales ill also increase b% 2"P. 'll other costs ill remain constant. >ou are re,uired to ma.e pricing decision based on the above information. -asicall%, unit cost or cost per unit is calculated as8 &otal fi7ed costs S &otal variable costs &otal units produced 12

$urrent selling price8 G##.12 per unit Proposed selling price8 (55.12 less 10%) i.e. 5.6.789 per unit )stimated total units8 L#","5L units &argeted total units8 (650,036 + 20%) i.e. (650,036 + 130,007.2) T :98;8.#.2 units $urrent cost of sales8 G1K,KJK Ne cost of sales8 (18,878 + 20%) i.e. (18,878 + 3,775.6) T 522;7<#.7 &otal fi7ed costs remain constant i.e. !minist"ation + #ist"ib$tion (3,075 + 3,%81) UGL,##LV &otal variable costs have increased b% 2"P i.e. the Wne cost of sales< of 522;7<#.7

&herefore, unit cost at the proposed rates8 &otal fi7ed costs (3,075 + 3,%81) UGL,##LV S &otal variable costs UG22,L#5.LV &otal units produced UJK","!5.2V T G2B,2"B.L : JK","!5.2 T G"."5J appro7imatel% G"."! or !p &e'e"al p"icin( !ecisions can be ma!e))) consi!e" the attache! notes an! choose an*))).

P#.#- Assess the )iabilit of a pro(ect using in)estment appraisal techni=ues. &he investment appraisal process includes the generation of ideas, assessment and authorization, implementation and control of the pro/ect 06ennis ;. >oung, 2""J1. 6ecision-ma.ing is increasingl% more comple7 toda% because of uncertaint%. 'dditionall%, most capital pro/ects involve numerous variables and possible outcomes. Aor instance, estimating cash flo s associated ith a pro/ect involves or.ing capital re,uirements, pro/ect ris., ta7 considerations, e7pected rates of inflation, and disposal values. (t is necessar% to understand e7isting mar.ets to forecast pro/ect revenues, assess competitive impacts of the pro/ect, and determine the life c%cle of the pro/ect. (nvestment 'ppraisal is therefore more than the identification and evaluation of suitable pro/ects. (t includes consideration of timing and the identification and balancing of ris.. ' ma/or problem for decision ma.ers in enterprises is the appraisal of potential investment pro/ects that can absorb capital assets. &his evaluation, also .no n as investment appraisal, is reall% crucial for the future of an% firm, since it determines the financial sources of the firm2s budget and ultimatel% defines the level of the shareholders ealth. (n theoretical finance, several methods of investment appraisal are developed in order to help financial managers or accountants to evaluate ith increased certaint% cash flo s, viabilit% and profitabilit% of an% investment pro/ect 0;osenberg, 2""11. (n order to assess the viabilit% of the pro/ect organisation can ta.e several t%pes of investment appraisal techni,ues such as81(

a1 Accounting >ate of >eturn ,A>>-: +igher rates of ';; can ma7imise profits for the organisation and financial managers can accept that pro/ect. 4anagers can control the costs of the business for ma7imising the ';; 06%son, 2""11. b1 Pa 1ack Period ,P1-: $ompanies can onl% accept those pro/ects selection of the pro/ect 06avies, 2""#1. c1 &et Present ?alue ,&P?-: (f the NP@ is sho ing the positive value, then organisations can accept that pro/ect. 3rganisations can onl% accept higher rate of NP@ because it can ma7imise the profits of the organisation 0;ice, 2"""1. d1 %nternal >ate of >eturn ,%>>-: (f the pro/ect have higher rate of (;; value than organisations can accept those pro/ects. +igher rate of (;; can also ma.e the profit ,uic.l% and selection of those pro/ects has fe er ris.s for the organisation 0Wood, 2""21. hich have higher rate of

pa%bac. period. 3rganisations can calculate the rate the pa%bac. period for ma.ing effective

P..1 @iscuss the main financial statements ,the discussion should focus on basic form and purpose of main financial statementsAinancial statements provide an overvie of a business2 financial condition in both short and long term. &here are numerous purposes of financial statements. +o ever, the different ob/ectives of financial statements can be e7plained under the follo ing headings8 /ash-flow statements8 &he purpose of this financial statement is to .eep an account of the different activities of the business entit%. (t also provides information on the mode of generation of funds re,uired for repa%ment. &he cash-flo statement also helps to anal%se the amount of cash that ould be re,uired in order to meet the operating costs. %ncome +tatement8 &his t%pe of financial statement .eeps an account of the net surplus or deficits. &he net surplus or deficit is calculated b% considering all the activities in the last financial %ear. -% having a detailed account of the past, one can forecast or assess the future performance of the compan%. 1alance +heet8 &he balance sheet basicall% gives an idea of the financing structure of the compan%. With the help of this one can predict the funds that ould be utilised in the future. (t ould further reflect the capacit% of the firm to raise additional capital. +tatement of retained earnings8 e7plains the changes in a compan%2s retained earnings over the reporting period. P..2 /ompare appropriate formats of financial statements for different t pes of business &here are three t%pes of financial statements for businesses8 income statement, balance sheet and cash flo statement. )ach of these financial statements sho s a different aspect of the business. +o ever, to properl% understand the financial health of a business, all three financial statements should be studied together. )ach financial statement can sho potential problems or areas of ea.ness that are not evident in the other statements. &here are standard formats used for each of the three financial statements. 1>

)asic ,ncome *tatement &he basic format for an income statement states revenues first, follo ed b% e7penses. &he e7penses are subtracted from the revenue to calculate the net income of the business. &his is the most simplified version of an income statement that ould be used b% most service providers and others that do not have a cost of goods sold for the services the% use to create a profit. (f there is a cost of goods sold, the income statement is a more involved statement. )alance *heet &he balance sheet sho s the assets, liabilities and shareholders< e,uit% of the business. &he total assets must e,ual the summation of the total liabilities and shareholders< e,uit%. &he first section of the balance sheet lists all assets. &his includes cash, investments, real estate, e,uipment and other business holdings. &he ne7t section lists the liabilities, or hat the compan% o es to others. &his ould include an% loans or accounts pa%able. &he final section is the shareholdersFR"5B= e,uit%, hich is the difference bet een the total assets and total liabilities. )alance *heet 6ifferences Aor a small compan%, the organization ma% have a ver% simple balance sheet as described above. Aor a larger compan%, the business often ill brea. it do n to current and long-term assets and current and long-term liabilities. $urrent assets refer to an% assets that can ,uic.l% be converted to cash, such as shortterm investments or chec.ing accounts. *ong-term assets are those things that ould ta.e longer to convert to cash, such as e,uipment or real estate. $urrent liabilities are those debts that are due ithin the ne7t %ear. *ong-term liabilities are those due more than one %ear from the date of the balance sheet. .ash /low *tatement ' cash flo statement sho s the actual flo of cash in and out of the business. 4an% businesses handle their accounting on an accrual basis. &his means the% ill recognize income received from a contract hen the contract is e7ecuted and not necessaril% hen the cash is received. &he cash flo statement sho s hen the cash is received. &he cash flo statement can help investors and others determine if the business is having difficult% managing its cash flo . &he format of the cash flo statement begins ith cash flo from operations, follo ed b% cash flo from investing and cash flo from operations. )ach categor% sho s incoming and outgoing cash from the business. &he ending cash flo should be e,ual to the amount of cash the business has on hand. 4ainl% there are different formats of financial statements that can be found across different businesses. &hese are the income statement, balance sheet and cash flo statement. )ach of these statements needs to be understood b% a business in order for them to manage their mone% efficientl% and successfull%. Whatever formats used the results ill be same. &here are accounting slanders such as %nternational *inancial >eporting +tandards ,%*>+- and Generall Accepted Accounting Principles ,GAAPhich are practices that are accepted globall%. 6ifferent t%pes of business use different t%pes of formats. Aor e7ample a sole trader ould prepare a simple profit and loss account compared to a public limited liabilit% compan% hich ill have to prepare based on (A;S or ?''P. When financial statements are not prepared based on standards it is difficult to compare ith other organizations. &he other is a multi step format here cost of sales is deducted from sales to sho gross profit and other income and e7pense are presented to give income before ta7. &he difference bet een these t o formats is that the single format does not sho the margins hile the multi step format gives the margin b% classif%ing hat is direct cost and indirect cost. &hese classifications are important in ma.ing good financial decisions 1?

P..# %nterpret financial statements using appropriate ratios and comparisons; both internal and e"ternal using the data gi)en below. 'nal%sis of financial statements is an attempt to assess the efficienc% and performance of an enterprise. &hus, the anal%sis and interpretation of financial statements is ver% essential to measure the efficienc%, profitabilit%, financial soundness and future prospects of the business units. Ainancial 'nal%sis serves the follo ing purposes8 4easuring the profitabilit &he main ob/ective of a business is to earn a satisfactor% return on the funds invested in it. Ainancial anal%sis helps in ascertaining hether ade,uate profits are being earned on the capital invested in the business or not. (t also helps in .no ing the capacit% to pa% the interest and dividend. %ndicating the trend of Achie)ements Ainancial statements of the previous %ears can be compared and the trend regarding various e7penses, purchases, sales, gross profits and net profit etc. can be ascertained. @alue of assets and liabilities can be compared and the future prospects of the business can be envisaged. Assessing the growth potential of the business &he trend and other anal%sis of the business provides sufficient information indicating the gro th potential of the business. /omparati)e position in relation to other firms &he purpose of financial statements anal%sis is to help the management to ma.e a comparative stud% of the profitabilit% of various firms engaged in similar businesses. Such comparison also helps the management to stud% the position of their firm in respect of sales, e7penses, profitabilit% and utilising capital, etc. Assess sol)enc of the firm &he different tools of an anal%sis tell us and long term liabilities or not. +atios nal*sis &he ratios anal%sis is the most po erful tool of financial statement anal%sis. ;atios simpl% mean one number e7pressed in terms of another. ' ratio is a statistical %ardstic. b% means of hich relationship bet een t o or various figures can be compared or measured. ;atios can be found out b% dividing one number b% another number. ;atios sho ho one number is related to another. 7rofitability 3atios Profitabilit% ratios measure the results of business operations or overall performance and effectiveness of the firm. Some of the most popular profitabilit% ratios are as under8 ?ross profit ratio Net profit ratio 3perating ratio )7pense ratio ;eturn on shareholders< investment or net orth ;eturn on e,uit% capital ;eturn on capital emplo%ed 0;3$)1 ;atio 1@

hether the firm has sufficient funds to meet its short term

6ividend %ield ratio 6ividend pa%out ratio )arnings Per Share 0)PS1 ;atio Price earning ratio

8i4uidity 3atios
*i,uidit% ratios measure the short term solvenc% of financial position of a firm. &hese ratios are calculated to comment upon the short term pa%ing capacit% of a concern or the firm2s abilit% to meet its current obligations. Aollo ing are the most important li,uidit% ratios.

$urrent ratio *i,uid : 'cid test : Xuic. ratio

5ctivity 3atios 'ctivit% ratios are calculated to measure the efficienc% ith hich the resources of a firm have been emplo%ed. &hese ratios are also called turnover ratios because the% indicate the speed ith hich assets are being turned over into sales. Aollo ing are the most important activit% ratios8 (nventor% : Stoc. turnover ratio 6ebtors : ;eceivables turnover ratio 'verage collection period $reditors : Pa%able turnover ratio Wor.ing capital turnover ratio Ai7ed assets turnover ratio 3ver and under trading 8ong +erm *olvency or 8everage 3atios *ong term solvenc% or leverage ratios conve% a firm2s abilit% to meet the interest costs and pa%ment schedules of its long term obligations. Aollo ing are some of the most important long term solvenc% or leverage ratios.

6ebt-to-e,uit% ratio Proprietar% or ),uit% ratio ;atio of fi7ed assets to shareholders funds ;atio of current assets to shareholders funds (nterest coverage ratio $apital gearing ratio 3ver and under capitalization

/onclusion: Ainall%, financial planning is an important area of ma.ing more profits for the organisation such as it can determine the costs of running the business operations and improve the financial decision ma.ing for the organisation. -% the help of cost anal%sis organisation can determine their financial strengths 1A hich can

also reduce the costs of running the business activities. Ainancial decision ma.ing can also determine the future ris.s for the organisation and reduce the problems reduce an% future ris.s of the financial operations. ith effective utilisation of the financial hich can help to resources. +o ever, it is important to continuousl% monitoring the financial activities

>eferences 1. 't.inson +, -err% ' and Yarvis ; 02""11 )usiness 5ccounting for =ospitality and +ourism , 05rd edition1, &homson *earning 2. 'trill and4c*ane%, 02""K1, A5ccounting and /inance for ;on>*pecialists I, 0Lth edition1, Prentice +all, U9 5. $aplan, S. 02"""1, H/inance and 5ccountingI, 'dams 4edia $orporation, U9 !. 6avies, 6. 02""#1, ?anaging financial information, 02nd edition1, $hartered (nstitute of personnel and development. #. 6rur% $ 02""!1, ?anagement and .ost 5ccounting, &homson *earning 18

L. 6%son, Y ;, 02""11, @5ccounting for ;on>5ccounting studentsA, 0#th edition1, Prentice +all, U9 J. ?uilding $ 02""21, /inancial ?anagement for =ospitality 6ecision ?a-ers -utter orth+einemann K. 9otas ; 02""21, ?anagement 5ccounting for =ospitality and +ourism, 05rd edition1, &homson *earning B. *odish, *.4. 02"""1, H' user-oriented model for Ainancial s%stem ith ratio anal%sis,I Yournal of Ainance, @ol. !!, Summer, pp. J"-K. 1". 3 en, ?. 02""!1, A5ccounting for =ospitality, +ravel and 8eisureA,05rdedition1, *ongman, U9 11. ;ice, '. 02"""1, A5ccounts 6emystifiedA, Prentice +all, U9 12. Srinivasan, @. 02""11, H'n investigation of the e,ual financial anal%sis,I 4anagement of Ainance, @ol. 2J, pp. J51-#L. 15. Stephenson, P.;., $ron, W.*. and Arazier, ?.*. 02""B1, H6elegating ratio anal%sis in business,I Yournal of Ainance, @ol. !5, Spring, pp. 21-K. 1!. Wood, A., 02""21, A/ran- BoodCs 5ccounting ' and %A,0Bth edition1, Prentice +all, U9 1#. Zoltners, '.'. and Sinha, P. 02"""1, H(nteger programming models for financial s%stem and structureI 4anagement of Ainance, @ol. 2L, pp. 2!2-L".

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