mfrd - lalitesh
TRANSCRIPT
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ASSESSMENT CRITERIA
Learner name: LALITESH SUTRAVE Learners Registration No: DL11071
Course title: Unit 2: Managing Financial Resources and Decisions Unit code: H/601/0548 QCF Level 5
Assessor name : Dr.NEERAJA
Task L O Assessment criteria Pass Merit Distinction
1.1 11.1 identify the sources of finance available to a business
P
1.2 11.2 assess the implications of the different sources
P M2
1.3 11.3 evaluate appropriate sources of finance for a business
projectP D1
2.1 2 2.1 analyse the costs of different sources of finance P M1
2.2 2 2.2 explain the importance of financial planning P
2.3 22.3 assess the information needs of different decision
makersP M2
2.4 22.4 explain the impact of finance on the financial
statementsP
3.1 3 3.1 analyse budgets and make appropriate decisions P D1
3.2 33.2 explain the calculation of unit costs and make pricing
decisions using relevant informationP M2
3.3 3 3.3 assess the viability of a project using investmentappraisal techniques
P D2
4.1 4 4.1 discuss the main financial statements P
4.2 44.2 compare appropriate formats of financial statements
for different types of businessP M2
4.3 44.3 interpret financial statements using appropriate
ratios and comparisons, both internal and external.P M2
Date set: Hand-in date Submitted Date:
Review dates 1: 2: 3: 4:
Learner declaration I, herebyconfirm that this assignment is my own work and not copied or plagiarized. It
has not previously been submitted as part of any assessment for this qualification. All the sources, from
which information has been obtained for this assignment, have been referenced. (Harvard format). I further
confirm that I have read and understood the Roots Business School rules and regulations about plagiarism
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and copying and agree to be bound by them
Learner signature Date
TasksTask
No (Include the grading statement from the published specifications)
Evidence required for
learning outcome
ASSIGNMENT I PONNI SUGARS & CHEMICALS LIMITED
1 1.1 identify the sources of finance available to
a business
Ascertain different sources of finance
available in the given case.
2 1.2 assess the implications of the different
sources
Enumerate the implications for each source of
finance
3 1.3 evaluate appropriate sources of finance
for a business project
Evaluate different sources of finance for the
project of Ponni Sugars and Chemicals Ltd
4 2.1 analyse the costs of different sources of
finance
For different sources of finance evaluate by
comparison
5 2.2 explain the importance of financial
planning
What is financial planning how does it help the
organisation
6 2.3 assess the information needs of different
decision makers
Evaluate the information needs of different
decision makers in a organisation
7 2.4 explain the impact of finance on the
financial statements
Assess the impact of finance on financial
statements
ASSIGNMENT II TESCO RETAIL OUTLET & Vishal Mega Mart
8 3.1 analyse budgets and make appropriatedecisions
Analyze budgets and recommend actions
9 3.2 explain the calculation of unit costs and
make pricing decisions using relevant
information
Assess costing and recommend pricing
decisions
10 3.3 assess the viability of a project using
investment appraisal techniques
Ascertain project viability by using investment
appraisal methods
11 4.1 discuss the main financial statements Explain financial statements and their purpose.
12 4.2 compare appropriate formats of financial
statements for different types of business
Compare financial statements of different
businesses
13 4.3 interpret financial statements using
appropriate ratios and comparisons, both
internal and external.
Compare financial statements both internal and
external using financial ratios.
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ASSIGNMENT 1
Task 1.1
Identify the different sources of finance available to Ponni Sugars &Chemicals Ltd.
Equity Share capital
Common stocks are equity share capital. It means you paid for a fixed amount of ownership by
buying stock company, and if that company's value and profitability goes up or down, so does
the value of that stock. In short, it means you have "an equal share" in that company's capital.
Equity capital is integral to a company's financing strategies, as it provides the lifeblood
necessary to fund short-term initiatives. Besides, equity helps senior leadership maintain healthy
working capital ratios. Working capital gauges an organization's short-term cash and equalscurrent assets minus current liabilities. Having a varied group of equity holders helps a company
diversify its financing sources, enabling corporate managers to seek additional funds for long-
term expansion plans. (1)
Preference Share Capital
Preference Share Capital is often considered as a hybrid form of financing because it has many
features of both equity shares and debenture. It resembles equity capital in the following ways:
(i) The non-payment of dividend does not force the company to insolvency in other words,
(ii) Preference dividend is not an obligatory payment.
(iii) Dividends are not a tax-deductible payment.
(iv)In some cases, preference shares have no fixed maturity date.
On the other hand, it is similar to debentures are.
(i) Dividend rate of preference shares is usually fixed just like it is fixed on debentures,
(ii) Preference shares don't share in residual earnings,
(iii) Preference shareholders normally don't enjoy the voting right. (2)
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to capital markets. It typically entails high risk for the investor, but it has the potential for
above Average returns.It is also a way in which public and private actors can construct an
institution that systematically creates networks for the new firms and industries, so that they can
progress. This institution helps in identifying and combining pieces of companies, like finance,
technical expertise, know-how of marketing and business models. Once integrated, theseenterprises succeed by becoming nodes in the search networks for designing and building
products in their domain. (6)
TASK 2
1.2 assess the implications of the different sources
Equity share capital
Legal implications:
1. Equity shareholders are entitled to voting rights by the law. Hence dilution of ownership
and control of the firm. They do not have any preference for payment of dividend or
repayment of capital.
2. Law requires company to give existing equity shareholders the first opportunity to
purchase additional equity shares.
Financial implications:
1. The cost of equity capital is high,
2. Dividends are paid out of profit after tax. This makes the relative cost of equity more.3. Claims arise only after satisfying the claims of preference shares.
Preference share capital
Preference shares are more prior shares.
Legal implications
1. Payment of dividends is not legal, but if the company skips paying dividends for a long
time, preference shareholders acquire voting rights as per law.2. They have a prior claim on the assets and earnings of the firm. The laws say that in case
of bankruptcy, preference shareholders are entitled to claim liquidation.
3. Preference share have an preference over equity for re-payment of capital in the event of
winding-up.
Financial implications:
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1. Financial distress on account of redemption obligation is not high.
2. Compared to debt capital, it is a very expensive source of financing because dividend
payable is not tax deductible.
Debentures
Legal implications
1. As per law, Company enjoys greater flexibility in designing the debenture issue but after
the issue, the firm hardly has any freedom in re-negotiating the terms of the issue.
2. Appointment of a trustee through a trust deed is must.
Financial implications
1. Payment of interest is must but it is tax deductible.
2. Redemption of debentures poses a financial distress.
3. Receives fixed rate of interest whether the company makes profit or loss.
Long term loan
Legal implications:
1. Mortgage of all immovable properties of the borrower, both present and future.
2. Financial institutions have a right to appoint nominee directors.
3. Obtain clearance and licenses from various government agencies.
Financial implications:
1. A firm has to reduce the proportion of debt in its capital structure by issuing additional
equity and preference capital. This causes a sizeable amount of expenditure.
2. Payment of interest.
Retained earnings
Legal implications:
1) Less legal implications as it is available internally and do not require talking to lenders.
2) Does not lead to payment of cash.
Financial implications
1. Opportunity cost is quite high as it represents dividends foregone by equity shareholders.
2. Avoid issue of cost.
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TASK 3
1.3 evaluate appropriate sources of finance for a business project
The most preferable option which gives appropriate sources of finance is
Option I: This detail will help us to know which option would be better.
Option I: Equity share Capital (208000 Equity shares of 100 each) Rs. 2, 08, 00,000
10% Preference share Capital (605000 PS of 100 each) Rs. 6, 05, 00,000
8% Debentures (face value Rs.1000) Rs. 12, 50, 00,000
6% Loan from IDBI- Financial Institution Rs. 22, 05, 00,000
Retained Earnings Rs. 2, 82, 00,000
Earnings per share (EPS) = Earning after interest and Tax
Total Equity Shares
Particulars Rs
Earnings before Interest and Tax 100,00,00,000
Less: Interest on Debentures (12,50,00,000
x 8/100)
(1,00,00,000)
99,00,00,000
Less: Interest on Loan (22,05,00,000 x6/100)
(1,32,30,000)
97,67,70,000
Less: Corporate tax(97,67,70,000 x 40/100) (39,07,08,000)
58,60,62,000
Less: Dividends on Preference Shares
(6,05,00,000x10/100)
(60,50,000)
Earnings after Interest, Tax and Dividends 58,00,12,000
EPS = 58, 00, 12,000 = Rs. 2788.5
208000
Capital Gearing Ratio: Inside funds = 2, 08, 00,000 + 2, 82, 00,000 .
Outside Funds 6, 05, 00,000+12, 50, 00,000 + 22, 05, 00,000
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= 4, 90, 00,000 = High Geared
40, 60, 00,000
Option II: Equity share Capital (605000 Equity shares of 100 each)
Rs. 6, 05, 00,000
10% Preference share Capital (208000 PS of 100 each)
Rs.2, 08, 00,000
8% Debentures (face value Rs.1000) Rs. 22, 05, 00,000
6% Loan from IDBI- Financial Institution Rs. 12, 50, 00,000
Retained Earnings Rs. 2, 82, 00,000
Particulars Rs
Earnings before Interest and Tax 100,00,00,000
Less: Interest on Debentures (22,05,00,000
x 8/100)
(1,76,40,000)
98,23,60,000
Less: Interest on Loan (12,50,00,000x
6/100)
(75,00,000)
97,48,60,000
Less: Corporate tax(97,48,60,000 x 40/100) (38,99,44,000)
58,49,16,000
Less: Dividends on Preference Shares
(2,08,00,000x10/100)
(20,80,000)
Earnings after Interest, Tax and Dividends 58,28,36,000
EPS = 58, 28, 36,000 = Rs. 963.3
605000
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Capital Gearing Ratio= 6, 05, 00,000 + 2, 82, 00,000
2, 08, 00,000+22, 05, 00,000+12, 50, 00,000
= 8, 87, 00,000 = High Geared
= 36, 63, 00,000
Option III: Equity share Capital (208000 Equity shares of 100 each)
Rs. 2, 08, 00,000
10% Preference share Capital (2205000 PS of 100 each)
Rs. 22, 05, 00,000
8% Debentures (face value Rs.1000) Rs. 12, 50, 00,000
6% Loan from IDBI- Financial Institution Rs. 6, 05, 00,000
Retained Earnings Rs. 2, 82, 00,000
Particulars Rs
Earnings before Interest and Tax 100,00,00,000
Less: Interest on Debentures (12,50,00,000
x 8/100)
(1,00,00,000)
99,00,00,000
Less: Interest on Loan (6,05,00,000x
6/100)
(36,30,000)
98,63,70,000
Less: Corporate tax(98,63,70,000 x 40/100) (39,45,48,000)
59,18,22,000
Less: Dividends on Preference Shares (22,05, 00, 000x10/100)
(2,20,50,000)
Earnings after Interest, Tax and Dividends 56,97,72,000
EPS = 56, 97, 72,000 = Rs. 2739.2
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208000
Capital Gearing Ratio= 2, 08, 00,000 + 2, 82, 00,000
22, 05, 00,000+ 12, 50, 00,000 + 6, 05, 00,000
= 4, 90, 00,000 = High Geared40, 60, 00,000
Comment: Pooni and Sugars should go for option I which gives the highest amount of earning
per share i.e. Rs 2788.5. Thus by the above details we can find out the amount of dividend they
get is dependent on the percentage of profit the company gains in the particular financial year. In
terms of capital gearing ratio is concerned all the three options are having high geared ratio.
Hence capital gearing ratio does not make much difference in taking a decision to choose an
appropriate option of finance for Pooni and sugars company. In the option 1 we are getting moreearnings so it is the appropriate choice to make.
TASK 4
2.1 analyse the costs of different sources of finance
Answer:
Kda= I (1-t)
NPCost of debt=
Where I= Interest, NP = Net proceeds, Kda= Cost after tax and t= Tax
Interest = 1, 00, 00,000
Cost of flotation (2%) = 25, 00,000
Net proceeds = Principalcost of flotation
= 12, 50,00025, 00,000
= 12, 25,000Tax = 40% = 0.40
Kda= I (1-t)NP
=1, 00, 00,000(1- 0.40)
12, 25, 00,000
Cost of Preference shares:
Kp= Cost of preference shares, D = Annual preference dividend, NP- Net Proceeds
12, 50, 00,000 x 2= 25, 00,000100
12, 50, 00,000 x 2= 25, 00,000100
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Cost of flotation (2%) = 12, 10,000
NP= 6, 05, 00,00012, 10,000 = 5, 92, 90,000
D= 60, 50,000
Kda= I .
NP=60, 50,000
59290000
= 0.102 or 10.2 %
Cost of equity shares:
D= Expected annual dividend per share, NP = Net proceeds
D = 20% annual dividend and Rs 100 per share value=20 x 100 = 20
100
NP = Rs 100 per share valueRs 2 cost of issue= 98
= 20.4%
Cost of retained earnings:
D= Expected annual dividend per share, NP = Net proceedsD = 20% annual dividend and Rs 100 per share value
NP = Rs 100 per share valueRs 2 cost of issue= 98
= 0.204 X 0.60
=0.1224
Comment: As per the above analysis the cost of retained earnings is lower compare to cost ofdebt, preference shares, equity.
Cost of equity is very high.
6, 05, 00,000 x 2= 12, 10,000100
Kes= DNP
Kes= D (1 t)NPKes= 20 = 0.204
98
= 20 x 100 = 20100 K es= 20X (1- 0.40)
98
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TASK 5
2.2 explain the importance of financial planning
Answer:
Financial planning helps in determining short and long-term financial goals and create a
balanced plan to meet those goals.
Here are ten powerful reasons of financial planning,.
1. Income:It's possible to manage income more effectively through planning. Managing
income helps you understand how much money you'll need for tax payments, other
monthly expenditures and savings.
2. Cash Flow:Increase cash flows by carefully monitoring your spending patterns and
expenses. Tax planning, prudent spending and careful budgeting will help you keep moreof your hard earned cash.
3. Capital:An increase in cash flow, can lead to an increase in capital. Allowing you to
consider investments to improve your overall financial well-being.
4. Family Security:Providing for your family's financial security is an important part of
the financial planning process. Having the proper insurance coverage and policies in
place can provide peace of mind for you and your loved ones.
5. Investment:A proper financial plan considers your personal circumstances, objectives
and risk tolerance. It acts as a guide in helping choose the right types of investments to fit
your needs, personality, and goals.
6. Standard of Living:The savings created from good planning can prove beneficial in
difficult times. For example, you can make sure there is enough insurance coverage to
replace any lost income should a family bread winner become unable to work.
7. Financial Understanding:Better financial understanding can be achieved when
measurable financial goals are set, the effects of decisions understood, and results
reviewed. Giving you a whole new approach to your budget and improving control over
your financial lifestyle.
8. Assets:A nice 'cushion' in the form of assets is desirable. But many assets come with
liabilities attached. So, it becomes important to determine the real value of an asset. The
knowledge of settling or canceling the liabilities, comes with the understanding of your
finances. The overall process helps build assets that don't become a burden in the future.
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9. Savings:It used to be called saving for a rainy day. But sudden financial changes can
still throw you off track. It is good to have some investments with high liquidity. These
investments can be utilized in times of emergency or for educational purposes.
10.Ongoing Advice:Establishing a relationship with a financial advisor you can trust is
critical to achieving your goals. Your financial advisor will meet with you to assess your
current financial circumstances and develop a comprehensive plan customized for you.
Recommendation to Ponni Sugar & Chemicals Ltd:
These recommendations reflect the facts about the reality of new retirement system with areduced pension rising in the state which in return is a problem for a normal person. There can bemany problems for an individual and can also have related general insecurity with regard to
individual financial situations, which also may arise with the retirement.
TASK 6
2.3 assess the information needs of different decision makers
Answer:
In an any organization we find different decision makers, the highest decision making authority
for any company is basited on the board of the company. The managing director will be
executing the directions given by the board of directors. Director production, director finance,
director personal, director marketing would be on the top making major decisions in their
respective departments but taking the directions from managing director.
The chief management account looks after the financial aspects concerning the organization. The
management accountant directs management controller, budget controller, internal auditor, head
organization methods and credit control,
The above decision makers who are at different levels taking different decisions requires
different reports to take appropriate decisions. The decisions taken at board are strategic in
nature and requires the figures like sales growth and profitability figures for each quarter and
comparative statements relating to the present and the past.
The managing director who looks after day to day management of the company requires much
more detail reports concerning production, finance, marketing and human resources. Here the
reports depending on the size of the organization may be prepared for monthly or forthnatly to
find divisions from the planed budgets.
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The directors concerning various departments who are heading different departments would like
to get forthnatly reports on the actuals Vs budgeted figures to find divisions and take a
appropriate decisions.
The chief management accountant will be the overall in-charge likes to have different statements
reports concerning expenditures, incomes, specific reports relating to various responsibilities to
control overall finances of the organization.
TASK 7
2.4 explain the impact of finance on the financial statements
Answer:
Financial Statements represent a formal record of the financial activities of an entity. These arewritten reports that quantify the financial strength, performance and liquidity of a company.
Financial Statements reflect the financial effects of business transactions and events on the
entity.
Four Types of Financial Statements
The four main types of financial statements are:
1. Statement of Financial Position
Statement of Financial Position, also known as the Balance Sheet, presents the financial
position of an entity at a given date. It is comprised of the following three elements:
Assets: Something a business owns or controls.
Liabilities: Something a business owes to someone.
Equity: What the business owes to its owners. This represents the amount of
capital that remains in the business after its assets are used to pay off its
outstanding liabilities. Equity therefore represents the difference between the
assets and liabilities.
2. Income StatementIncome Statement, also known as the Profit and Loss Statement, reports the company's
financial performance in terms of net profit or loss over a specified period. Income
Statement is composed of the following two elements:
Income: What the business has earned over a period.
Expense: The cost incurred by the business over a period.
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Net profit or loss is arrived by deducting expenses from income.
3. Cash Flow Statement
Cash Flow Statement, presents the movement in cash and bank balances over a period.
The movement in cash flows is classified into the following segments:
Operating Activities: Represents the cash flow from primary activities of a
business.
Investing Activities: Represents cash flow from the purchase and sale of assets
other than inventories.
Financing Activities: Represents cash flow generated or spent on raising and
repaying share capital and debt together with the payments of interest and
dividends.
4. Statement of Changes in Equity
Statement of Changes in Equity, also known as the Statement of Retained Earnings,
details the movement in owners' equity over a period. The movement in owners' equity is
derived from the following components:
Net Profit or loss during the period as reported in the income statement
Share capital issued or repaid during the period
Dividend payments
Gains or losses recognized directly in equity.
Effects of a change in accounting policy or correction of accounting error.
Capital + Liabilities Rs Assets Rs
Equity share capital 208, 00,000 Land and site
development
102, 00,000
Preference share capital 605, 00,000 Buildings 543, 00,000
Debentures 1250, 00,000 Plant and Machinery 29, 59, 00,000
Loan from IDBI-
Financial Institution
2205, 00,000 Miscellaneous Fixed
Assets
176, 00,000
Retained earnings 282, 00,000 Fees and Consultants 55, 00,000
Preliminary and Pre-
operative Expenses
445, 00,000
Provision for 210, 00,000
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contingences
Margin money for
working capital
60, 00,000
45, 50, 00, 000 45, 50, 00, 000
Comment: - The cost of capital will increase which is risky for the company. Returns should
increase in proportion to the risk. The incremental cost of capital should have covered by
increasing profitability of the firm.
References:
Task1.1
1.
in.answers.yahoo.com/question/index?qid=20120705235242AAjUybN2. publishyourarticles.net/knowledge-hub/company-accounts/what-is-preference-share-
capital.html
3. en.wikipedia.org/wiki/Debenture
4. investopedia.com/terms/l/longterm.asp#ixzz2BFEoKaFy
5. ask.com/wiki/Retained_earnings
6. investopedia.com/terms/v/venturecapital.asp#ixzz2BFGV0ZIl
Task 2.2
7.
businesscasestudies.co.uk/business-theory/finance/financial-analysis-and-planning.html#ixzz2BFLnT4wd
8. businesscasestudies.co.uk/business-theory/finance/financial-analysis-and-
planning.html#ixzz2BFKmN9U5
Task 2.3
9. investorwords.com/3775/preference_shares.html#ixzz2BFU7bmpq
10.en.wikipedia.org/wiki/Debenture
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ASSIGMENT 2:
TASK 8
3.1 analyse budgets and make appropriate decisions
Working:
Collection from customers: June sales is collected in July and in August. Therefore June
sales amount includes of Apr and of May sales. Similarly July collection includes of May
and of June sales
June collection: Apr + May = (1,00,000x ) + (1, 20,000x ) = 50000 + 60000= 1, 10,000
July Collection: May + June= (1, 20,000x ) + (1, 40,000x ) = 60000 + 70000 = 1, 30,000
August Collection: June + July = (1,40,000x ) + (1, 60,000x ) =70000 + 80000 =150000
Sales commission: Sales Commission on Apr sales will be paid in June. Similarly Mays
commission is paid in July.
June: 1, 00,000 x 5/100 = 5000 July: 1, 20,000 x 5/100 = 6000 Aug: 1, 40,000 x 5/100 = 7000
-Payments to creditors: Creditors are paid in the following month of supply. May purchases are
paid in June.
June: 80000 July: 90000 August: 1, 00,000
-Plant purchased in the month of June Rs. 78,000 of which Rs. 48,000 paid immediately and the
balance Rs. 30,000 is paid in two equal installments Rs. 15,000
June: 48,000 July: 15,000 August: 15,000
-Wages paid on the due date while during next month.
(Considering the due date to be in the same month, i.e. June payment in June and in July)
June: (9500x ) + (9500x ) = 7125 + 2375 = 9500
July: (12,00x ) + (9500 x ) = 9000+ 2375 = 11375
August: (14,000x ) + (12,000x ) = 11500 + 3000 = 14500
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-Selling expenses and overheads are one month lag. Apr payment in May and May in June.
Cash Budget:
Particulars June July August
Opening Balance 10,000 (30,500) (32,375)
Receipts- Collection from
customers
1,10,000 1,30,000 1,50,000
Total receipts (A) 1,20,000 99,500 1,17,625
Payments:
-Sales Commission 5,000 6,000 7,000
-Payment to credit
(Purchase)
80,000 90,000 1,00,000
-Plant 48,000 15,000 15,000
-Wages 9,500 11,375 14,500
-Selling expenses 3,500 3,500 3,500
-Overheads 4,500 6,000 6,000
Total Payments (B) 1,50,500 1,31,875 1,46,500
Closing Balance (A-
B)
(30,500) (32,375) (28,875)
Comment: After subtracting the income from expenditure we get the closing balance of June as
RS30,500 which means the company has incurred with loss of Rs.30,500. After subtracting
receipts and payment the cash balance at the end of the month is again a loss.
TASK 9
3.2 explain the calculation of unit costs and make pricing decisions using relevant
information
Unit contribution for Rs. 1500 units @ price of Rs 10/unit
Direct Cost: Per unit
Direct material 5
Direct Wages 3
Prime Cost ( Direct material + wages) 8
Variable Cost:
Factory overheads 0.5
Selling overheads 0.5
Marginal Cost (Prime cost +Factory, 9
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Selling overheads)
Selling price 10
Contribution/unit (Selling price MarginalCost)
1
Comparative analysis to accept or not to accept selling 15,000 units to foreign buyer
Particulars Profit without accepting Profit for accepting
Direct material 250000 (50000 x 5) 3,25,000( 65000x 5)
Direct Wages 150000 (50000x 3) 1,95,000(65000x 3)
Prime cost 400000 5,20,000
Factory overheads 25000 32,500
Selling overheads 25000 32,500Marginal Cost (PC +Overheads)
4,50,000 5,85,000
Fixed Cost 37500 37500
Total Cost (MC + FC) 487500 622500
Sales 600000 750000
Profit (SalesCost) 112500 127500
Comment: They can their 15000 units of surplus goods to foreign and increase their profits. By
this the Tesco Company can spread the business in global market.
TASK 10
3.3 assess the viability of a project using investment appraisal techniques
Project- Mumbai (Worli)
Initial Investment- 2, 00,000
Estimated life- 5 yrs
Scrap- 10,000
Year Cash flow PV factor PV
I 50,000 0.909 45450
II 1,00,000 0.826 82600
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III 1,00,000 0.751 75100
IV 30,000 0.683 20490
V 20,000 0.621 12420
V (scrap) 10,000 0.621 6210
Present Value of all
cash inflows
242270
Less: Initial
Investment
200000
Profit 42270
Project- Mumbai (Virar)
Initial Investment- 300000
Estimated Life- 5 yrs
Scrap- Rs. 20000
Year Cash Flow PV factor PV
I 2,00,000 0.909 181800
II 1,00,000 0.826 82600
III 50,000 0.751 37550
IV 30,000 0.683 20490
V 20,000 0.621 12420
V (scrap) 20,000 0.621 12420
Present Value of allcash inflows
347280
Less: InitialInvestment
3,00,000
Profit 47280
Rate of Returns = Total profits x 100
Initial Investment
Project Mumbai (Worli): 42270 x 100 =21.135 %
2, 00,000
Project Mumbai (Virar): 47280 x 100 = 15.76%
300000
Comment:
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Project Worli and Project Virar they both are making high profits but project Worli is preferable
for Tesco Co. Investment on project Worli is 2,00,000 where as project Virar has 3,00,000
investment. For Project Worli present value of all cash inflows is 242270 and for project Virar
347280 and benefits are 42270 and 47280.Though project Virar has more profit than project
Worli but the initial investment is also greater.
Both the projects resulted into positive figures. But by comparing the rate to returns of both the
projects it is found that project Worli is better than Project Virar.
Rate of returns: Worli =21.135 %Virar = 15.76%
Therefore taking up project Worli, it will be profitable for Tesco Co.
TASK 11
4.1 discuss the main financial statements
A financial statementis a formal record of the financial activities of a business, person, or other
entity. In British law including a financial statement is often referred to as an account, although
the term financial statement is also used, particularly by accountants. Fora business enterprise, all
the relevant financial information, presented in a structured manner and in a form easy to
understand, are called the financial statements. They typically include four basic financial
statements, accompanied by management:
1. Statement of Financial Position: also referred to as a balance sheet, reports on acompany'sassets,liabilities,and ownership at a given point in time.
2. Statement of Comprehensive Income: also referred to as Profit and Loss statement
reports on a company's income, expenses, and profits over a period of time. A Profit &
Loss statement provides information on the operation of the enterprise. These include
sale and the various expenses incurred during the processing state.
3. Statement of Changes in Equity: explains the changes of the company's equity
throughout the reporting period
4. Statement of cash flows: reports on a company's cash flow activities, particularly its
operating, investing and financing activities.
Simply put, the income statement measures all your revenue sources vs. business expenses for a
given time period. To help explain things easily, let's consider an apparel manufacturer as an
example in outlining the major components of the income statement:
Sales This is the gross revenue generated from the sale of clothing less returns and
allowances (reduction in price for discounts taken by customers).
http://en.wikipedia.org/wiki/Statement_of_Financial_Positionhttp://en.wikipedia.org/wiki/Statement_of_Financial_Positionhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Legal_liabilityhttp://en.wikipedia.org/wiki/Statement_of_Comprehensive_Incomehttp://en.wikipedia.org/wiki/Statement_of_Comprehensive_Incomehttp://en.wikipedia.org/wiki/Statement_of_Changes_in_Equityhttp://en.wikipedia.org/wiki/Statement_of_Changes_in_Equityhttp://en.wikipedia.org/wiki/Statement_of_cash_flowshttp://en.wikipedia.org/wiki/Statement_of_cash_flowshttp://en.wikipedia.org/wiki/Statement_of_cash_flowshttp://en.wikipedia.org/wiki/Statement_of_Changes_in_Equityhttp://en.wikipedia.org/wiki/Statement_of_Comprehensive_Incomehttp://en.wikipedia.org/wiki/Legal_liabilityhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Statement_of_Financial_Position -
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Cost of goods sold.This is the direct cost associated with manufacturing the clothing.
These costs include materials used, direct labor, plant manager salaries, freight and other
costs associated with operating a plant (for example, utilities, equipment repairs, etc.).
Gross profit:The gross profit represents the amount of direct profit associated with the
actual manufacturing of the clothing. It's calculated as sales less the cost of goods sold.
Operating expenses:These are the selling, general and administrative expenses that are
necessary to run the business. Examples include office salaries, insurance, advertising,
sales commissions and rent.
Depreciation:Depreciation expense is usually included in operating expenses and/or
cost of goods sold, but it is worthy of special mention due to its unusual nature.
Depreciation results when a company purchases a fixed asset and expenses it over the
entire period of its planned use, not just in the year purchased.
Operating profit:This is the amount of profit earned during the normal course of
operations. It is computed by subtracting the operating expenses from the gross profit.
Other income and expenses:Other income and expenses are those items that don't occur
during the normal course of business operation. For instance, a clothing maker doesn'tnormally earn income from rental property or interest on investments, so these income
sources are accounted for separately. Interest expense on debt is also included in this
category. A net figure is computed by subtracting other expenses from other income.
Net profit before taxes:This figure represents the amount of income earned by the
business before paying taxes. The number is computed by adding other income (or
subtracting if other expenses exceed other income) to the operating profit.
Income taxes:This is the total amount of state and federal income taxes paid.
Net profit after taxes:This is the "bottom line" earnings of the business. It's computed
by subtracting taxes paid from net income before taxes. (1)
TASK 12
4.2 compare appropriate formats of financial statements for different types of business
Format for Retail Business:
Trading and Profit and Loss A/c
Particulars Rs Particulars Rs
To Opening Stock Xxx By sales XxxTo purchases Xxx By Other direct Income Xxx
To Other Direct Expenses Xxx By closing Stock Xxx
To Gross Profit Xxx
Xxx xxx
To salaries Xxx By Gross Profit
To Trade expenses Xxx By Commission received Xxx
To Rent and taxes and interest Xxx By discount received Xxx
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To Commission allowed Xxx By Interest on drawings Xxx
To Other indirect expenses Xxx By other indirect incomes Xxx
To Net profit Xxx xxx
Balance Sheet
Capital + liabilities Rs Assets Rs
Capital: Opening capital xxx Fixed Assets Xxx
Less: Drawings xxx
Add: interest on capital xxx
Less: interest on drawings xxx Investment Xxx
Add: Net profit xxx Xxxx
Long Term Loans Xxx Current assets/Advances and loans
Short Term loans Xxx A. Current assets
Sundry debtors Xxx
Current liabilities Cash in hand/bank XxxSundry creditors Xxx Closing stock Xxx
Outstanding items Xxx B/R Xxx
B/P Xxx B.Loans and advances
Commission in advance Xxx Prepaid items Xxx
Fictitious Assets
xxx
Xxx Xxx
Format for manufacturing business:
Manufacturing, Trading and P & L account
Particulars Rs Particulars Rs
To Raw material consumed By cost of goods manufactured xxx
Opening stock of RM xxx
Add: Purchases of RM xxx
Less: Closing stock of RM xxx Xxx
To Wages Xxx
PRIME COST Xxx
To factory rent Xxx
To factory salary Xxx
Xxx XxxTo cost of goods manufactured Xxx By sales Xxx
To Opening stock of Finished
goods
Xxx By Closing stock Xxx
To purchases of FG Xxx
To gross profit Xxx
Xxx Xxx
To Office expenses By Gross Profit Xxx
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To Other indirect expenses By other indirect incomes
To net profit Xxx
Xxx Xxx
Balance Sheet
Capital + liabilities Rs Assets Rs
Capital: Opening capital xxx Fixed Assets Xxx
Less: Drawings xxx
Add: interest on capital xxx
Less: interest on drawings xxx Investment Xxx
Add: Net profit xxx Xxxx
Long Term Loans Xxx Current assets/Advances and loans
Short Term loans Xxx A. Current assetsSundry debtors Xxx
Current liabilities Cash in hand/bank Xxx
Sundry creditors Xxx Closing stock Xxx
Outstanding items Xxx B/R Xxx
B/P Xxx B.Loans and advances
Commission in advance Xxx Prepaid items Xxx
Fictitious Assets
xxx
Xxx Xxx
In a retail business final accounts consist of trading, P& L account and Balance sheet.
Trading account includes Opening stock, purchases and all the direct expenses of thecompany like carriage inwards, factory rent, wages etc on the debit side and all the direct
incomes like sales on the credit side.
After Trading, P & L (profit and loss) account a financial statement that summarizesthe revenues, costs and expenses incurred during a specific period of time - usually a
fiscal quarter or year. These records provide information that shows the ability of a
company to generate profit by increasing revenue and reducing costs. The P&L statement
is also known as a "statement of profit and loss", an "income statement" or an "incomeand expense statement".
After ascertaining the net profit, it is carried to the capital side in the balance sheet.Further balance sheet is tallied.
For manufacturing company, some like to ascertain the cost of goods manufactured by them
during the year distinctly before they prepare the trading and ascertain the gross profit this kind
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of account is called the manufacturing account and is prepared in addition to the trading account.Manufacturing account is an accounting statement that is an integral part of the final accounts
of a manufacturing organization. For any particular period, it indicates, among other things,
prime cost of manufacturing, manufacturing overhead, the total manufacturing cost, and themanufacturing costs of finished goods. This figure is obtained by adjusting the purchase of
materials for the opening and closing stock of materials. In the manufacturing concern there willalways be some unfinished goods or work-in-progress. The cost of work-in-progress at the endof the year is credited to this account, shown in the balance sheet and debited to the
manufacturing account of next year as on opening balance. (2)
Treatment of stock Opening Closing
Raw material Include as cost in
calculation of material
consumed
Deduct from opening stock +
purchases and include in balance
sheet.
Work in progress Include as cost in
manufacturing account
Deduct from manufacturing account
and include in balance sheet
Finished goods Include as cost in tradingaccount
Deduct from trading account andinclude in balance sheet
Manufacturing A/c Trading A/c
1. Manufacturing a/c is part of trading a/c 1. Trading a/c is one of the most important
accounts of final account.
2.Manufacturing a/c is prepared by
productive industries only
2.Trading a/c is prepared by both
productive and non productive industries
3. Inventories a/c are taken into
consideration in manufacturing a/c
3. Direct the cost of product is taken in
trading a/c
FORMAT OF BALANCE SHEET AND PROFIT & LOSS ACCOUNTSub-section (1) of section 29 of the Banking Regulation Act, 1949 requires every banking
company to prepare a balance sheet and a profit and loss account in the forms set out in the ThirdSchedule to the Act or as near thereto as the circumstances admit.
It has two part A- Balance sheet and Part B Profit and loss account. Format of both is as under
Form of Bank Balance Sheet
Balance Sheet of Bank
Schedule As on 31.3__(current year)
As on 31.3__(previous year)
Capital & Liabilities
Capital 1
Reserves & Surplus 2
Deposits 3
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Borrowings 4
Other liabilities and provisions 5
Total
Assets
Cash and Balances with ReserveBank of India
6
Balances with banks and money atcall and short notice
7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent LiabilitiesBills for Collection
12
TASK 13
4.3 interpret financial statements using appropriate ratios and comparisons, both internal
and external.
To compare the financial statements of Tesco Co and Vishal Mega Mart we need to extract
profitability, liquidity and solvency ratios. Based on that ratios financial statement is determined.
Profitability ratios: Tesco Co
1. Gross Profit Ratio:
= 50%
2. Net Profit Ratio:
= 41.5%
Net Profit after tax x 100
Net Sales
Gross Profit 100
Net Sales
= 5, 00,000 x 100
10,00,000
= 4, 15,000 x 100
10, 00,000
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3. Earnings per share:
= Rs 415
4. Time Interest Earned Ratio:
= 4, 15,000 (profit after interest) + 10,000 (interest)
= 4, 25,000 (profit before interest)
= 42.5
5. Return on share holders equity:
Avgamt = 1, 00,000 (equity capital) + 1, 00,000 (reserves)
= 2, 00,000
= 207.5
Liquidity Ratios:
1. Working Capital turnover:
Working Capital= current assetscurrent liabilities
(Tesco)= 4, 00,0001, 50,000 = 2, 50,000
= 4:1
2. Current Ratio:
Profit after tax
Total Equity shares
= 4, 15,000
1,000
Profit before Interest and Tax
Interest expenses
= 4, 25,000
10,000
Net profit after tax x 100
Average amt of share holders equity
= 4, 15,000 x 100
2, 00,000
Net sales
Working capital
= 10, 00,000
2, 50,000
Current Assets
Current Liabilities
= 4, 00,000
1, 50,000
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= 2.6:1
3. Quick Ratio:
Quick Assets = All current assets except stock and prepaid
=1, 50,000
= 1:1
4. Average receivable turnover: (debtors turnover ratio)
= 1000
= 10:1
5. The days sale in account receivable ratio: (Debtors conversion period)
= 36.5 days
6. Inventory Turnover ratio:
Cost of sales = Sales- Gross profit
=10, 00,0005, 00,000
= 5, 00,000
Quick Assets
Current Liabilities
=1, 50,000
1, 50,000
= Net sales x 100
Debtors
= 10, 00,000 x 100
1, 00,000
=No of days of yr
Debtors turnover ratio
= 365
10
Cost of sales
Avg Stock
Average Stock= Opening stock + Closing stock
2
= 1, 50,000 + 2, 50,000
2
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= 2, 00,000
= 2.5
7. Inventory Conversion Period:
= 146
Solvency Ratios:1. Debt of equity ratio:
Total liabilities = current liabilities + long term loans
= 1, 50,000 + 2, 00,000
= 3, 50,000
= 1.75:1
The following are Vishal Mega Mart Ratios:Profitability ratios:
1. Gross Profit Ratio:
= 65.45%
2. Net Profit Ratio:
= 55.9%
3. Earnings per share:
= 5, 00,000
2, 00,000
No of days in yr
Inventory conversion
= 365
2.5
Total Liabilities
Equity share funds
=3, 50,000
2, 00,000
Gross Profit 100
Net Sales
= 7, 20,000 x 100
11, 00,000
Net Profit after tax x 100
Net Sales
= 6, 15,000 x 100
11, 00,000
Profit after tax
Total Equity shares
= 6, 15,000
2000
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= Rs. 307.5
4. Time Interest Earned Ratio:
= 6, 15,000 (profit after interest) + 35,000 (interest)
= 6, 50,000 (profit before interest)
= 18.57
5. Return on share holders equity:
Avgamt (Vishal mega mart) = 2, 00,000(equity capital) + 1, 00,000(reserves)
= 3, 00,000
= 205
Liquidity ratios:
1. Working Capital turnover:
Working Capital= current assetscurrent liabilities
(Vishal Mega Mart) = 5, 00,0002, 50,000
= 2, 50,000
= 4.4: 1
2. Current Ratio:
= 2:1
3. Quick Ratio:
Profit before Interest and Tax
Interest expenses
= 6,
50,000
Net profit after tax x 100
Average amt of share holders equity
= 6, 15,000 x 100
3, 00,000
Net sales
Working capital
= 11, 00,000
2, 50,000
Current Assets
Current Liabilities
=5, 00,000
2, 50,000
Quick Assets
Current Liabilities
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Quick Assets = All current assets except stock and prepaid
=2, 50,000
= 1:1
4. Average receivable turnover: (debtors turnover ratio)
= 1100
= 11:1
5. The days sale in account receivable ratio: (Debtors conversion period)
= 33.1
6. Inventory Turnover ratio:
Cost of sales = Sales- Gross profit
=11, 00,0007, 20,000
= 3, 80,000
= 3, 10,000
= 1.2
= 2, 50,000
2, 50,000
= Net sales x 100
Debtors
= 11, 00,000 x 100
1, 00,000
=No of days of yr
Debtors turnover ratio
= 365
11
=Cost of sales
Avg Stock
Average Stock= Opening stock + Closing stock
2
=2, 50,000+3, 70,000
2
=3, 80,000
3, 10,000
No of days in yr
Inventory conversion
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7. Inventory Conversion Period:
= 304.1
Solvency Ratios:
1. Debt of equity ratio:
Total liabilities = current liabilities + long term loans
= 2, 50, 00 +3, 00,000
= 5, 50,000
= 1.83:1
Comment:
After finding out all the ratios the following analysis done:
1. The funds for day to day activity which is termed as working capital of both Tesco and
Vishal Mega Mart is equal, hence we can say that both has same working capital.
2. The relationship between current assets and current liabilities i.e. current ratio of Tesco
is more than Vishal Mega Mart which has an ideal ratio 2:1 but Tesco has 2.1:1.
3. The relationship between quick asset and current liabilities shows the quick ratio,
therefore 1:1 is consider as the ideal ratio and Tesco and Vishal Mega Mart both has 1:1ratio which means they dont have sufficient assets to meet the liabilities.
4. Account receivable ratio indicates the numbers of times the account receivable can be
converted into cash, account receivable of Tesco is 10:1 and Vishal Mega Mart has 11:1,
hence we can say that Vishal Mega Mart can convert account receivable into cash more
than Tesco.
= 365
2.5
Total Liabilities
Equity share funds
=5,
50,000
3, 00,000
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5. The number of days required to convert accounts receivable into cash is indicated by
days sales in this case Tesco took around 36.5 days and Vishal Mega Mart took 33.1
days which means here also Vishal Mega Mart is more capable to convert their account
receivables into cash.
6. Inventory converted into sales is indicated through inventory turnover ratio from the casewe can say that Tesco has better inventory turnover ratio than Vishal Mega Mart as the
Tesco took 2.5 times and Vishal Mega Mart took 1.2 times.
7. Days sales in inventory ratio indicate the number of days took to convert inventory into
cash, hence in the above cash Tesco took 146 days which is better than Vishal Mega Mart
which took 304 days.
From the above analysis we can say that both Vishal Mega Mart and Tesco have almost similar
liquid position, we come to this conclusion that:
a) Tesco has more inventory conversation ratio
b) Vishal Mega Mart has more current ratio and account receivable ratio.
c) Comparatively Vishal Mega Mart has more gross profit and net profit ratio than Tesco.
d) Earnings per share of Tesco are greater than Vishal Mega Mart.
e) Tesco has better solvency than Vishal Mega Mart.
Reference:
Task 4.1
1. en.wikipedia.org/wiki/Financial_statement
Task 4.2
2. investopedia.com/terms/p/plstatement.asp#axzz2BWImfLVV
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FEEDBACK TO LEARNER
Outcome/Grading Criteria Comments on evidence produced Feedback
LO1 Understand the sources of
finance available to a business
1.1 identify the sources of finance
available to a business
1.2 assess the implications of the
different sources
1.3 evaluate appropriate sources
of finance for a business project
LO2 Understand the
implications of finance as a
resource within a business
2.1 analyse the costs of different
sources of finance
2.2 explain the importance of
financial planning
2.3 assess the information needs
of different decision makers
2.4 explain the impact of finance
on the financial statements
LO3 Be able to make financial
decisions based on financialinformation
3.1 analyse budgets and make
appropriate decisions
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3.2 explain the calculation of unit
costs and make pricing decisions
using relevant information
3.3 assess the viability of aproject using investment
appraisal techniques
LO4 Be able to evaluate the
financial performance of a
business
4.1 discuss the main financial
statements
4.2 compare appropriate formats
of financial statements for
different types of business
4.3 interpret financial statements
using appropriate ratios and
comparisons, both internal and
external