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Unit title Accounting for Decision Makers

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Word count 4000 words

Due date / Time 17 March 2022

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Table of Contents

TASK A...........................................................................................................................................1
1.0 Introduction to Browns Investments 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 Browns Investments PLC..............................................................................4
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....................................................15

TASK C.........................................................................................................................................16
3.1 The importance of capital investment decisions......................................................................16
3.2 Projects evaluation of Biosis Pty Ltd (BPL)............................................................................17
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 Browns Investments PLC

Browns Investments PLC (BI) is an investment vehicle. The Company's principal activities
are investments in listed and non-listed companies and investments in subsidiaries and jointly
controlled entities, which are mainly engaged in the plantation management, agriculture,
hydro power, leisure and construction sectors.

1.1 The Importance of Accounting

The main objectives of the accounting as follows,

 To maintain systematic records of business transaction

Initially organization record their business transaction in ledgers and subsidiary books. They
use source documents do record transaction in books. This is considered as one of the main
objectives of accounting since it will help to eliminate fraud and errors. Other thing is these
records used to provide information to interested parties.

 To ascertain the financial position

Another main objective of accounting is to identify the financial health of the business.
Organization will prepare financial position indicating the value of assets, equity and
liabilities at specific date. This will provide clear picture about business operation and going
concern.

 Preparing Income Statement

Based on the systematic record of organization they will prepare income statement to
ascertain the profit or loss from the business transactions. This statement is prepared by
deducting all the business expenses from revenue. This can be made daily, monthly,
Quarterly or annually.

 To provide information’s to interested parties

Accounting will provide information to interested parties in timely manner. They use this
information when making decisions. This is identified as integral of accounting to provides
accurate, complete and reliable information in timely manner.

1|Page
1.2 The usefulness of accounting policies/principles when preparing financial
statements.

Accounting policies are principals, rules and regulations used by management when
preparing financial statements. When analyzing financial statements of Browns Investment
PLC identified the following accounting policies consistently adopted by the company.
 Inventories
Company needs to follow LKAS 02 when accounting inventories. Company have identified
inventories at the lower of cost and net realizable value. Cost of purchased inventory are
determined after deducting discounts and rebates while net realizable value is deducting cost
of sale by selling price in the ordinary course of business. Costs are assigned to individual
items of inventory based on weighted average costs.
Browns Investment PLC use below cost formula to incur cost to the inventories.

Biological Assets Measured at its fair value less cost to sell at the point of
harvest.
Finished goods Valued at the lower of cost and estimated net realizable
value, after making due allowance for obsolete and slow
moving items.
Input Material, Spares and At actual cost on weighted average basis.
Consumables
Finished Goods First In First Out (FIFO) basis

 Impairment of assets
Company needs to follow LKAS 16 when accounting depreciation for tangible assets while
need to follow LKAS 36 to get guidelines for impairment calculation for intangible assets.
Goodwill and intangible assets need to test annually for impairment that have an indefinite
useful life.
An impairment loss is recognized when assets carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal
and value in use. Non-financial assets other than goodwill that suffered an impairment are
reviewed for possible reversal of the impairment at the end of each reporting period.

 Borrowing costs
Borrowing cost is that are directly attributable to the acquisition, construction or production
of a qualifying asset are capitalized during the period that is required to complete and prepare
the asset for its intended use or sale. Qualifying assets are assets that necessarily take a

2|Page
substantial period to get ready for their intended use or sale. Other borrowing costs are
expensed in the period in which they are incurred.
Company follows accounting policies due to the importance of those policies. Some of them
are,
 Accounting policies is a guideline for management when preparing financial
statements.

 Accounting policies help to maintain the consistency in financial statements.

Financial statement consistency will increase the credibility of investors and
shareholders toward the business. When shareholder trust increase, they will invest in
business without any hesitation.

 Accounting policies help to maintain the internal control within the company.
Accounting policies will create good practice among the business which cause for less
chance of wrongdoing.

 When organization follow accounting policies, it will help to compare the financial
position and performance with other companies.

3|Page
1.3 Ratio analysis of Browns Investments PLC.

Browns Investments PLC

Report on financial position and financial performance

Browns Investment PLC mainly engage in travel and tourism, stock broking, banking,
insurance, real estate management, super marketing, BPO and many more other businesses.
The main purpose of this report is to provide meaningful information about the company’s
financial position and performance. For that used ratio analysis for company’s liquidity,
profitability, efficiency, and solvency.

I. Liquidity ratios
Liquidity ratios indicate Browns Investment PLC ability to pay off its debt. These ratios
indicate how quickly Browns Investment PLC can convert its current assets into cash so they
can pay off its liability on a timely basis.
Browns Investment PLC has current ratio less than one 1 in 2020 and 2021 which indicates
number of times short-term assets cover short-term liabilities. In both years companies
doesn’t not have enough liquid assets to cover its short-term liabilities but in 2021 there is
increase in ratio compared to 2020.
The quick ratio for the company is 0.22 and 0.41 in 2020 and 2021 respectively. This
measures the ability to pay of current liability without considering inventories of the business.
However, company have risk of pay off its current liabilities which indicates that the
company have problems in meeting its short-term obligations.

Liquidity ratios
Years Current Ratio Quick Asset Ratio
2020 0.310 0.222
2021 0.590 0.415

Source: Author's Work, 2022

4|Page
 0.700
0.600
0.500
0.400
0.300
0.200
0.100
0.000
2020 2021

Quick Asset Ratio Current Ratio

Source: Author's Work, 2022

II. Profitability Ratios

A profitability ratio is used to measure the Browns Investment PLC performance.
Profitability is simply the capacity to make a profit.
Browns Investment PLC has less gross profit ratio of 5% in 2021. When compared to 2020
GP is considerably lower in 2021. There is significant decrease in net profit and ROE in
2021. In 2021 both net profit and ROE is negative ratio which indicate that company
performance is weak. They were impacted by pandemic.
Browns Investment PLC has negative ROE ratio which means that there is no return for
equity investment. This will impact on shareholders motivation toward company and cause to
decrease in share price. Current share price of Browns Investment PLC is approximately
Rs.11.

Profitability Ratios    
Years Gross Profit Net Profit ROE
2020 0.10 1.29 0.13
2021 0.05 (0.57) (0.05)

Source: Author's Work, 2022

5|Page
 1.50

1.00

0.50

-
2020 2021
(0.50)

(1.00)

Gross Profit Net Profit ROE

Source: Author's Work, 2022

III. Efficiency Ratio

Efficiency ratios analyze how well Browns Investment PLC uses its assets and liabilities
internally. Browns Investment PLC has higher number of debtor turnover which is 1.2 in
2021 and when compared to 2020 debtors’ turnovers is comparatively less. Also, they have
more than 1 inventory turnover in both years this is a good indication about the company.

Efficiency Ratios
Years Debtors Turnover Inventory Turnover
2020 1.299 1.993
2021 1.203 1.217

Source: Author's Work, 2022

2.500

2.000

1.500

1.000

0.500

0.000
2020 2021

Debtors Turnover Inventory Turnover

Source: Author's Work, 2022

6|Page
IV. Solvency Ratio
This ratio assesses the ability of Browns Investment PLC to meet its financial obligations.
Gearing ratio is a measure of how much of a company's operations are funded using debt and
equity. Browns Investment PLC has low gearing ratio in 2021 which means less funded by
debt finance. Debt to equity ratio in 2021 is 39% and equity ratio is 60%. In 2020 company
has high gearing ratio because of that they have more funded by debt in 2020 which is 53%.

Solvency Ratios
Years Gearing Ratio Debt Equity Ratio Equity Ratio
2020 1.148 0.535 0.465
2021 0.650 0.394 0.606

Source: Author's Work, 2022

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.

Organization needs to use LKAS 16 as guideline when accounting Property, plant, and
equipment (PPE). First need to satisfy the definition criteria according to the standard. PPE is
intangible assets held by an entity in the production or supply of goods or service, for rental
to others, or for administrative purposes and expected to be used during more than one
period. If organization fulfill definition criteria, then need to look at recognition criteria as per
LKAS 16.
LKAS 16 recognition criteria are as follows,
A. 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.
B. Individually insignificant assets such as tools and moulds may be aggregated for
recognition as PPE.
However, recognition criteria have been changed after 1st January 2020 as relevant
information about the element, faithful representation and benefits that outweigh the cost of
preparation. If company able to meet above recognition criteria they can identify PPE in
financial position under non-current assets. Initially PPE measured at cost such as purchase
cost, directly attributable cost, and cost of dismantling.
The expense relating to fixed assets is not recognized as expense to P&L but if the assets is
depreciable assets can charge depreciation expense to the P&L. The reason is fixed assets
have more than one period useful life because of that need to identify under non-current
assets. PPE is not expense, it an asset for the company.

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

Company presents their revenue and expenses in income statement. Revenue is earrings from
ordinary business transaction while expense is cost incurred to generate revenue. Company
needs follow LKAS 1 as guidelines when preparing financial statements. There are eight
general feature and one of the features is accrual basis of accounting. Accrual basis of
accounting is recognizing transaction and events when they occur, not when cash is received
or paid to them.

All the financial statement except cash flow statement prepares using accrual basis. Accrual
basis revenue include sales made on credit and expense include when they are incurred. Cash
basis is considered revenue when payment is received and consider expense when they are
paid.

Cash flow statement prepare based on cash basis and income statement is based on accrual
basis. When business use accrual basis, revenue and expenses on the income statement does
not exactly line up with the cash inflows and outflows.

The basis Income Profit

of
comparison
Definition Income is amount of money Profit is excess of revenue after
earned during a specific period. deducting all the expenses related to
business transaction.

Dependents Both revenue and profit. Only consider revenue

Nature Total cash inflow of revenue. Profitability of the business
Uses To calculate value of the business To calculate profitability of the
business

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

 Creditors
Creditors has an interest toward business organization to verified that their payment will be
received on time. Creditors will immediately take credit recovery action if company does not
pay their money back. Also not provide credit to the business.

 Competitor
Competitors have an interest toward business to identify strategies and innovation. They are
competing within same market to maximize their profit After identifying organization
strategies competitors come up with new business strategy.

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

 Communities
Communities are people who live near an organization. They have an interest to identify the
impact of local health and safety of their community. If there is an impact to the community,
they will act immediately.

 Governments
Government has interest toward business to check whether company pay taxes and follow
rules and regulations. Government takes taxes on company’s profit and employee income as
the ruling body of the country.

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

Marginal cost (MC) refers to the change in the total cost resulting from producing an
additional unit. MC include both fixed and variable cost. Fixed cost needs to consider if
there is expand of production while variable cost always included in marginal costing.

MC is helping to profit planning. Company can identify profit at each activity level. This
means they know how much profit can be earned at specific production level. This is
important to decide whether organization make profit or loss at certain level of
production.
This also provides guidance to decide whether to produce within organization or to
outsource. This technique is easy to understand and operate and provide guidance to
decide the optimum selling price.

MC is helping to identify the variable cost for production. They can compare actual
variable cost with variable analysis report. This is helping to control the variable cost.
This method helps to decide which customers are profitable and while which customers
are not profitable. Then they can decide to discontinue operation with loss making
customers. Marginal costing can be used to evaluate different department.

Following are the main criteria that need to take in to account in determining whether a
cost is relevant for business decision making.

1) Future Cash Flows

Past cost is irrelevant since we cannot affect them by current decisions. If cost is
incurred in the future as result of decision is known as relevant cost.

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

3) Avoidable Costs
Relevant cost can be avoiding if a particular activity or sector is not performed. As
example cost of making biscuits is avoidable if business make decision to stop the
biscuits production.

11 | P a g e
2.1 a) Break-Even Point (BEP) and Margin of Safety – Original Budget

BEP in units

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

According to this example BEP is 4,375 units which means that company production level
makes zero profit. In other words, the level of production at which the costs of production
equal the revenue of a product. If sales are lower than BEP 4,375 units company will make
loss. When the sales higher than BEP they can make profits. 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   Alternative 2  
       
BEP in units BEP in units  
       
BEP=Total ¿ Cost ¿ BEP=Total ¿ Cost ¿
  Contribution   Contribution
 
       
   
70,000   75,000  
BEP= BEP=
   12   12  
       
  BEP ¿ 5,834
  Units   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

According to above analysis we recommended to select the original budget. When compared
to alternative 1 and 2 original budget is the best option to implement. In original budget able
to make 42,000 profit with 2,625 units of margin of safety.

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2.1 c) Profit – Volume Graph

PROFIT - VOLUME GRAPH

45,000.00
42,000.00
40,000.00
38,000.00
35,000.00
30,000.00 30,000.00
25,000.00
20,000.00
15,000.00
10,000.00 9,000.00 10,000.00
7,000.00 5,834.00 6,250.00
5,000.00 4,375.00
- - - -
Original -BEP Original Alternative 1 - Alternative 1 Alternative 2 - Alternative 2
BEP BEP

Products Profit

14 | P a g e
2.1 d) Limiting factor decision making under CVP analysis

Limiting factor decision making is a method used by organization to maximize their

production with limiting resources. Limiting Factor means scarce resource for organization.
Organization would like to increase their production but limiting resource become constraint
for them. This means organization does not have unlimited resources to make their products
and service. They need to manage their resource to make highest profit.
Every organization has a product mix in this method, they decide most possible product mix
to produce with the scarce resources to maximize profit. Process of selecting the best
production mix,
1. Determine limiting factor.
One of the decisions needs to make within this process is determine the limiting factor for the
organization. Organization needs to identify what resource is limited for them such as labour
hours, materials, or machine hours etc. After deciding the limiting factor need to assess the
amount of limiting factor required to fulfill the organization requirement.
2. Calculate the contribution and rank the products according to contribution
Next step is to calculate the contribution. Contribution is profit after deducting direct cost of
product by its selling price. After calculating the contribution company need to rank the
product according to the contribution. This will help to identity the products that has highest
contribution to maximize the profit.
3. Determine the product mix.
This the last step in process of selecting best product mix. Once rank the product according to
contribution management can select best product mix for the organization. Priority gives to
product with highest contribution since it will create a budget that maximize organization
profit.

15 | P a g e
 TASK C
3.1 The importance of capital investment decisions.

Capital investment decision is a long-term decision taken by management for the growth of
the business. Capital investment decision is how entity use their funds to acquire capital
assets. As example how company acquire assets, replacing or rebuilding existing equipment
etc. These are not repetitive expense like operational expenses. There are several reasons to
consider capital investment decision as most important decision for an organization.
One importance is capital investment needs large number of funds. These are unique decision
because of that there is no market for capital investment. If they make wrong capital
investment decision, they need to incur huge loss. Other main importance is capital
investment decision take after monitoring and controlling the expenditures. This will help to
control the expense of the organization. Management always considers cost benefit analysis
before implementing capital investment decision. These decisions also important to attract the
investors. When company do investment for the growth of the company shareholders also
motivate toward company since they know company make profit in future due to these
investments. Ultimately this will help to maximize the organizational wealth. These are
irreversible decision due to that impact of this decision will reflect for many years. Capital
investment decision will help to growth and prosperity of the organization. Company always
tries to make correct decision since these decisions can affect to the organizational
sustainability.
There are some key finance decisions related to capital investment decision.
 Need to decide whether capital investment fits into the long-term strategy of the
company.
 Need to decide whether cash flow from the investment will generate a positive return
on investment.
 Need to decide whether company has enough funds to acquire the assets.
 Need to decide whether capital investment decision increase the sales.
 Whether the investment is required by regulatory requirement, irrespective of the
return of investment.

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

NPV
Project A

years 0 1 2 3 4 5
Cash (250,000. 70,0 70,0 70,0 70,00 70,000
flow 00) 00.00 00.00 00.00 0.00 .00
Discount
Rate 1.00 0.893 0.797 0.712 0.636 0.567
(250,000. 62,5 55,7 49,8 44,52 39,690
DCF 00) 10.00 90.00 40.00 0.00 .00
2,350
NPV .00          

Project B

years 0 1 2 3 4 5
Cash (150,000. 47,0 47,0 47,0 47,00 47,000
flow 00) 00.00 00.00 00.00 0.00 .00
Discount
Rate 1.00 0.893 0.797 0.712 0.636 0.567
(150,000. 41,9 37,4 33,4 29,89 26,649
DCF 00) 71.00 59.00 64.00 2.00 .00
19,435
NPV .00          

17 | P a g e
IRR
Project A

IRR=A +
[ C
C−D ]
×[B− A]

IRR=0.12+
[ 2350
2350−(15,290) ]
×[0.15−0.12]

IRR = 12.39%

Project B

IRR=A +
[ C
C−D ]
×[B− A]

IRR=0.12+
[ 19,435
19,435−7,591 ]
×[0.15−0.12]

IRR = 16.92%

Workings
Project A

years 0 1 2 3 4 5
Cash flow (250,000.00) 70,000.00 70,000.00 70,000.00 70,000.00 70,000.00
Discount Rate 1.00 0.870 0.756 0.658 0.572 0.497
DCF (250,000.00) 60,900.00 52,920.00 46,060.00 40,040.00 34,790.00
NPV (15,290.00)

18 | P a g e
Project B

years 0 1 2 3 4 5
Cash flow (150,000.00) 47,000.00 47,000.00 47,000.00 47,000.00 47,000.00
Discount Rate 1.00 0.870 0.756 0.658 0.572 0.497
DCF (150,000.00) 40,890.00 35,532.00 30,926.00 26,884.00 23,359.00
NPV 7,591.00

PAY BACK PERIOED

Project A

years 0 1 2 3 4 5
Cash flow (250,000.00) 70,000.00 70,000.00 70,000.00 70,000.00 70,000.00
Discount Rate 1.00 0.893 0.797 0.712 0.636 0.567
DCF (250,000.00) 62,510.00 55,790.00 49,840.00 44,520.00 39,690.00
(250,000.00) (187,490.00) (131,700.00) (81,860.00) (37,340.00) 2,350.00

 Pay-back period is 5 Years

Project B

years 0 1 2 3 4 5
Cash flow (150,000.00) 47,000.00 47,000.00 47,000.00 47,000.00 47,000.00
Discount Rate 1.00 0.893 0.797 0.712 0.636 0.567
DCF (150,000.00) 41,971.00 37,459.00 33,464.00 29,892.00 26,649.00
(150,000.00) (108,029.00) (70,570.00) (37,106.00) (7,214.00)

 Pay-back period is 4 years and 4 months

Recommended to accept project B since these are mutually exclusive projects and project B
generate highest positive NPV. The other reason is NPV is superior to IRR and PBP.

19 | P a g e
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

(PBP) Return (ARR)

1. Not consider time value of money
In PBP does not consider time value of
money. They only consider time needed to
recover the initial investment. Time values of
money need to consider since money has
more value in now than the same money in
future.
2. Ignore cash flow received after PBP
This technique only considers cash flow up to
initial investment recovery. After the initial
recovery does not consider about the cash
flow.
1. Not consider time value of money
Viability of investment can be measure
through time value of money. But in ARR does
not consider about the time value of money.
This is one of the main disadvantages in ARR.
2. Ignore cash flow
ARR ignores the external factors. This
technique only considers accounting profit. It
eliminates the cash flow and taxes when
making decision.

IRR is rate at which the net present value of cash flows of a project is zero. This is
consistence with the wealth maximization. IRR is useful to compare projects due to following
advantages.
 Consider time value of money
IRR is evaluation technique used to decide which project has highest yield and consider the
time value of money when evaluating a project. This eliminates the disadvantages in ARR
and PBP. IRR is Interest rate at which the present value of future cash flows is equal to the
capital investment required.
 simplicity
If project is independent and IRR exceed the cost of capital (IRR> COC) project need be
accepted. When it is mutually exclusive project highest positive IRR need to be accepted.
IRR provides clear guidance to managers when evaluating projects.

20 | P a g e
 TASK D
4.1 The importance of preparing budgets for an organization.

Corporate budgeting is known as forecasting of organization expense and revenue over a

specified period. Corporate budget also known as financial plan which prepare for monthly,
quarterly, or annually.
The main purposes of preparing budget are as follows.
 To predict cash flow
Budgeting will help to predict the company cash flow which is extremely useful for
companies that are rapidly growing. As example these company have seasonal sales or
irregular sales pattern. Most of the garments have highest sales in April and December when
compares to other months due to the festival season. So, these types of companies can
manage their cash flow by looking at their sales pattern.
 To make decisions
Budgeting is financial framework for decision making process. As example budget will
highlight whether company has cash flow shortage or excess. If there is cash shortage
management can take financing decision to fulfill their business transaction. If there is excess
of cash can invest excess resources in profitable investment to earn returns.
 To forecast revenue and expense
This is integral part of the business planning. As example company need to assess whether
the organization will make profit or loss. This a model they use to identify the way of
business perform, financial health, strategies and plans that are carried out by the
organization.

 To measure the business performance

Most of the companies use corporate budget as basis for evaluate employee performance,
using variance from the budget. The main purpose is to measure actual business performance
against the forecast one.

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

Cash Budget
Victory (Pvt) Limited
for the months 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
 Total Receipts 0 00 0
Payments      
(5,100.0 (6,200.0 (8,200.0
Purchases (Working 2) 0) 0) 0)
(800. (1,000.0 (1,400.0
Salaries 00) 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
 Total Payments 0) 0) 0)
(100. (4,600.0 300.
Net cash flows 00) 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)

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Working 1 Jan Feb Mar Apr May June
Jan 800.00 - 3,200.00 - -
Feb - 1,100.00 - 4,400.00 -
Mar - - 1,600.00 - 6,400.00
Apr - - - 2,000.00 - 8,000.00
May - - - - 2,600.00
June - - - - - 3,600.00
800.00 1,100.00 4,800.00 6,400.00 9,000.00 11,600.00

Working 2 Jan Feb Mar Apr May June

Jan 250.00 2,250.00 - - - -
Feb - 300.00 2,700.00 - - -
Mar - - 500.00 4,500.00 -
Apr - - - 600.00 5,400.00 -
May - - - - 800.00 7,200.00
June - - - - - 1,000.00
250.00 2,550.00 3,200.00 5,100.00 6,200.00 8,200.00

Victory (Pvt) Limited has negative cash flow at the end of month of May. This mean that
company has more cash outflows compares to cash inflows. Company will face cash shortage
in future because of that they need to take financing decision. There sales are not enough to
cover their expenses.

4.3 What is meant by “Incremental Budgeting” approach.

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Incremental budgeting is integral part of management accounting and most common
approach since it’s easy to implement. Incremental budgeting use precedent year as a base for
upcoming year’s budgeting which is most suitable for less competitive markets.
Advantages
 Simplicity
Incremental budgeting is easy to learn and implement within organization. This the reason for
becoming most common budgeting technique.
 Funding Stability
This is a best method for organization having project that involve funding for several years
since Incremental budgeting ensures funding remain stable over the period.
 Reduces Internal Rivalry
There is no competition within department to acquire higher budget since this approach use
budget after adjusting equal incremental changes to previous year.

Disadvantages
 More spending
This will motivate employees to use budget for the period fully even without actual need
since does not consider the actual need of funding for each department when implement this
method.
 Waste of recourses
This method does not consider actual need of funding which cause for waste of resources.
These excess resources become idle resources which can be used to other cash generating
activities.

Incremental budgeting is a conservative method which can destroy company in future.

Company needs to use flexible budget which assess their business and identify expenses
before implementing budgeting approach. Recommended to use Zero-based budget which
minimize disadvantages in incremental budgeting.

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4.0 References
 CSE - Colombo Stock Exchange. (2022). Retrieved from
https://www.cse.lk/home/market [Last accessed 05 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 12 Feb. 2022].

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

https://www.mbaknol.com/financial-management/financial-management-decisions/
[Accessed 14 Feb. 2022].

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

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

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‫‪5.0 Appendix‬‬

‫‪Liquidity Ratio‬‬

‫ݏ ݁ݏݏܣ ݐ݊݁ݎݎ ݑܥ݈ܽݐ݋݈ܽܶ‬‫ݏݐ‬

‫ݐ‪ P‬ݐ݊݁ݎݎ ݑܥ‬
‫‪ ൌ‬݋݅ݐܴܽ‬
‫݈ܾ݅ܽ݅ܮ ݐ݊݁ݎݎ ݑܥ݈ܽݐ݋݈ܽܶ‬ ‫݁݅ݐ݁݅‬
‫ݏݏ‬

‫݊݁ݎݎܥ݈ܽݐ݋݈ܽܶ‪ሺ‬‬
‫ݏ ݁ݏݏܣݐ݊݁ݎݎݑ‬
‫‪ െ‬ݏݐ‬ ‫݊݁ݒ݊݁ ݊ܫ‬‫݁݅ݎ݋ݐ݁݅ݎ‬
‫‪ሻ‬ݏ ݏ‬
‫ݏ ݁ݏݏܣ ݑ‪P‬‬
‫݇ܿ݅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

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‫‪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

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