Profit and loss account for the period Actions € €

Sales 750
Less: Cost of sales Materials 500
Labour 20
Depreciation 50 570
Gross profit 180
Less: Selling and administrative costs
Advertising 10
Salaries 10 20
Net profit € 160

balance sheet
Fixed assets € €
Plant and equipment at cost 12000
Less: Depreciation 50 11950
Current assets
Inventories 5500
Debtors 750
Cash 4960
11210
Less: Current liabilities
Creditors 3000 8210
Net assets of the company 20160
Represented by:
Capital introduced 20000
Profits earned 160
Owners’ equity 20160

Cash flow statement for the period to Action 7

Sources of cash € €
Profit from operations 160
Adjusted for non-cash items: depreciation 50
210
Capital introduction 20000
Increase in creditors 3000 23000
23210
Uses of cash
Purchase of plant 12 000 12000
Increase in debtors 750 750
Increase in inventories 5 500 18 250 5500 18250
Closing balance of cash €4 960 4960

Worked solution 1.9

Profit and loss account for the period Actions € €
Sales 13900
Less: Cost of sales Materials 8000
Labour 700
Depreciation 540 9240
Gross profit 4660
Less: Selling and administrative costs expenses
Advertising 400
Depreciation on Vechile 750
Motor repair 100
Bad debt 100
Audit 200 1550
Operation Net profit € 3,110
Extra ordinary sales from factory 2000
Net profit € 5,110

Balance Sheet
Fixed assets
Planet 4860
Factory 20000
Mini Van 2250 27110
Current Assets
finished goods 7000
debtors 3000
cash 16000 26000
Liabilities
Owners equity 53110
Represented by
Capital 40000
net profit 5110
45110
Less: Drawings 2000
Owners equity 43110
long term loan 10000 53110
Straight Line method
(Acquisition cost - residual value) / number of years
annual depreciation 400
Reduced balance

reduce balance factor 0.66

year 1 year 2 year 3
Depreciation expence 822.506 281.2931 96.20089
Book value 427.494 146.2009 50

Consumption (Acquisition cost - scrap value) * CONSUMPTION RATE

year 1 year 2 year 3
consumption rate 0.333333 0.533333 0.133333
Depreciation expense 400 640 160

Inventory costing method

Specific identification
FIFO
LIFO
Average
Cash flow
source of cash increase in liability items decrease in asset items
use of cash increase in asset items decrease in liability items

Cash flow

Prepare a Cash Flow Statement for the year to 30 November 2008 based on the draft Accounts in Appendix 1.

Cash flow statement – Year to 30 November 2008

Net cash flow from operating activities (see note 1)

Taxation (Liability at 30.11.07)

Capital expenditure
Payments for fixed assets (see note 2)
Sales of fixed assets

Equity dividends paid to shareholders (2007 and 2008)

Financing
Receipt of long-term loans (see note 3)
Issue of share capital (see note 4)

Increase in Cash (see note 5)

Note 1:
Profit before taxation
Add back: Depreciation

Adjustments to working capital

2008
£'000
Decrease in Inventories 326
Decrease in Debtors 446
Increase in Creditors (Trade only) 405

Net cash flow from operating activities

Note 2:

Net book value at 30.11.08

Net book value at 30.11.07
Increase in NBV
Sales of assets
Depreciation
Therefore, purchases of assets

Note 3:
Long-term creditors at 30.11.08
Long-term creditors at 30.11.07
Receipt of loans

Note 4:
Share capital at 30.11.08
Share premium at 30.11.08
Share capital at 30.11.07
New shares subscribed

New shares have been subscribed for an amount of £450 000 (300 000 at £1.50/share)

Note 5:
Cash at bank at 30.11.08
Cash at bank at 30.11.07
Increase in cash at bank
ccounts in Appendix 1.

£'000
2 078

–155

–1 793
30
–1 763
–300

155
450
605
465

1 155
200
1 355

23007
£'000
645 319
600 154
155 250
723
2 078

Plant Motor Total

Vehs
£'000 £'000
1 585 455
422 55
1 163 400
0 30
125 75
1 288 505 1 793
1 2
£'000
625
470
155

£'000
500
150
–200
450

£'000
650
185
465
Liquidity ratios

Profitability ratios

return on assets
return on inventory

Capital structure ratios

leverage - gearing

Efficiency ratios

Stock Market Ratios

 Current Ratio = Current Assets / Current Liability
Quick Ratio (Acid Test)= Current Assets - Inventory / Current Liability

Gross Profit margin = gross profit / revenues

profit margin = profit from operating activities before taxation / revenues
ROA = Profit from operating activites before taxation / assets
ROI = Profit from operating activites before taxation / Inventory
Return on capital employed = Profit from operating activites before taxation / capital employed
Return on equity = profit from operation activites after preferred stock distribution and after tax / equity
Return on investment = Net profit / net assets
cture ratios
fixed to current asset ration = fixed asset / current assets
times interst earned = profit before tax/ interest charges
debt ratio = total debt / total assets
leverage = total assets / equity

Inventory turnover = COGS / inventory

avg. collection period = receivables/revenue per day
fixed asset turnover = revenue/fixed assets

earning per share(EPS)=net profit after tax/no. of shares

price earning ratio (PE)=market price/earning per share
dividend yield = dividend per share/ share market price *100
dividend cover=net profitafter tax/dividend
dividend payout = dividend * no. of common shares
gross dividend yield = (dividend per share *1/(1-tax rate)/ share market price)*100

working capital (net current liability)= current assets - current liability

Cpital employed = OE+non current liability
capital employed = net current assets=(net asset - current liability)
BEP (break even point) The Equation method

The Contribution margin method

Contribution Margin Ratio

sales= fixed cost + variable cost + profit
BEP=fixed cost + variable cost
contribution margin = sales revenue - variable cost
BEP= fixed cost /contribution margin
profit/volume ratio = contribution margin / sales revenue
BEP=fixed cost/contribution margin ratio
`

2
1. All costs can be identifiable as variable or fixed – difficult to be so clear-cut in real situations

All costs behave in a linear manner – economists would disagree.

Sales price/unit remains unchanged: ignoring market conditions, discounting, etc.

Sales mix is precisely as budgeted: again very restrictive assumption in reality.

All production is sold: this rarely happens.

Cost Accounts
The Step mehod

210-30

218000×50
÷180

6750-225-4500
6750-225-4500

37800-1800-
12000-16500
Overhead allocation rate = budgeted overhead for accounting period/ budgeted production units

Direct Method
 218000×100 218000×20
218000×50 ÷180 218000×10
÷180 ÷180
÷180

5-4500
5-4500

800-
6500

cost for each unit=total cost/no. of units

cost per equivelant unit = Total costs/equivelant units
 F w P
252500 113750 218000
218000×10 P 180 60555.56 121111.11 0.00

÷180 C 2025 27771.60 4628.60 0.00

S 7500 106909.88 71273.25 0.00

447737.04 310762.96
C S
100750 73500
24222.22 12111.11 218000.00
124972.22
0.00 92572.02 124972.22
178183.13
0.00 0.00 178183.13

758500.00
Denominmator volume variance(for full absorption)

•The following list of tasks is often used by management.

•Task One: Define the Problem and List All Feasible Alt
•Task Two: Cost the Alternatives
•Task Three: Assess the Qualitative Factors
•Task Four: Make the Decision

review absorption and variable costing

The net profit in absorption and variable costing equals only if the budgeted equals the actual production
management.
All Feasible Alternatives

he actual production
why budget
1. To aid the planning of actual operations:
2. To co-ordinate the activities of the organization:
3. communicate plans to various responsibility centre managers:
4.To motivate managers to strive to achieve the budget goals:
5. To control activities:
6. To evaluate the performance of managers:

Disadvantage
1. time consuming activity
2. lack of top management commitment
3. Form of punishment
4. Resonsibilities are blurred
5. budgeting reward inefficiency

Determining
Determining the budgeted
budgeted units
units of
of production:
production:
Budgeted Budgeted Desired
Desired Beginning
Production
Production = Sales
Sales + Ending
Ending – Inventory
(in
(in units)
units) (in
(in units)
units) Inventory
Inventory (in units)
(in
(in units)
units)
Beginning
Inventory
(in units)
•An adverse variance is one where actual cost is above st
•A favourable variance is one where actual cost is less th
Sales variances
Sales contribution variance = (Actual CM per unit-budgeted CM per unit)× Actual sales (units)

Sales volume variance = (Actual sales − Budgeted sales) × Budgeted unit CM

Variable overheads

Spending variance = Standard cost of actual time taken less

for units produced

Efficiency variance = Standard cost forbudgeted time for less

units produced
review Dec 2007 case 2
tual cost is above standard cost
actual cost is less than standard cost.
er unit)× Actual sales (units)

Budgeted unit CM

Actual costs incurred

Standard cost of actual

time taken for units
produced
Division advantage
1. career mobility
2. sharper decisions
3. specialization
4. size
5. motivation
Division disadvantage
1.lack of control
2.cost
3.internal rivalries
Types of divisions
1. cost center
2. Revenue Center
3. Profit Center
4. investment center
RI : residual income
Investment process
1. search
2. Control
3. Evaluation
Pay back period

•First, it does not consider the time value of money.

•Second, the method fails to consider cash flows beyond the payba

(1 i)
n
FV  PV
FV future value
PV present value
I interest rate
n period of time

FV
PV 
(1 i)
n

discounting

PV  C 1
 C2
 C 3
 ....  .....  Cn

(1i) (1i) (1 i) (1i)

1 2 3 n

stream cash flow

Net present value

NPV= PV of Cash Inflows – PV of Cash Outflows

NPV= PV of Cash Inflows – Cash Cost
weighted average cost of capital

WACC  WD K D (1  T )  W
 WACC  WD K D (1  T )  W
Where:
KD = Pre-tax cost of long- term debt
KE = Cost of equity
WD = Proportion of total capital represented by long- term debt
WE = Proportion of total capital represented by equity
T = The company’s marginal tax rate

Average cost of capital

Discounted cash flow rate of return = IRR

1. DCF rate of return > Cost of capital: therefore accept the project.
2. DCF rate of return < Cost of capital: therefore reject the project.
3. DCF rate of return = Cost of capital: a break-even situation, theref

•Accept and fund an investment if IRR>WACC

Key variables for the application of sensitivity analysis are:

Purchase cost
Contribution margin
Fixed costs
Choice of discount rate

Key investment factors

1.Capital investment
2. Operating cash flows
3. Investment life
4. Cost of capital
 eyond the payback period.

 .....  Cn

(1i)
n

utflows

 T )  WE K E
 T )  WE K E

therefore accept the project.

therefore reject the project.
a break-even situation, therefore reconsider
Throughput accounting
Throughput accounting ratio=Return per factory hours/cost per factory hours
Return per factory hours=sales price-material cost/time spent at bottleneck
cost per factory hours=total factory cost/total time spent at bottleneck

Balanced Score Card (BSC)

past exams
end of modules assesment
self assessment