Student Details (Student should fill the content)

Name

Batch No

Student ID (University ID and Cardiff Met ID : ICBT ID:

ICBT ID)

Scheduled unit details

Unit code MBA 7001

Unit title Accounting for Decision Makers

Assignment Details

Nature of the Assessment WRIT 1- Assignment 1 (Exam converted as an assignment)

Topic of the Case Study GIVEN

Learning Outcomes covered YES

Word count 4000 words

Due date / Time 17 March 2022

Declaration

I certify that the attached material is my original work. No other person’s work or ideas have been
used without acknowledgement. Except where I have clearly stated that I have used some of this
material elsewhere, I have not presented it for examination / assessment in any other course or
unit at this or any other institution

Signature Date

Result (Assessor use only)

Marks by 1st Name & Signature of the 1st Agreed

Assessor Assessor Mark

Marks by IV: Name & Signature of the IV

For Office use only (hard copy assignments)

Receipt Received by
date
Assignment Type & Title:

For student use: Critical feedback on the individual progression towards achieving the
assignment outcomes

For 1st Assessor use: Assessment feedback

Strengths

Weaknesses

Name & Signature of the Date

Assessor : :

Comments by the IV

Date
Name & Signature of the IV:
:
Table of Contents

TASK A...........................................................................................................................................1
1.0 Introduction to Bukit Darah PLC.............................................................................................1
1.1 The Importance of Accounting..................................................................................................1
1.2 The usefulness of accounting policies/principles when preparing financial statements...........2
1.3 Ratio analysis of Bukit Darah PLC...........................................................................................4
I. Liquidity ratios..........................................................................................................................4

I. Profitability Ratios.....................................................................................................................5

II. Efficiency Ratio.........................................................................................................................6

III. Solvency Ratio...........................................................................................................................7

1.4. How company recognize expenses related to the fixed assets..................................................8

1.5.Why the cash position of an organization is different from its Profit?.....................................9
1.6. Why stakeholders interested in affairs of a business organization?......................................10
TASK B.........................................................................................................................................11
2.0 The importance of Marginal cost its usefulness in business decision making.......................11
2.1 a) Break-Even Point (BEP) and Margin of Safety – Original Budget.................................12

2.1 b) Break-Even Point (BEP) and Margin of Safety - Alternatives.........................................13

2.1 c) Profit – Volume Graph........................................................................................................14

2.1 d) Limiting factor decision making under CVP analysis......................................................14

TASK C.........................................................................................................................................15
3.1 The importance of capital investment decisions......................................................................15
3.2 Projects evaluation of Biosis Pty Ltd (BPL)............................................................................16
3.3 Limitations of ARR and PBP..................................................................................................20
TASK D.........................................................................................................................................21
4.1 The importance of preparing budgets for an organization.....................................................21
4.2 Cash budget of Victory (Pvt) Limited.....................................................................................22
4.3 What is meant by “Incremental Budgeting” approach..........................................................24
4.0 References................................................................................................................................25
5.0 Appendix..................................................................................................................................26
 TASK A
1.0 Introduction to Bukit Darah PLC

Bukit Darah PLC, together with its subsidiaries, engages in the oil palm plantation, oils and
fats, beverage, portfolio and asset management, real estate, leisure, and management
businesses in Sri Lanka, Malaysia, Indonesia, India, Mauritius, and Singapore.

1.1 The Importance of Accounting

Accounting can be simply identified as identifying, measuring, recording, classifying,

summarizing, analyzing and communication the results to interested parties.

The main objectives of the accounting as follows,

 To keep systematic records

One of the main objectives of accounting is to keep a systematic record of financial
transaction. This will help the users to understand the day-to-day transaction in a systematic
manner. Other than that, this will help users to get overall knowledge about the business.

 To calculate profit or loss

Accounting will ascertain the loss or profit on business transaction during a particular period.
Profit is when there is an excess of revenue after deducting the expenditure. If there is more
expenditure than revenue, we called it as loss. This will help user to identify whether
organization is generating income through the daily business operations.

 To ascertain the financial position of the business

When considering the going concern organization need to analyze the financial health of the
business. This cannot be identified by profit or loss for this business need to prepare the
financial statements. Mainly business prepare the “statement of financial position” to identify
the value of assets and liabilities and equity. This provides the clear picture about the
business to its users.

 To ascertain the progress of the business

Business use past recorded data to take right decision for the future. Because of that foresee
the business growth become an objective of accounting. When business have data, they will
use those recorded data to make decision.

 To prevent and detect errors and frauds

Maintaining and recording appropriate accounts will reduce the financial frauds. Employees
cannot do fraud when they have proper financial reporting system within the organization.
Other than that systematic financial record reduces the errors and can get correction action
when identify the errors.
1|Page
1.2 The usefulness of accounting policies/principles when preparing financial
statements.

Accounting policies is an integral part which provides a framework for business to operate,
record their business transaction, measure, and recognize assets and liabilities and to prepare
financial statement. Bukit Darah PLC has used varies policies in the preparation of the annual
financial statements. Following are some of policies they use consistently,

 Policies of Inventories
Bukit Darah PLC need to get guidance from the LKAS 02 when accounting inventories.
LKAS 02 provides guidance on recognition of cost and its subsequent as an expense
including write down to net realizable value. Also provides cost formulas to assign cost to
inventories. According to the LKAS 02 they have measure inventories at lower of cost and
the net realizable value after making due allowance for slow moving items and obsolete,
except for fresh fruit bunches which are valued at realized values.

The cost of inventories of the Bukit Darah PLC

Inventories Cost
Raw Material and Containers Cost of purchase together with any incidental expenses
Work - in – progress Raw material cost and a proportion of manufacturing
expenses
Finished Goods Raw material cost and manufacturing expenses in full
Food Items Weighted average cost basis

 Policies of Depreciation
Bukit Darah PLC follow LKAS 16 when accounting depreciation. They have start
depreciation from the date PPE are available for use or, from the date that the assets are
completed and ready for use. Bukit Darah PLC used straight-line basis for depreciation over
their estimated useful lives except land. They use cost after reducing residual value for
depreciation.
Bukit Darah PLC have recognized depreciation in income statement. Depreciation of an asset
ceases at the earliest date that the asset is classified as held for sale or the date that the asset is
derecognized. They review depreciation method, useful lives at each reporting period. If there
is any need for adjustment, they do it.

2|Page
  Borrowing costs policies
Borrowing cost is interest and other costs that a company incur in borrowing of money. These
costs can be capitalized according to the LKAS 23 as part of cost of a qualifying asset if they
are directly attributable to the construction, acquisition, or production of the assets. To
commence the capitalization, need to fulfill followings,

 When the activities to prepare the asset for its intended use or sale are in progress
 Need to incur expenditures and borrowing costs

Borrowing costs are capitalized until the assets are substantially completed for their intended
use or sale. All other borrowing costs are charged to profit or loss in the period they occur.

Above policies consider as important due to followings,

 These policies help to management of the company while preparing the

financial statement
 These are set procedures for companies to use if there is similar circumstance
 These policies help to maintain the consistency in financial statement which
help to information users to do comparison within company or with other
companies.
 Help to increase investors and shareholder’s trust about the business.
 Help in maintaining internal control by following the set procedure for similar
kinds of transactions.

3|Page
1.3 Ratio analysis of Bukit Darah PLC.
Report for status of financial position and financial performance of the Bukit Darah PLC.
Bukit Darah PLC was incorporated in 1916 and based in Sri Lanka and operate in Sri Lanka,
Malaysia, Indonesia, and Singapore. The main business of the company is sale of palm oil,
fresh fruit bunches and palm kernel. The main purpose of this report is to provide financial
analysis of the company based on the last two years ratio.
I. Liquidity ratios
A liquidity ratio is a type of financial ratio used to determine a company’s ability to pay its
short-term debt obligations. This ratio helps to determine whether company can use its
current, or liquid, assets to cover its current liabilities. A ratio of 1 means that a company can
exactly pay off all its current liabilities with its current assets. A ratio of less than would
imply that a company is not able to satisfy its current liabilities.

Liquidity ratios
Year Current Ratio Quick Asset Ratio
2020 1.049 0.892
2021 1.205 0.997

Source: Author's Work, 2022

1.400

1.200

1.000

0.800

0.600

0.400

0.200

0.000
2020 2021

Quick Asset Ratio Current Ratio

Source: Author's Work, 2022

4|Page
  Current Ratio

The current ratio is a popular metric used across the industry to assess a company's short-term
liquidity with respect to its available assets and pending liabilities. Bukit Darah PLC current
ratio is above 1 in 2019 and 2020. This indicate that Bukit Darah PLC can satisfy its current
liabilities.

 Quick Ratio

The quick ratio measures a company's capacity to pay its current liabilities without needing to
sell its inventory or obtain additional financing. The quick ratio for Bukit Darah PLC which
compared to the baseline indicates the company's ability to service short-term obligations is
less than one. Another important aspect is company current asset does not have significant
portion of inventory.

I. Profitability Ratios
Profitability ratios indicate how efficiently a company generates profit and value for
shareholders. Higher ratio results are often more favorable. Gross margin measures how
much a company makes after accounting for cost of good sales. The larger the gross profit
margin, the better for the company. Bukit Darah PLC has higher gross profit ratio and net
profit of 27% and 8% respectively in 2021 when compared to 2020.

When compared to 2020 both ROE and ROA has been increased in 2021. ROE and ROA in
2021 is 14% and 5% respectively. These two ratios considered as most important ratios for
investors. These two ratios are correlated with the stock market.

Bukit Darah PLC has higher ROE ratio. Companies with a high return on equity are usually
more capable of generating cash internally and less dependent on debt financing. ROE may
increase without additional equity investments. The ratio can rise due to higher net income
being generated from a larger asset base funded with debt. In 2020 companies were affected
by pandemic and this figure indicate they are in the process of recovery.

Profitability Ratios
Year Gross Profit Net Profit ROE ROA
2020 0.24 (0.02) (0.12) (0.02)
2021 0.27 0.08 0.14 0.05

5|Page
Source: Author's Work, 2022

0.30
0.25
0.20
0.15
0.10
0.05
-
2020 2021
(0.05)
(0.10)
(0.15)

Gross Profit Net Profit

ROE ROA

Source: Author's Work, 2022

II. Efficiency Ratio

The efficiency ratio is typically used to analyze how well a company uses its assets and
liabilities internally. (Investopedia, 2022)

Efficiency Ratios
Year Inventory Turnover Debtors Turnover
2020 10.655 27.795
2021 9.102 26.179

Source: Author's Work, 2022

30.000

25.000

20.000

15.000

10.000

5.000

0.000
1 2

Inventory Turnover Debtors Turnover

Source: Author's Work, 2022

6|Page
Bukit Darah PLC has higher debtor turnover and inventory turnover. Higher turnover ratio is
better for any company. The higher debtor’s turnover ratio indicates that, a company is
successful in collecting from its customers and higher inventory turnover ratio indicate that
company is efficiently manage their inventory.

III. Solvency Ratio

This ratio is used to measure the companies’ financial health. This ration provide indication
of whether company can meet its financial obligation in the long term. Both liquidity and
solvency ratio provide insight about companies’ financial health.

Proportion of debt and equity a company is using to finance its assets can be identified as
gearing ratio. A higher ratio means that company has larger proportion of debt compared to
equity. Bukit Darah PLC has gearing less than 1%. means that they are greatly funded by
equity finance.

Solvency Ratios
Year Gearing Ratio Debt Ratio Equity Ratio
2020 0.645 1.812 0.295
2021 0.545 1.200 0.369
Source: Author's Work, 2022

2.000
1.800
1.600
1.400
1.200
1.000
0.800
0.600
0.400
0.200
0.000
2020 2021

Gearing Ratio Debt Equity Ratio Equity Ratio

Source: Author's Work, 2022

7|Page
1.4. How company recognize expenses related to the fixed assets.

Property, plant and equipment are defined as tangible assets that, are held by and entity for
use of the production or supply of goods or service, for rental to others, or for administrative
purposes but not for the sale. Also expected to be used during more than one year period.
Tangible assets have physical substance and can be touched. To recognize PPE in financial
statement first need to fulfill the definition criteria of the PPE. After satisfying the definition
next need to meet the recognition criteria.
Mainly there are two recognition criteria.
 An item of PPE is recognized when, it is probable that future economic benefits
associate with the assets will flow to the entity and the cost of the assets to the entity
can be measured reliably.
 Individually insignificant assets such as tools and moulds may be aggregated for
recognition as PPE.
Next, need to identify the cost of the PPE. Mainly there are three type of cost can be
identified. They are Purchase price which includes import duties paid and excluding any trade
discount and sales tax paid, directly attributable cost of bringing the assets to working
condition for its intended use and cost of dismantling and removing the item and restoring the
site on which it is located.

Initially business will be recognized PPE at cost in the statement of financial position. Even
though, expense relating to the PPE is not charged to income statement business can charge
depreciation expense to the income statement if the asset is depreciated.

8|Page
1.5.Why the cash position of an organization is different from its Profit?

Income statement is used to present the expense and revenue of a business. Revenue is
defined as money brought into a business by its day-to-day business activities. The cost
incurred to generate those revenue can be identified as expense.

When preparing financial statement need to follow guidance issued by LKAS 1. According to
the general features of financial statements need to adopt to the accrual basis. Except cash
flow statement all the other statements need to prepare based on accrual basis.

Business transaction and events are recognized when they occur, but not when cash is
received or paid for them called as accrual basis. According to the accrual accounting sales
made on credit identified as revenue and expenses are recorded when they are incurred. Cash
basis is considered sales as revenue when payment is received, and expense when they are
paid. Ultimately, income statement is prepare based on accrual basis and cash flow statement
is prepare based on cash basis.

Revenue and cost figures shown on a standard income statement does not represent the actual
cash inflows and outflows that occurred during a period due to the difference in basis of
accounting.

Income is defined as actual amount of money earned during a period while profit is defined
as excess of revenue after deducting all the expenses related to business operation. Mainly
income is total cash inflow of revenue and profit is the profitability of the business. Income is
depending on both revenue and profit and profit is depend on revenue. Main use of income is
to calculate the value of the business. Profit is used to calculate the profitability of the
business on for given period.

9|Page
1.6. Why stakeholders interested in affairs of a business organization?

Stakeholders Reason for interest

Customers  Customers have interest about the product and service.
 Customers are directly impacted by the quality and value of
product or service of the business.
 If customers are not satisfied with the organization products
and service, they will move to substitutes.

Employees  Employees have an interest in their income and job security.

 They also consider about whether company providing fair
wage to them when compares to other organization.
 Employee retention will depend the organization action
towards employee’s well-being.
Investors  Investors are the real owners of the business.
 They have invested funds and expect return for their
investment.
 Investors have interest in the financial returns of the
investment.
 If investors unable to have expected return they will
withdraw the investment.
Communities  Communities are people who live near an organization's
physical location.
 They have interest about the business to identify the impact
of local health and safety of their community.
 If there is any impact to their community, they will get action
against the organization for the sake of the society.

Competitor  Competitors are other organization provides similar products

or service.
 They are also competing within same market to maximize
their profit.
 Competitors has an interest toward business to identify
strategies and knowledge.
 After identifying business organization strategies competitors
come up with new business strategy.

10 | P a g e
 TASK B
2.0 The importance of Marginal cost its usefulness in business decision making

Cost of producing one additional unit of output called as marginal costing. Marginal cost is
used to determine the optimal quantity of production at a least cost. This is also identified as
pricing model used to calculate the least price when customer request the lowest possible
price for certain orders.
Marginal costing is considered as valuable technique for decision making due to following
importance,

 It is easy to understand and operate.

 MC is help to management to decide the optimum selling price, make or buy decision
and export decision of a product.
 This help to identify the production activity level and profit at each activity level
 This is helping to decide best possible range of potential products to produce.
 This help to control variable cost at short term.

Relevant costs are cost that will be affected by a managerial decision. There are criteria to
decide whether cost is relevant for business decision making

1) Future Cash Flows

Relevant cost is cash expense that will be incurred in the future because of a business
decision.

2) Avoidable Costs
If cost can be avoided by a decision only those costs are relevant to a decision.

3) Opportunity Costs
Cash inflow that will be sacrificed as a result of a selecting best possible alternative known as
relevant cost.

4) Incremental Cost
Where different alternatives are being considered, relevant cost is the incremental or
differential cost between the various alternatives being considered.
11 | P a g e
2.1 a) Break-Even Point (BEP) and Margin of Safety – Original Budget

Break-even point

BEP=Total ¿ Cost ¿
Contribution

70,000
BEP=
16

BEP ¿ 4,375 units

Margin of safety

Margin of safety=¿ Actual Sales - BEP

Margin of safety=¿ 7,000- 4,375

Margin of safety=¿ 2,625

BEP means the level of production at which the costs of production equal the revenue of a
product. Sales lower than BEP of units 4,375 is loss for a business while sales exceed BEP of
units 4,375 is profit for the business. Margin of safety of 2,625 units means it is the safety
level for business before incurring losses.

12 | P a g e
2.1 b) Break-Even Point (BEP) and Margin of Safety - Alternatives

Alternative 1

break-even point in units

BEP=Total ¿ Cost ¿
Contribution

70,000
BEP=
12

BEP ¿ 5,834 Units

Alternative 2

break-even point in units

BEP=Total ¿ Cost ¿
Contribution

75,000
BEP=
12

BEP ¿ 6,250 Units

Options Units Profits

Original – BEP 4,375 -
Original 7,000 42,000
Alternative 1 – BEP 5,834 -
Alternative 9,000 38,000
Alternative 2 – BEP 6,250 -
Alternative 10,000 30,000

The best option is original budget due to it has the highest profitability when compared to
alternative 1 and 2.

13 | P a g e
2.1 c) Profit – Volume Graph

PROFIT - VOLUME GRAPH

42,000.00
38,000.00

30,000.00

9,000.00 10,000.00
7,000.00 5,834.00 6,250.00
4,375.00
- - -
Original -BEP Original Alternative 1 -BEP Alternative 1 Alternative 2 -BEP Alternative 2

Products Profit

2.1 d) Limiting factor decision making under CVP analysis

Organization use limiting factor decision making technique to maximize the contribution.
Factors which limit indefinite expansion of an organization called as limiting factors. When
there is limiting factor, organization allocate scarce resources to good or service which earn
the highest contribution per unit.
Product mix is range of products offer by organization. They try to provide all the products
that has more sales. But sometimes due to constraints company must limit the production.
The best solution is to use optimal product mix which provide higher return.
Process of selecting the best production mix.
1. Determine which resources are scarce.
First task is to determine which resource is limited. As example it can be labour hours,
materials, or machine hours. Need to decide the limiting factor that would be required if
produce all the units.
2. Rank the products in order of contribution (profit) is made per unit
Next step is to rank the product according to the contribution per unit. Contribution is earning
after deducting all the direct cost.
3. Determine a production plan that takes the limits into consideration.
After ranking according contribution management can decide best product mix to produce.
Priority gives to product with highest contribution.
4. Create a budget that maximizes profits.

14 | P a g e
 TASK C

3.1 The importance of capital investment decisions.

Capital investment decision is contribution of fund to acquire capital assets for the growth of
the organization. Capital assets are long term assets such as purchase of an asset, replacing or
rebuilding existing equipment. Due to the following reason capital investment decision
consider as most important decision for an organization.

 Capital investment decision is a long-term goal. These decisions are important to

organization since wrong decision can destroy the survival of the organization.
Capital investment decision will impact in long time span and affect to growth of the
organization
 Capital investment decision take for large amount of funds. Companies have limited
resources because of that they need to take best decision to take optimum results. That
means need to take correct capital investment decision.
 This is an irreversible decision as it requires large amounts of funds. Once the
decision has implemented can’t reverse it due to lack of the suitable market for that
assets. Most of the capital investment decision are specified to company requirement.
If they make wrong decision, they need to incur huge losses.
 Capital investment decision make after monitoring and controlling the expenditures.
A good project can turn to worse if cost isn’t control, since this is a crucial benefits of
capital investment.
There are some key finance decisions related to capital investment decision. Some of them
are
1. Need to decide whether capital investment fits into the long-term strategy of the
organization.
2. Need to decide whether capacity increase really impact to increase in sales
3. Need to decide whether increase in fixed assets help to enhance the breakeven point
of the business.
4. Need to decide whether cash flow from the capital investment will generate a positive
return.

15 | P a g e
3.2 Projects evaluation of Biosis Pty Ltd (BPL).

NPV

Project A

year 0 1 2 3 4 5
(250,000.0 70,000. 70,000. 70,000 70,000.0 70,000.
Cash flow 0) 00 00 .00 0 00
1.
Discount Rate 00 0.893 0.797 0.712 0.636 0.567
(250,000.0 62,510. 55,790. 49,840 44,520.0 39,690.
DCF 0) 00 00 .00 0 00

2,350.
NPV 00

Project B

year 0 1 2 3 4 5
(150,000.0 47,000. 47,000. 47,000 47,000.0 47,000.
Cash flow 0) 00 00 .00 0 00
1.
Discount Rate 00 0.893 0.797 0.712 0.636 0.567
(150,000.0 41,971. 37,459. 33,464 29,892.0 26,649.
DCF 0) 00 00 .00 0 00

19,435.
NPV 00

16 | P a g e
 IRR

Project A

IRR=A +
[ C
C−D ]
×[B− A]

IRR=0.12+
[ 2350
2350−(40,700)]×[0.2−0.12]

IRR = 12.44%

Project B

IRR=A +
[ C
C−D ]
×[B− A]

IRR=0.12+
[ 19,435
19,435−(9,470)]×[0.2−0.12]

IRR = 17.38%

17 | P a g e
 Workings

Project A

Years 0 1 2 3 4 5
(250,000.0 70,000. 70,000. 70,000 70,000.0 70,000.
Cash flow 0) 00 00 .00 0 00
1.
Discount Rate 00 0.833 0.694 0.579 0.482 0.402
(250,000.0 58,310. 48,580. 40,530 33,740.0 28,140.
DCF 0) 00 00 .00 0 00

(40,700.0
NPV 0)

Project B

Years 0 1 2 3 4 5
(150,000.0 47,000. 47,000. 47,000 47,000.0 47,000.
Cash flow 0) 00 00 .00 0 00
1.
Discount Rate 00 0.833 0.694 0.579 0.482 0.402
(150,000.0 39,151. 32,618. 27,213 22,654.0 18,894.
DCF 0) 00 00 .00 0 00
(9,470.0
NPV 0)

18 | P a g e
 PAY BACK PERIOD

Project A

year 0 1 2 3 4 5
(250,000.0 70,000. 70,000. 70,000 70,000.0 70,000.
Cash flow 0) 00 00 .00 0 00
1.
Discount Rate 00 0.893 0.797 0.712 0.636 0.567
(250,000.0 62,510. 55,790. 49,840 44,520.0 39,690.
DCF 0) 00 00 .00 0 00
(250,000.0 (187,490.0 (131,700.0 (81,860. (37,340.0 2,350.
0) 0) 0) 00) 0) 00

Pay-back period is 5 Years

Project B

year 0 1 2 3 4 5
(150,000.0 47,000. 47,000. 47,000 47,000.0 47,000.
Cash flow 0) 00 00 .00 0 00
1.
Discount Rate 00 0.893 0.797 0.712 0.636 0.567
(150,000.0 41,971. 37,459. 33,464 29,892.0 26,649.
DCF 0) 00 00 .00 0 00
(150,000.0 (108,029.0 (70,570.0 (37,106. (7,214.0
0) 0) 0) 00) 0)

Pay-back period is 4 years and 4 months

19 | P a g e
NPV is superior than IRR and Pay-back period. If the projects are independent, then we can
accept both A and B projects as they have positive NPV. Recommended to accept project B
since this is mutually exclusive project and which has highest NPV.

3.3 Limitations of ARR and PBP.

Accounting Rate of Return (ARR) and pay-back period (PBP) have following disadvantages
as project evaluation techniques.

Disadvantages of the pay-back period Disadvantages of the Accounting Rate of Return

(PBP) (ARR)

1. Not consider time value of 1. Not consider time value of money

money
In PBP does not consider time value of
money. It only considers time needed to
recover the initial investment.
2. Ignore cash flow received after
PBP
This technique only considers cash flow
up to initial investment recovery.
ARR ignores the time value of money. This is a
main disadvantage in ARR. Time value of money
help to decide the viability of investment.
2. Ignore cash flow received after PBP
This technique only considers accounting profit. It
eliminates the cash flow and taxes when making
decision.

3. Ignore profitability 3. Ignores the external factors

Short PBP does not mean that it is This is not a recommended method to long-term
profitable. If cash flow reduces or end project. ARR ignores the external factors, and the
after the PBP, a project can be unwise results are different if the same project is analyzed
investment. using return on investment method.

IRR is rate of return that a project would generate. IRR is useful to compare projects due to
following advantages.
 Time Value of Money
IRR considers the time value of money when evaluating a project. This the main
disadvantage in PBP and ARR. IRR is Interest rate at which the present value of future cash
flows is equal to the capital investment required.
 Simplicity
After calculating IRR this method is very simple to interpret. If it is an independent project
IRR exceed cost of capital (IRR> COC) project need be accepted. When it is mutually
20 | P a g e
exclusive project highest positive IRR need to be accepted. This is providing clear guidance
to managers to take decision.

TASK D

4.1 The importance of preparing budgets for an organization.

Estimation of company’s revenue and expenses over a specified period is known as corporate
budget. It is basically a financial plan for a year. Corporate budget is essential for a business
to operate efficiently. It is a flexible plan which can be adjusted according to the business and
market changes. The main purpose is to track the revenue and expense and make sure
business have adequate savings for their future transaction.
Budget is effective management tool of analyzing estimated with actual results, coordinating
future activities, and setting realistic target. The main purposes of preparing budget are as
follows.
 Revenue and expense forecasting
One of the important parts of the business planning process is budgeting. As example owners
of the organization need to assess whether the organization will make profit or not. To
identify that they need to have model to identify the way of business perform, financial
health, strategies and plans that are carried out by the organization.

 Help to decision making

Purpose of budgeting is to provide a financial framework for the decision-making process. It
will provide framework to assess whether proposed course action is something they have
planned or not. As example if organization need to increase expense on advertising they
examine if they already utilized budget for the advertising or not. If the expense is more than
budget they will not utilize more on advertising. The reason is they strictly control the
expenditure to achieve their goals

 To assess the business performance

Goal of budgeting is to measure actual business performance against the forecast one. As
example if the budgeted and actual has no significant variance the organization is on the track
of achieving their objectives.

21 | P a g e
4.2 Cash budget of Victory (Pvt) Limited.

Cash Budget
Victory (Pvt) Limited
April to June

  April May June  

Receipts  
6,400. 9,000. 11,600.0
Sales (Working 1) 00 00 0  
500.
Disposable of machine 00 - -  
5,000.
Bank loan 00 - -  
11,900.0 9,000. 11,600.0
  0 00 0  
   
Payments  
(5,100.0 (6,200.0 (8,200.0
Purchases (Working 2) 0) 0) 0)  
(800.0 (1,000.0 (1,400.0
Salaries 0) 0) 0)  
(1,100.0 (1,400.0 (1,700.0
Overhead 0) 0) 0)  
(5,000.0 (5,000.0
Machine 0) 0)  
(12,000.0 (13,600.0 (11,300.0
  0) 0) 0)  
(100.0 (4,600.0 300.
Net cash flows 0) 0) 00  
1,500. 1,400. (3,200.0
Opening Cash balance 00 00 0)  
1,400. (3,200.0 (2,900.0
Closing cash balance 00 0) 0)  
         

22 | P a g e
 Working 1
Jan Feb Mar Apr May June
800. 3,200.
Jan 00 - 00 - -
1,100. 4,400.
Feb - 00 - 00 -
1,600. 6,400.
Mar - - 00 - 00
2,000. 8,000.
Apr - - - 00 - 00
2,600.
May - - - - 00
3,600.
June - - - - - 00
800. 1,100. 4,800. 6,400. 9,000. 11,600.
00 00 00 00 00 00

Working 2
Jan Feb Mar Apr May June
250. 2,250.
Jan 00 00 - - - -
300. 2,700.
Feb - 00 00 - - -
500. 4,500.
Mar - - 00 00 -
600. 5,400.
Apr - - - 00 00 -
800 7,200.
May - - - - .00 00
1,000.
June - - - - - 00
250. 2,550. 3,200. 5,100. 6,200. 8,200.
00 00 00 00 00 00

Victory (Pvt) Limited has negative cash flow at the end of May. This mean that company has
more outgoing than cash inflows. Company will face cash shortage in future. They need to go
for financing and investment since can’t cover expense from sales. They can increase sales,
reduce operating expense, and delay the payment as short-term remedies.
23 | P a g e
4.3 What is meant by “Incremental Budgeting” approach.

One of the important parts in management accounting is incremental budgeting. Incremental

budgeting is budget based on preceding period’s budget or actual results. This is most
common approach in business who does not wish to take much time on budgeting.
Organizations in less market competition use this method since there is no significant
variance in profit from year to year.

Advantages Disadvantages
Easy to implement – This is most easy Not Risk-Taking – Incremental budgeting
budget to implement since it is very easy to has practice of use funding for repetitive
learn. activities. This will become a barrier for
allocating budget to new activities.
Therefore, incremental budgeting does not
support risk-taking.
Simplicity – This is very simple approach Discourage Innovation – This method
since it use the budget for present period to demotivate risk taking. Because of that there
forecast the future budget. This will save is less chance for completely new ideas and
time. promote conservative business environment.

Operational Stability – This will ensure that Waste of recourses – Without considering
departments are operated in a stable way for actual need of budgeting for activities this
long periods of time. method uses to allocate budget based on
past budget. This is a waste of resource.

Incremental budgeting is a conservative budgeting method which can be destroy the company
in long-term. Organization needs to have re-assessment of a business when constructing a
budget and clear examination on expenditures. As alternative method organization can use
Zero-based budget. This is a flexible, focus operation and lower cost budgeting method.

24 | P a g e
4.0 References
 CSE - Colombo Stock Exchange. (2022). Retrieved from
https://www.cse.lk/home/market [Last accessed 12 Mar. 2022].

 Understanding Solvency Ratios vs. Liquidity Ratios. (2022). [online] Retrieved from
https://www.investopedia.com/articles/investing/100313/financial-analysis-solvency-
vs-liquidity-ratios.asp [Accessed 13 Feb. 2022].

 Francis A. (2022). Financial Management Decisions. [online] Retrieved from

https://www.mbaknol.com/financial-management/financial-management-decisions/
[Accessed 15 Feb. 2022].

 Investopedia (2022). Sharper Insight. Smarter Investing. [online] Investopedia.

Available at: https://www.investopedia.com. [Accessed 25 Feb. 2022].

 Wikipedia Contributors (2022b). Bukit Darah PLC. [online] Wikipedia. Available at:
https://en.wikipedia.org/wiki/Carson_Cumberbatch. [Accessed 25 Feb. 2022].

25 | P a g e
‫‪5.0 Appendix‬‬

‫‪Liquidity Ratio‬‬

‫ݏ ݁ݏݏܣ ݐ݊݁ݎݎ ݑܥ݈ܽݐ݋݈ܽܶ‬‫ݏݐ‬

‫ݐ‪ R‬ݐ݊݁ݎݎ ݑܥ‬
‫‪ ൌ‬݋݅ݐܴܽ‬
‫݈ܾ݅ܽ݅ܮ ݐ݊݁ݎݎ ݑܥ݈ܽݐ݋݈ܽܶ‬ ‫݁݅ݐ݁݅‬
‫ݏݏ‬

‫݊݁ݎݎܥ݈ܽݐ݋݈ܽܶ‪ሺ‬‬
‫ݏ ݁ݏݏܣݐ݊݁ݎݎݑ‬
‫‪ െ‬ݏݐ‬ ‫݊݁ݒ݊݁ ݊ܫ‬‫݁݅ݎ݋ݐ݁݅ݎ‬
‫‪ሻ‬ݏ ݏ‬
‫ݏ ݁ݏݏܣ ݑ‪R‬‬
‫݇ܿ݅ݑܳ‬ ‫ݐݏݐ‬
‫‪ ൌ‬݋݅ݐ݅ ܴܽ‬
‫݊݁ݎݎܥ݈ܽݐ݋݈ܽܶ‬
‫݈ܾ݅ܽ݅ܮݐ݊݁ݎݎݑ‬
‫ݐ‬ ‫݁݅ݐ‬‫ݏ ݁݅‬

‫‪Profitabiltiy Ratio‬‬

‫ݏݏݎܩ‬‫ݐ݂݅݋݂݅ݎܲݏݏ݋‬
‫ݏݏܩ‬
‫‪݃݅݊ൌ‬ݎܽܯݐ݂݅݋ݎܲݏݏ݋‬ ‫‪ൈ‬‬
‫ͲͲͳ‬
‫ݏ ݈݈݁ܽܵܽݐ݋݈ܽܶ‬

‫ݐ݂݅݋݂݅ݎܲݐ ݁ܰ‬
‫݊݅݃ݎ ܽܯݐ݂݅݋݂݅ݎܲݐ݁ܰ‬ ‫‪ൌ‬‬ ‫‪ൈ‬‬
‫ͲͲͳ‬
‫ݏ ݈݈݁ܽܵܽݐ݋݈ܽܶ‬

‫ݐ݂݅݋ݎܲݐ݁ܰ‬
‫݋ ݊ݎ ݑ ݐܴ݁‬
‫‪ ൌ‬ݕݐ ݑ݅ݍܧ ݊‬ ‫‪ൈ‬‬
‫ͲͲͳ‬
‫݁݃ܽݎ ݁ ݒܣݒ‬ ‫ݕݐ ݑ݅ݑ݅ݍܧ‬

‫‪26 | P a g e‬‬
‫‪Efficiency Ratio‬‬

‫ݏ ݈݂݁ܽܵ݋ݐݏ݋ܥ‬
‫݊݁ݒ ݊ܫ‬
‫ݎݕ ݊݁݋ݐ ݒ‬
‫݊ݎܶ‬
‫݊ݎݑ‬
‫ݎ ݁‬
‫‪ ൌ‬݋݅ݐܴܽݎ݁ݒ݋‬
‫݁݃ܽݎ݁ݒ݁ܣ‬
‫݁݃ܽݎ‬ ‫݇ܿ݋ݐ݇ܿܵ‬
‫ݏ݇ܿݏ‬

‫ݏ ݈݁ܽܵݐ ݅݀݁ݎܥ݈ܽݐ݋݈ܽܶ‬
‫ܾ݁ܦ‬ ‫‪ ൌ‬݋݅ݐ݅ ܴܽݎ ݁݁ݒ݋ ݊ݎݒ ݑܶݏݎ݋ݐ‬
‫ݏݎ‬
‫݁݃ܽݎ݁ݒ݁ܣ‬
‫݁݃ܽݎ‬ ‫ݏݎ ܾ݁ܦ‬
‫ݏݎ݋ݐ‬

‫‪Solvency Ratio‬‬

‫݈ܾ݅ܽ݅ܮ݈ܽݐ݋݈ܽܶ‬‫ݕݐ݅ݐ‬
‫ܽ݁ܩ‬ ‫݃݊݅ݎ‬ ‫‪ ൌ‬݋݅ݐ݅ ܴܽ‬
‫ݕݐ ݑ݅ݑݍܧ݈ܽݐ݋݈ܽܶ‬

‫݈ܾ݅ܽ݅ܮ݈ܽݐ݋݈ܽܶ‬ ‫ݕ݅ݐ݅‬
‫ܾ݁ܦ‬ ‫‪ ൌ‬݋݅ݐ݅ ܴܽݐ‬
‫ݏ ݁ݏݏܣ݈ܽݐ݋݈ܽܶ‬‫ݏݐ‬

‫ݕݐ ݑ݅ݑݍܧ݈ܽݐ݋݈ܽܶ‬
‫‪ ൌ‬݋݅ݐ݅ ܴܽݕݐ ݑ݅ݑݍܧ‬
‫ݏ ݁ݏݏܣ݈ܽݐ݋݈ܽܶ‬
‫ݏݐ‬

‫‪27 | P a g e‬‬