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− − − − Course: HND Business – Level 4 Subject Learner’s Name(s) Student Number
− Lecturer: Olumide Olo an
Table of Contents
Analysing the Cash Budget.................................................................................................11
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
Ban0 o-erdraft 1
retained profits. ! 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<<<<<.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).s in-est%ent=ca'ital . he could part-fund the project with his own funds. Produce an academic report. Combination of any of the above options i. P1. 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. +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). grants P1. 2 .e.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 . detailing the above issues ith a ord limit of !""" to !#"" ords." ! 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.etained 'rofit +wners9 ca'ital 5o-ern%ent" local authority or :.
tax effects).g. (t should be uploaded on )-*earning platform before the deadline and submitted to -------. 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. 3 ner<s investment:capital attracts no additional costs since it signifies %our o n level of financial investment in the business.ecommendations 0summarizing the hole scenario . ( . $omplete the title page and sign the statement of authenticit%.uestion clearl%. etc.uentl%.1 Underpinning 9no ledge 0 rite about the relevant theor%:points1 'pplied . should be comprehensivel% referenced and all sources must be full% ac.uestion. $ollusion and Plagiarism must be avoided.eeping in vie pass. Submit the document in a folder in the form of a file as ell as a soft cop% on the submission date.1 Task Two 2 Understand the implications of finance as a resource within a business P2. opportunity costs e.no ledge06ata 'nal%sis1 $onclusions and . 62 and 65.Anal se the costs of different sources of finance (tangible costs e. for e7ample8 (ntroduction 0anal%ze the . ebsites 0include the date of visit1. Start each ans er on a ne page and pages should be numbered. &he 'ssignment sheet should be attached in the front.45 (n order to get a 6istinction %ou need to address the characteristics of Pass.uestions. for cheaper sources of funds. . %ou have not traded= being a ne business. 'ssignments submitted after the deadline ill not be accepted unless mitigating and ma% be entitled for a late fee.1. $onse.no ledged. interest. +o ever. and obtain cheaper sources of finance although time constrains do not al a%s permit organizations to loo.s and /ournals. there are no retained profits for %ou to use.etained profits attract no additional cost.g. merit. +o ever. dividends. loss of alternative projects when using retained earnings. 4erit and then 61. (t is al a%s good for a business to see. +ighlight each . it is ver% clear that internal sources of finance are al a%s cheaper than e7ternal sources of finance.and sign the submission form of the college. distinction criteria. &r% to give the page numbers. 'trill 02""#1 e7presses the vie that different sources of finance attract different costs. 'll or. Use a common format for the . 42. (nclude a -ibliograph% at the end of the assignment and use the +arvard referencing s%stem. such as boo.
ho ever. emplo%ees. Sale of fi7ed assets ould not attract an% additional fees in the form of interest rates. Such schedules and supplementar% information ma% deal. lenders. suppliers and other trade creditors. &he% ma% also include supplementar% schedules and information based on or derived from. depending on the agreed profit sharing ratios. Ainancial planning consists of the compan%<s investment and financing plans. &he business finish it ith pa%ing more than the real cost of the asset for its purchase. ith financial information about industrial and geographical segments and disclosures about the effects of changing prices. @enture capital is fle7ible. management is in a better position to react to an% changes in mar. and e7pected to be read ith. 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. such statements.no the firm<s investment plan. and those notes and other statements and e7planator% material that are an integral part of the financial statements. such as slo er than e7pected sales or une7pected problems. Users and Their %nformation &eeds &he users of financial statements include present and potential investors. overdraft<s interest is calculated on a dail% basis. So.g. 50 50. Aabozzi et al. !0 "0. governments and their agencies and the public. management needs to figure out hen funds are needed and here the% ill come from. discussion and anal%sis b% management and similar items that ma% be included in a financial or annual report. >ou onl% dispose assets initiall% o ned Secured loan (you could obtain a secured loan against your property at a lower interest rate. Ainancial statements do not. ' complete set of financial statements normall% includes a balance sheet. 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%. Aor e7ample. such as a reduction in the suppl% of ra materials= − -% constructing a financial plan. #0 $0. include such items as reports b% directors. '0 (0. a cash flow statement. b% developing a financial plan. its reported earnings and its need for e7ternal financing= − -% formulating financial plans. &his is accomplished b% developing a budget. P2. +ire purchase8 the pa%ment made in affordable e7penditure. %0 &0.et conditions. -an. 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. &hese statements are useful to different users for different reasons.!"plain the importance of financial planning Ainancial planning allocates a firm<s resources to achieve its investment ob/ectives. 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= − $reating a financial plan helps management understand the trade-offs inherent in its investment and financing plans. &he% use financial > − . 3nce e . ?rant from the government ould not attract an% cost0s1. for e7ample. hich is basicall% the compan%<s investment and financing plans e7pressed in monetar% terms. P2.#$ Assess the information needs of different decision makers Ainancial statements form part of the process of financial reporting. it depends on ho long %ou need the funds for. statements b% the chairman. customers.2. an income statement. its cash flo s.
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. 0f1 ?overnments and their agencies. decision-ma. their investments. &he providers of ris. the provision of financial statements that meet their needs ill also meet most of the needs of other users. The 'b(ecti)e of *inancial +tatements ? . determine ta7ation policies and as the basis for national income and similar statistics. ?overnments and their agencies are interested in the allocation of resources and. Suppliers and other creditors are interested in information that enables them to determine hether amounts o ing to them ill be paid hen due. &hese needs include the follo ing8 0a1 (nvestors.statements in order to satisf% some of their different needs for information. Aor e7ample. hether their loans. &he% need information to help them determine hether the% should bu%. published financial statements are based on the information used b% management about the financial position. 0e1 $ustomers. capital and their advisers are concerned ith the ris. )nterprises affect members of the public in a variet% of a%s. Shareholders are also interested in information hich enables them to assess the abilit% of the enterprise to pa% dividends.. especiall% hen the% have a long-term involvement ith. capital to the enterprise.ing and control responsibilities. ill be paid hen due. retirement benefits and emplo%ment opportunities. enterprises ma% ma. therefore. 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. &he% also re. 0g1 Public. or are dependent on. is be%ond the scope of this frame or. ho ever. 0d1 Suppliers and other trade creditors. the enterprise. 0b1 )mplo%ees. 4anagement has the abilit% to determine the form and content of such additional information in order to meet its o n needs.uire information in order to regulate the activities of enterprises.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. &rade creditors are li. inherent in. &he management of an enterprise has the primar% responsibilit% for the preparation and presentation of the financial statements of the enterprise. hold or sell. )mplo%ees and their representative groups are interested in information about the stabilit% and profitabilit% of their emplo%ers. &he reporting of such information. the activities of enterprises. Nevertheless. $ustomers have an interest in information about the continuance of an enterprise. &he% are also interested in information hich enables them to assess the abilit% of the enterprise to provide remuneration. 's investors are providers of ris. While all of the information needs of these users cannot be met b% financial statements.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. performance and changes in financial position of the enterprise. there are needs hich are common to all users. 0c1 *enders. and return provided b%. *enders are interested in information that enables them to determine and the interest attaching to them.
and so on.. (nterest Pa%able. @ ill reduce the . 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.e economic decisions= these decisions ma% include. Ainancial statements also sho the results of the ste ardship of management.. &he ob/ective of financial statements is to provide information about the financial position.ccdg. or (nventor%.s-: http8:: . Some describe the balance sheet as a DsnapshotD of the compan%2s financial position at a point 0a moment or an instant1 in time.er ho ants to determine hether or not a compan% . and labour unions 'n e7pense ill decrease the amount of assets or increase the amount of liabilities.gov. potential investors.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. performance and changes in financial position of an enterprise that is useful to a ide range of users in ma.sg:frs:attachments:2C P2. Aor e7ample an e7pense might8 a1 reduce a compan%<s assets such as $ash.e economic decisions since the% largel% portra% the financial effects of past events and do not necessaril% provide non-financial information. suppliers.holders< e. -ecause the balance sheet informs the reader of a compan%2s financial position as of one moment in time. Aor e7ample. hether to hold or sell their investment in the enterprise or hether to reappoint or replace the management +ource. &hose users ho ish to assess the ste ardship or accountabilit% of management do so in order that the% ma% ma.ing economic decisions. &his is valuable information to the ban. or increase the amount of accrued e7penses pa%able such as Wages Pa%able. 2"11 reflect that instant hen all the transactions through 6ecember 51 have been recorded. and amount of o ner<s or stoc. it allo s someoneEli. +o ever. for e7ample. competitors. compan% management. government agencies. some customers. Prepaid )7penses. 3thers ho ould be interested in the balance sheet include current investors. financial statements do not provide all the information that users ma% need to ma.uit%.!"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. the amounts reported on a balance sheet dated 6ecember 51.ualifies for additional credit or loans. or the accountabilit% of management for the resources entrusted to it. Ainancial statements prepared for this purpose meet the common needs of most users.
&he (ncome Statement is /ust a statement to sho the compan%2s Net Profit or Net *oss. We then *ist all e7pense. Aor e7ample. the income statement as referred to as the Profit and *oss 0or PF*1 statement.evenue1 &he cash account does not affect the (ncome Statement. .uidit% inflo s and outflo s over a specific period of time. or ill reduce the credit balance in the . -udgeting activities include8 A . (t represents a plan for the future.ent )7pense. $ash is listed on all &rial -alance Sheets.e decisions based entirel% on the reported earnings from the income statement ithout consulting the balance sheet or cash flo statements (which. and has since evolved into the most ell-.no n and idel% used financial report on Wall Street.uired and used during a specific time periodI 0p.""" for the period ending 0usuall% monthl%1. $orporate cash flo s also affect the balance sheet. 'lso .etained )arnings account of a corporation. e7pressed in formal measurable terms. these include such e7penses as . if e are a compan% and e have sales of G#. while a mista-e. 's a financial blueprint or action plan. such as a fiscal %ear. and so on. an e7pense ill reduce the credit balance in the 3 ner $apital account of a sole proprietorship. +he . $ash does not go on the (ncome Statement. &he -alance Sheet.evenue minus these e7penses gives us our Net Profit 0Net *oss if e7pense are more than . Wage )7pense 0salaries1.!1.no n as a li.1. investing and financing activities. Ward 01BB!1 defines a budget as Ha detailed plan sho ing ho resources ill be ac.etained )arnings. investors ma. .ash /low *tatement ' firm2s cash flo statement tells the tale of corporate li.uidit% report.evenue 0(ncome1 and )7penses. >ears ago. &he accounts used on the (ncome Statement are .#J1.(n addition to the change in the assets or liabilities. this goes in our . (ncome &a7 )7pense. it is able to translate strategic plans into measurable e7penditures and anticipated returns over a certain period of time. of hich cash is a component 0Wahlen. &he +arvard -usiness School 02""B1 defines a budget as Hthe financial blueprint or action plan for a department or organisationI 0p. is a testament to how influential it is).ncome *tatement &he primar% purpose of the income statement is to report a compan%2s earnings to investors over a specific period of time.Anal se budgets and make appropriate decisions. 4an% times. (t is not used on either the (ncome Statement or Statement of .evenue 'ccount 0(ncome1 and is listed on the (ncome Statement. this accounting summar% indicates the firm2s cash flo s from operating. 2"111 P#.
capita= investments and e7penses reconciling those forecasts to organisational goals and financial constraints obtaining organisational support for %our proposed budget managing subse.- forecasting future business results.en ithout ensuring that it fits in ith other plans. division. $ash budgets are usuall% prepared b% an organisation<s finance department an d are critical to ensuring that the compan% has sufficient li. /apital budgets $apital budgets sho planned outla%s for investments in plant. revenues. -udgeting tends to produce better results than decisions made 2on the spot2. alternative future courses of action. Aor e7ample. the budgeted balance sheet and the budgeted statement of cash flo s. and to prepare for circumstances 0even simple course of action such as prearranging a ban. and therefore consider. 'll of these budgets together are then Hrolled up intoI the master budget. (t also encourages managers to anticipate problems before the% arise. *unctions of budgets Planning -udgeting forces managers to plan. finance. etc1 ma% ma. the sales department ma% plan an advertising campaign to boost sales to a point be%ond the productive capacit% of the firm. based on information provided in operating and capital budgets. &he% t%picall% cover a one-%ear period.uipment and product development. 8 . 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). such as sales volume. and business unit budgets. $apital budgets ma% cover periods of three. 0aster budgets &his is the overall budget for the entire enterprise. production. managers of different functions ithin the firm 0i.uidit% (cash and credit) available to meet e7pected cash disbursements.uent business activities to achieve budgeted results. thus giving themselves time to consider alternative a%s of overcoming them hen the% do happen. 04aster budgets reflect the aggregation of department. sales.e decisions about the future hich are in conflict ith other departments. &here are different t%pes of budgets for different purposes. /ash budgets $ash budgets plot the e7pected cash balances the organisation ill e7perience during the forecast period. 6epartmental operating and capital budgets are coordinated to create financial budgets including the cash budget.e. /o-ordination Without a full s%stem of budgetar% control. overdraft ill be possible as part of the budgeting process1. summarising the financial pro/ections ithin an organisation for a given period of time. five or even ten %ears. e. 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. to evaluate them properl% and to decide on the best alternative.
(ndividual departments can be anal%sed b% e7amining hat mone% has been either generated or spent b% each department. reduce costs or focus on %our most profitable lines. %ou ma% need to increase prices or ration sales to avoid the ris. %ou ma% need to increase prices. %ou need to ta.el% at an% point during a month.e% figures. • (f %our overdraft is pro/ected to be close to or over %our limit. then investigative action can be ta. %ou ma% need to anal%se %our cash-flo shorter time periods to see if a problem is li. • • (f or. • (f %our cash position is e7tremel% variable. turnover and other . 0oti)ation (nvolving people throughout the organisation in the process of budgeting ill help to bring the staff closer together. • • into (f margins are unsatisfactor%.e% ratios. 1udget anal sis arning s%stem. >our cash budget pro/ects %our future cash position month b% month. of ban. /ompare pro/ected figures ith previous %ears to see here performance is improving or deteriorating.e appropriate action. &his helps ith overall performance evaluation.even level of turnover. -% delegating the budgetar% control do n the chain of command 0from the senior management to the /unior manages and other staff1. /ontrol $omparisons of budgeted data and the actual data 0 hen it occurs1 is a procedure . -% setting targets. (f an area of the business is continuall% overspending. staff are more li. >our pro/ected balance sheet allo s %ou to anal%se stoc. ho easil% %ou can meet %our financing pa%ments.el% to be more highl% motivated. $omparing hat as e7pected 0the budget1 ith hat actuall% happened can help mangers to control the finances in a more direct manner. &he% highlight here investigation and 'nal%sing %our budgets gives %ou the chance to deal ith potential problems before the% occur. 4ost importantl%. Profit and loss budgets let %ou anal%se pro/ected margins and other . %ou need to control it.no n as variance anal%sis. hich ill save time.el% to feel involved ithin the organisation and therefore are li. &his should help boost productivit% and also reduce absenteeism and labour turnover. ) . this should help boost motivation. (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.en to see h% this happening.ing capital is gro ing faster than sales. $hec.ruptc% through overtrading. ?ro ing businesses that are not %et profitable ma% find it useful to calculate the brea. (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. (f %ou cannot. budgets are an earl% appropriate corrective action is necessar%.
uired. the budget ill need to be separated into months for the budget period. the actual results from the profit and loss statement are compared ith the budgeted results and an% variances noted and anal%sed.u. depending on hat %ou are going to use the budget for. ' permanent )ariance is here the e7pected event is not li.bized. Profit and loss budgets let %ou anal%se pro/ected margins and other . .gov.K5" . in some cases. although.en to counteract future variances or implement ne or improved activities to ensure the strategic goals that underlie the budget can still be achieved. 0 *ocus of anal sis: o 0xpected income (*ales) 10 G5#.e% performance indicators. action can be ta. )as% personal and computer hard are sellers.el% to occur at all.htm1. &his is usuall% one %ear. ' timing )ariance is here the estimated result did not occur but is still e7pected to happen at some point in the future. ith those of other $onduct sensiti)it anal ses to see ho different outcomes affect performance. here re. the period can be shorter or longer.• >ou can also compare figures for pro/ected margins and gro th companies. -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. http8:: . &he po er of this anal%sis is that each variance is documented for future reference and. 's long as %ou prepare forecasts for the relevant information. %ou ma% need to increase prices.uipment manufacturers. 0onitoring and 0anaging our Profit and 2oss 1udget Where the profit and loss statement is prepared on a monthl% basis.:learn:sheets:glossar%. reduce costs or focus on %our most profitable lines.au:operating-a-business:managing-finances-and-ta7:finance-basics:budgeting /ase +tud )as% electronics *td.e% ratios8 - (f margins are unsatisfactor%.even level of turnover.co.business. or across different parts of %our business. 'll variances should be categorised as either a 2timing2 or 2permanent2 variance. producing (-4 compatible motherboards or main boards hich are sold to its o n e. has been trading for man% months. 't the end of each month. %ou can budget for and anal%se an% of %our . ?ro ing businesses that are not %et profitable ma% find it useful to calculate the brea. &he profit and loss budget is a summar% of e7pected income and e7penses set against the business operating plans for the budget period. Such variances should be noted on the reports and e7planations provided.vic.
e. 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.!BL G #"" G B. 6istribution cost) 7rofit before interest and tax (0).evision8'Q*evelQ'ccountsQ4oduleQ!QQ-udgetingQandQbudgetar%QcontrolRAunctionsQofQbudgets1. a%s b% hich it could *)?'**> reduce corporation ta7 or loo. $orporation ta7 N 25P seems a bit high. is the main cause of the changes in the cash flo M 11 .htm1.u.B#2 i.2BB G J. &hereb%.orporation tax 9 %#: .o o o o o o o o o o o .additional sources of income. doing more of online transactions li-e.:learn:sheets:glossar%.##L G1".)&'(N)6 profits so that it does not have to pa% interest.: i. but the compan% could aim more at reducing administrative and distribution costs e. &he loan interest of G#"" over a si7-month period does not seem high.et profit (profit after tax) 7rojected margins <ther -ey ratios (relevant financial ratios) G1L. and factory overheads) G1K.evenues over and above net sales N G1"" O company needs to see. ' cash budget is also .g. indirectl% increasing its profits.thestudentroom.no n as a cash flo forecast. )7penses are not too high N GL. (t is a prediction of future cash inflo s and cash outflo s over a period of time 0http8:: . else here 0another countr%1 for the e7pansion of our ventures.co. ?ross profit loo.+) 8oan interest (cost of finance) 7rofit before tax .##L. .B#2 G 1"" G L.u. the compan% can aim to have .KJK 1ross profit (sales 2 cost of sales) 3evenues over and above net sales (disposal of e4uipment) 0xpenses (5dministration cost.co.BBL G 2.ost of sales (direct material.i:.s good N G1L.KJK is not too high. 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 . <ther e4uipment not currently being used could also be disposed off. but could be further reduced in order to increase income and profit. 'll the same.LBJ MMMMMMM MMMMMMM $ost of sales N G1K. direct labour. *ocus of anal sis: - What is happening to the estimated cash flo M What do %ou thin. &he compan% could see.bized.
ill manufacture and sell L#". a manager ma% ant to leave capacit% here it is and instead outsource additional production. )7amples of step costs are adding ne production facilit% or production e. Ai7ed costs. -asicall%. sales are e7pected to increase b% 2"P. has as. computed usuall% as average cost.uired to ma. >ou are re. though this cost should decline some hat as unit volumes increase. such as direct materials. or adding a second or third shift.e if - What do %ou thin.e pricing decision based on the above information. unit cost or cost per unit is calculated as8 &otal fi7ed costs S &otal variable costs &otal units produced 12 . (t is estimated that )as% )lectronics *td. due to greater purchasing discounts. Unit costs include all fi7ed costs and all variable costs involved in production. though the% can increase as the result of additional capacit% being needed (-nown as a step cost. thereb% avoiding the additional fi7ed cost.ed %ou to evaluate a proposal to reduce the selling price b% 1"P from the current price of G##. $ost of sales ill also increase b% 2"P. should remain unchanged no matter ho man% units are produced.- Suppliers as.Total fi"ed costs 3 Total )ariable costs. primaril% because the total fi7ed costs ill be spread over a larger number of units (subject to the step costing issue noted above) . hich ill increase the cost per unit. store and sell one unit of a particular product. @ariable costs. the total fi7ed cost ill no incorporate the ne step cost. for their pa%ments at the end of each month. then. /ase +tud >ou are re. (t can also be described as e7penditure incurred in producing one unit of a good or service. such as building rent. the cost per unit calculation is8 . where the cost suddenly steps up to a higher level once a specific unit volume is reached) . 6epending on the size of the step cost increase.lift.4 Total units produced &he cost per unit should decline as the number of units produced increases. 'll other costs ill remain constant. adding a for. divided b% the number of units produced. Within these restrictions. that )as% )lectronics might be able to do to deal ith these problemsM P#. the cost per unit is not constant.!"plain the calculation of unit costs and make pricing decisions using rele)ant information. var% roughl% in proportion to the number of units produced. What difference the% insist on being paid in advanceM (n hich month0s1 does the compan% face cash flo problemsM ould it ma. Unit cost is the cost incurred b% a compan% to produce. When a step cost is incurred.12 per unit and as a result. &he cost per unit or unit cost is derived from the variable costs and fi7ed costs incurred b% a production process.2. &he finance director of )as% )lectronics *td.uipment. &his is a prudent choice hen the need for increased capacit% is not clear."5L mother boards for the si7 months period ending 51st 6ecember 2"15. &hus.uired to use the budgeted profit and loss account to e7plain ho unit costs are calculated.
(t is necessar% to understand e7isting mar.2V T G2B. ' ma/or problem for decision ma.uirements.7 &otal fi7ed costs remain constant i.%81) UGL.##LV &otal variable costs have increased b% 2"P i. (t includes consideration of timing and the identification and balancing of ris. several methods of investment appraisal are developed in order to help financial managers or accountants to evaluate ith increased certaint% cash flo s.8.2 units $urrent cost of sales8 G1K.L#5.7<#.##LV S &otal variable costs UG22.e. >oung. Aor instance.e. unit cost at the proposed rates8 &otal fi7ed costs (£3.. also .6) T 522. and determine the life c%cle of the pro/ect. !minist"ation + #ist"ib$tion (£3.LV &otal units produced UJK"."5J appro7imatel% G".075 + £3. pro/ect ris.#.Assess the )iabilit of a pro(ect using in)estment appraisal techni=ues. is reall% crucial for the future of an% firm. (nvestment 'ppraisal is therefore more than the identification and evaluation of suitable pro/ects.12 per unit Proposed selling price8 (£55.osenberg. 'dditionall%.036 + 20%) i.ues such as81( .2"B.2) T :98. the Wne cost of sales< of 522.036 + 130. estimating cash flo s associated ith a pro/ect involves or.KJK Ne cost of sales8 (£18. assessment and authorization.. (n theoretical finance.2 T G". 2""J1. (650.075 + £3. 5. P#.e.7 &herefore. implementation and control of the pro/ect 06ennis .ing is increasingl% more comple7 toda% because of uncertaint%.."!5. assess competitive impacts of the pro/ect. $urrent selling price8 G##. and disposal values."!5.789 per unit )stimated total units8 L#".e.ets to forecast pro/ect revenues. since it determines the financial sources of the firm2s budget and ultimatel% defines the level of the shareholders ealth. most capital pro/ects involve numerous variables and possible outcomes.e several t%pes of investment appraisal techni. &his evaluation.#.7<#. 6ecision-ma.e. (n order to assess the viabilit% of the pro/ect organisation can ta.6.ing capital re.%81) UGL.ers in enterprises is the appraisal of potential investment pro/ects that can absorb capital assets. e7pected rates of inflation. ta7 considerations.775. &he investment appraisal process includes the generation of ideas. viabilit% and profitabilit% of an% investment pro/ect 0. 2""11."! or !p &e'e"al p"icin( !ecisions can be ma!e))) consi!e" the attache! notes an! choose an*))). (£18.12 less 10%) i."5L units &argeted total units8 (650.no n as investment appraisal.007.878 + £3.L : JK".878 + 20%) i.
+o ever. can ma7imise profits for the organisation and financial managers can accept that pro/ect.. period for ma. period. can also ma. P.&P?-: (f the NP@ is sho ing the positive value. )ach of these financial statements sho s a different aspect of the business.. (t also provides information on the mode of generation of funds re. &here are standard formats used for each of the three financial statements. 06%son.%>>-: (f the pro/ect have higher rate of (. then organisations can accept that pro/ect.eep an account of the different activities of the business entit%.ness that are not evident in the other statements. -% having a detailed account of the past.1 @iscuss the main financial statements . balance sheet and cash flo statement. 2""21. c1 &et Present ?alue . (t ould further reflect the capacit% of the firm to raise additional capital.a1 Accounting >ate of >eturn . value than organisations can accept those pro/ects. &here are numerous purposes of financial statements.P1-: $ompanies can onl% accept those pro/ects selection of the pro/ect 06avies. 3rganisations can calculate the rate the pa%bac. one can forecast or assess the future performance of the compan%. &he cash-flo statement also helps to anal%se the amount of cash that ould be re. 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 .l% and selection of those pro/ects has fe er ris. 1> . +o ever. With the help of this one can predict the funds that ould be utilised in the future..ice. hich have higher rate of pa%bac...uic.uired for repa%ment.eeps an account of the net surplus or deficits.A>>-: +igher rates of '. 1alance +heet8 &he balance sheet basicall% gives an idea of the financing structure of the compan%.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. 2""11. 4anagers can control the costs of the business for ma7imising the '. +igher rate of (. 2"""1. all three financial statements should be studied together.ing effective P. 2""#1.uired in order to meet the operating costs.e the profit .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.. 3rganisations can onl% accept higher rate of NP@ because it can ma7imise the profits of the organisation 0. d1 %nternal >ate of >eturn . +tatement of retained earnings8 e7plains the changes in a compan%2s retained earnings over the reporting period. %ncome +tatement8 &his t%pe of financial statement .s for the organisation 0Wood. )ach financial statement can sho potential problems or areas of ea. b1 Pa 1ack Period . to properl% understand the financial health of a business. &he net surplus or deficit is calculated b% considering all the activities in the last financial %ear.
liabilities and shareholders< e.e longer to convert to cash.%*>+. &here are accounting slanders such as %nternational *inancial >eporting +tandards . follo ed b% cash flo from investing and cash flo from operations. such as shortterm investments or chec.)asic . the income statement is a more involved statement.uic. or hat the compan% o es to others. 6ifferent t%pes of business use different t%pes of formats.ing good financial decisions 1? . &he cash flo statement can help investors and others determine if the business is having difficult% managing its cash flo . the organization ma% have a ver% simple balance sheet as described above.uipment and other business holdings.uit%. $urrent assets refer to an% assets that can . follo ed b% e7penses. e.ual to the amount of cash the business has on hand. investments. &he first section of the balance sheet lists all assets. (f there is a cost of goods sold. hich is the difference bet een the total assets and total liabilities. 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 e7penses are subtracted from the revenue to calculate the net income of the business. &he total assets must e.uipment or real estate.ncome *tatement &he basic format for an income statement states revenues first. &he format of the cash flo statement begins ith cash flo from operations. &his includes cash.l% be converted to cash. 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. &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. &he final section is the shareholdersFR"5B= e. &his ould include an% loans or accounts pa%able. $urrent liabilities are those debts that are due ithin the ne7t %ear.uit%.S or ?''P. 4ainl% there are different formats of financial statements that can be found across different businesses. &he ending cash flo should be e. balance sheet and cash flo statement.ual the summation of the total liabilities and shareholders< e.ash /low *tatement ' cash flo statement sho s the actual flo of cash in and out of the business. such as e. )ach of these statements needs to be understood b% a business in order for them to manage their mone% efficientl% and successfull%. &hese are the income statement. . &he ne7t section lists the liabilities. &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. Aor a larger compan%.and Generall Accepted Accounting Principles .GAAPhich are practices that are accepted globall%.ing accounts. )ach categor% sho s incoming and outgoing cash from the business. the business often ill brea. &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.uit% of the business. real estate. &he cash flo statement sho s hen the cash is received. )alance *heet &he balance sheet sho s the assets. *ong-term liabilities are those due more than one %ear from the date of the balance sheet. &hese classifications are important in ma. )alance *heet 6ifferences Aor a small compan%. When financial statements are not prepared based on standards it is difficult to compare ith other organizations. it do n to current and long-term assets and current and long-term liabilities. Whatever formats used the results ill be same. *ong-term assets are those things that ould ta.
atios simpl% mean one number e7pressed in terms of another. +atios nal*sis &he ratios anal%sis is the most po erful tool of financial statement anal%sis. 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. e7penses. the anal%sis and interpretation of financial statements is ver% essential to measure the efficienc%. Assess sol)enc of the firm &he different tools of an anal%sis tell us and long term liabilities or not.atios sho ho one number is related to another.e a comparative stud% of the profitabilit% of various firms engaged in similar businesses.atio 1@ hether the firm has sufficient funds to meet its short term . .uate profits are being earned on the capital invested in the business or not. 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.# %nterpret financial statements using appropriate ratios and comparisons. 'nal%sis of financial statements is an attempt to assess the efficienc% and performance of an enterprise. ' ratio is a statistical %ardstic. gross profits and net profit etc. profitabilit%. %ndicating the trend of Achie)ements Ainancial statements of the previous %ears can be compared and the trend regarding various e7penses. /omparati)e position in relation to other firms &he purpose of financial statements anal%sis is to help the management to ma.P. .no ing the capacit% to pa% the interest and dividend. Such comparison also helps the management to stud% the position of their firm in respect of sales. 7rofitability 3atios Profitabilit% ratios measure the results of business operations or overall performance and effectiveness of the firm. both internal and e"ternal using the data gi)en below. sales.eturn on e. financial soundness and future prospects of the business units. (t also helps in .uit% capital . Some of the most popular profitabilit% ratios are as under8 ?ross profit ratio Net profit ratio 3perating ratio )7pense ratio . @alue of assets and liabilities can be compared and the future prospects of the business can be envisaged. &hus.eturn on shareholders< investment or net orth . 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.eturn on capital emplo%ed 0. purchases. profitabilit% and utilising capital. can be ascertained..3$)1 . etc. .
ratio 5ctivity 3atios 'ctivit% ratios are calculated to measure the efficienc% ith hich the resources of a firm have been emplo%ed. $urrent ratio *i.atio of current assets to shareholders funds (nterest coverage ratio $apital gearing ratio 3ver and under capitalization /onclusion: Ainall%. • • • • • • • 6ebt-to-e. Aollo ing are some of the most important long term solvenc% or leverage ratios. &hese ratios are also called turnover ratios because the% indicate the speed ith hich assets are being turned over into sales.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 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.atio of fi7ed assets to shareholders funds . 6ividend %ield ratio 6ividend pa%out ratio )arnings Per Share 0)PS1 . turnover ratio 6ebtors : .uid : 'cid test : Xuic.uit% ratio .uit% ratio Proprietar% or ). Aollo ing are the most important li.ing for the organisation.atio Price earning ratio 8i4uidity 3atios *i.uidit% ratios measure the short term solvenc% of financial position of a firm. -% the help of cost anal%sis organisation can determine their financial strengths 1A hich can .eceivables turnover ratio 'verage collection period $reditors : Pa%able turnover ratio Wor. &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. financial planning is an important area of ma.uidit% ratios. Aollo ing are the most important activit% ratios8 (nventor% : Stoc.
't.s for the organisation and reduce the problems reduce an% future ris. ith effective utilisation of the financial hich can help to resources. 6. ?anaging financial information. Ainancial decision ma. A5ccounting and /inance for . H/inance and 5ccountingI. U9 5. it is important to continuousl% monitoring the financial activities >eferences 1. Prentice +all. U9 !. 02""11 )usiness 5ccounting for =ospitality and +ourism .on>*pecialists I. 02""K1. 'dams 4edia $orporation. 6avies. +o ever. &homson *earning 18 .ost 5ccounting. ?anagement and . 0Lth edition1. #.also reduce the costs of running the business activities. &homson *earning 2.s of the financial operations. 'trill and4c*ane%. S. 02nd edition1. 6rur% $ 02""!1. 05rd edition1. 02"""1.inson +. $hartered (nstitute of personnel and development. $aplan.ing can also determine the future ris. 02""#1. -err% ' and Yarvis .
. A. 1". 0#th edition1. A/ran. 9otas . 02""21. @ol. *odish. 02""B1. Summer. pp. 02"""1. @ol. 6%son.BoodCs 5ccounting ' and %A. Srinivasan.. /inancial ?anagement for =ospitality 6ecision ?a-ers -utter orth+einemann K. Zoltners.*.. J"-K. 21-K. !!. U9 J. ?anagement 5ccounting for =ospitality and +ourism.I Yournal of Ainance.4. *. 2J. 1!. and Sinha. pp. 02""!1.I 4anagement of Ainance. A5ccounting for =ospitality. pp. U9 1#.L.ice. U9 12. Prentice +all. Spring.businessdictionar%. 2L. Stephenson. &homson *earning B.on>5ccounting studentsA.X 1) . and Arazier. @ol. J51-#L. 3 en. 02"""1. ?. Y . H' user-oriented model for Ainancial s%stem ith ratio anal%sis.*. 02"""1.htmlRi7zz1v"(h5a. @ol. P. @. '.'. $ron.ual financial anal%sis. W. '. P. 02""11. ?uilding $ 02""21. 2!2-L". 02""21.. ?. 02""11. +ravel and 8eisureA. Prentice +all. .05rdedition1.. @5ccounting for . H'n investigation of the e. !5. pp. H(nteger programming models for financial s%stem and structureI 4anagement of Ainance. *ongman. A5ccounts 6emystifiedA. U9 11. 15.I Yournal of Ainance.com:definition:investment-appraisal. Prentice +all. H6elegating ratio anal%sis in business. Websites8 http8:: . Wood. 05rd edition1.0Bth edition1.