Assignment Sample on Accounting & Finance
Introduction
Case study 1
Referring to the present case study, based on the trial balances provided by the accountant of EasyRide for the year 2022, income statement, balance sheet as well as statement of retained earnings have been developed which has reflected on the financial position of the company along with the financial health of the company.
Answer 1: Income statement
| “Income statement for year ended 31ST DEC 2022 | |||
| Particulars | £ | £ | |
| Revenue | 32,800 | ||
| 32,800 | |||
| Less: Expenses | |||
| Salaries expense | 17,000 | ||
| Advertising expense | 5,000 | ||
| Fuel expense | 2,000 | ||
| Depreciation expense | 5,000 | ||
| Interest expense | 1,200 | ||
| 30,200 | |||
| Net Profit | 2,600” | ||
Table 1: Statement of income for the year ended 2022
(Source: Self-developed)
Income statement refers to the financial statement of organisations that sheds light on the expenses and incomes of the same during a specific year. As per the words of Obeki (2018), the formation of income statement reflects on the knowledge regarding the company’s capability in making profit or losses for a particular financial period. In addition to this, it helps in understanding the financial health of an organisation thereby acknowledging the strength of making gains compared to the expenses incurred. The view sheds light on an understanding that the development of income statement is significantly essential for companies as it helps in understanding the absolute profit levels during a financial year after the deduction of all the operating costs (Robinson, 2020). Concerning this view, the income statement for Easyride has been established for the year ended 2022 which has reflected on the profit of the company for the same year.
In this context, it has been found that the revenue generated by the company has been £32,800. On the other hand, compared to the revenue, the expenses of the company in 2022 have amounted to a total of £30,200. The net profit obtained by the company at the end of the year has been found to be £2600. This explains that the company’s financial strength has been positive and it has been capable of generating profits for the company. However, it can be mentioned that the revenue levels have been high for the company which positively assisted in covering up the costs and earning a profit for the organisation.
Answer 2: Retained earnings
| “Statement of retained earnings for year ended 31st December 2022 | |||
| Particulars | Amount | Amount | |
| Current-period net income | 2600 | ||
| Dividends | 1000 | ||
| Retained earnings | 1600” | ||
Table 2: Statement of retained earnings for the year ended 2022
(Source: Self-developed)
Retained earnings are considered to be the profit amount that an organisation has been capable of generating after meeting all sorts of expenses. In other words, retained earnings refer to the profit that is generated by companies after the payment of direct and indirect costs, taxes and dividends (Zdanovskis and Pilvere, 2019). In addition to this, these earnings of the company reflect on the part of equity that the company can further use for future investments in assets or other projects. The purpose of formulating a statement of the retained earnings is that it showcases the ability of the company in reinvesting for the future growth of the same (Yemi and Seriki, 2018).
With respect to the above table, the retained earnings statement for EasyRide has been developed that has helped in understanding the part of the equity retained by the company after the payment of the dividends to the shareholders. In this context, it has been found that the total amount of retained earnings for the company amounted to £1600. The dividend paid by the company to the shareholders has been found to be £1000 which has been further deducted from the net profit earned by the company which has been £2600. Thus, the retained earnings of the company for the year ended 31st December 2022 have been £1600. However, it reflects that the organisational manager owns a positive attitude towards reinvestment that supports the growth of the company in the future years (Ball et al., 2020).
Answer 3: Balance sheet
| “Balance Sheet for the year ended 31st December 2022 | ||||||
| Liabilities | Amount | Amount | Assets | Amount | Amount | |
| Capital stock | 30000 | Equipment | 45000 | |||
| Add: Retained earnings | 1600 | Less: Accumulated depreciation | 5000 | 40000 | ||
| 31600 | Accounts Receivable | 4500 | ||||
| Accounts payable | 4000 | Cash | 15500 | |||
| Unearned revenue | 1200 | |||||
| Salaries payable | 2000 | |||||
| Interest payable | 1200 | |||||
| Notes payable | 20000 | |||||
| 28400 | ||||||
| 60000 | 60000” | |||||
Table 3: Financial position statement for 2022
(Source: Self-developed)
Balance sheet or financial position statement is the financial statement that reflects on the position of assets and liabilities of an organisation concerning a particular year. It also sheds light on the shareholder equity of the company that reflects on the net worth of the company including the owner’s contribution for the development of the business (Ferrouhi, 2018). As stated by Kohlscheen et al., (2018), it is essential for organisations to develop financial position statements as it helps in understanding the performance of the company in a financial year as well as the financial position in the market. Additionally, balance sheets are primary concerns of the external investors in the market as it reflects the financial instrument management capacity of the organisation. Also, it significantly helps them in understanding the potential of the company to manage the investments of the investors in an effective manner and generate return for the investors.
Based on the opinion, it can be stated that the formulation of the balance sheet has potentially helped in understanding the financial status of EasyRide in the year 2022. In this context, it has been found that the cash balance of the company has been stable reflecting stable liquidity of the firm. On the other hand, the company has been found to have due payments such as salaries to employees, notes payable, interest payable, and accounts payable. Furthermore, the company also reflects to have unearned revenue in the financial year 2022 which the company is yet to realise. The capital stock of the company has been found to be £30,000. However, the balance sheet total balance reflected to be £60,000.
Case study 2
Concerning the second case study, financial performance analysis of Ryanair Plc has been conducted for the last two years such as 2022 and 2021. In addition to this, a comparative analysis of the financial performance of the company has also been integrated in this section with the consideration of the peer company Wizz Air. However, a common-size balance for Ryanair has been developed reflecting balance sheets for 2021 and 2022.
Answer 1: Financial performance of Ryanair
The financial performance of Ryanair has been analysed with respect to the usage of ratios for the years of 2022 and 2021. Ratio analysis has potentially helped in understanding the performance of the company by evaluating the line items of the balance sheet and income statements (Zorn et al., 2018). In addition to this, it has shed light on the profitability, efficiency, and leverage and liquidity position of the company over the last two years thereby assisting in understanding the financial trend of the company. Ratio analysis has effectively shed light on the financial health of the company over the past two years thereby showcasing the potential of the company in managing its expenses, gains, assets and liabilities (Correa-Mejía and Lopera-Castaño, 2020)
Profitability ratios such as operating profit margin, net profit margin and return on equity have been evaluated to understand the profitability position of Ryanair over the years of 2022 and 2021. In this context, the operating profit margin ratio of the company in 2021 has been found to be 51.31% which declined to 7.07% in 2022. As per the industry, the company can be stated to have a stable profit margin in both the years; however, compared to 2021, the ratio margin declined reflecting a decline in the profitability position of the company. In this regard,it has been found that the expenses of fuel, oil, airport, handling charges and staff cost of the company increased in 2022 thereby profit levels of the same (Investor Ryanair, 2022).
Upon further analysis of the profitability position, the net profit margin has been analysed which reflects on the company’s capacity of generating profit after deduction of all the costs (Mulyadi and Sinaga, 2020). In this respect, it has been found that the company has generated loss both in 2021 and 2022. Furthermore, it can be stated that compared to the loss of € (1015.1) million in 2021, the loss amount of the company reduced in 2022 to € (240.8) million. The net profit margin in both the years therefore reflected to be negative that depicts the weak profitability position of the company in the market. On the other hand, due to negative profit levels, the returns generated by the company with respect to the equity levels have also been found to be negative (Amalya, 2018). Thus, the ratio values reflect that the profitability position of the company has been majorly impacted reflecting higher costs compared to the revenue generate
Liquidity ratio has been evaluated for the company with the help of current ratio which has reflected on the company’s ability to pay off the short term obligations with the usage of the current assets (Rashid, 2018). With respect to the industry standard it has been found that in both the years of 2021 and 2022 the company has been liquid enough to pay off the current liabilities reflecting stable current ratios of 0.98 and 1.01 respectively. This indicates that the liquidity position of the company has been strong in both the years there by reflecting stable financial status.
Referring to the efficiency ratios “receivable turnover ratio and asset turnover ratio” have been evaluated for Ryanair Plc. Concerning the “asset turnover ratio”, it has been found that the company has been inefficient in managing its assets for generating revenue reflecting lower values such as 0.32 and 0.13 in 2022 and 2021 respectively (Patin et al., 2020). In this context, it can be stated that compared to 2021, the ratio value has improved in 2022, however, the company has been still inefficient in developing sound management of the assets. Based on the results of “receivable turnover ratio” value, it can be stated that the performance of the company further weakened in 2022 reflecting higher ratio value depicting increased cash collection time (Eryatna et al., 2021).
Furthermore, leverage and solvency ratios of the company have been analysed including “debt to equity ratio and interest coverage ratio” respectively. Referring to debt-equity ratio, the capital structure of the company has been found to be balanced in both the years reflecting balanced amounts of debts and equities. On the other hand, the company is solvent reflecting a sound interest coverage ratio that reflects the ability of the company to pay off the outstanding interests (Sharma et al., 2022). Therefore, it can be stated that other than profitability and efficiency, the liquidity, solvency and leverage ratios of the company have been sound, reflecting partially stable financial health of Ryanair over the last two years.
Answer 2: Peer competitor financial performance analysis
In this section, the financial performance of Wizz Air has been compared with Ryanair Plc concerning the financial year 2022. In this respect, comparing the profitability ratios, it has been evident that the operating profit of Wizz Air has been negative reflecting negative net profits as well reflecting ratio values of (27.97)% and (38.63)% respectively. This indicated that the performance of Ryanair has been comparatively better than Wizz air as the company reflected positive operating profit and lower net loss levels in 2022. Moreover, comparing the ROE of both the companies, it reflected that Ryanair had lower negative returns of (0.04) % compared to (2.43) % of Wizz air. On the contrary, the liquidity performance of Wizz Air has been found to be better than Ryanair depicting a current ratio value of 1.14.
The asset turnover ratio has been comparatively similar for both the companies in 2022 reflecting inefficient management capabilities. Moreover, Ryanair has been found to be a solvent company whereas Wizz Air reflected a negative interest ratio showcasing insolvency. Also, the debt levels of the company have been high, however, only the receivables management system of the company has been better than Ryanair reflecting a better cash collection system of the organisation in the market (Wizzair, 2022). Hence, it can be said that the financial performance of Ryanair has been better than its peer competitor in the market in the year 2022. [Refer to Appendix]
Answer 3: Common-size balance sheet for Ryanair
“Common-size balance sheet” refers to the statement that is prepared with the intention of interpreting the financial statements of an organisation and comparing the financial performance over the years (Haralayya, 2021). In this regard, a common-size balance sheet statement has been developed for Ryanair with the consideration of the years of 2021 and 2022.It has positively helped in understanding the growth of the company in 2022 compared to 2021.
| “Common-size statement for Ryanair (Balance sheet for 2022 and 2021) | |||||
| Particulars | 2022 | % | 2021 | % | |
| Non-current assets | 9674.7 | 63.86% | 8869.7 | 71.95% | |
| Property, plant and equipment | 9095.1 | 60.03% | 8361.1 | 67.82% | |
| Intangible assets | 146.6 | 2.64% | 146.4 | 4.15% | |
| Current assets | 5475.1 | 36.14% | 3458.3 | 98.05% | |
| Inventories | 4.3 | 0.10% | 3.6 | 0.03% | |
| Trade receivables | 43.5 | 0.78% | 18.6 | 0.53% | |
| Cash and cash equivalents | 2669 | 17.62% | 2650.7 | 21.50% | |
| Total assets | 15149.8 | 100.00% | 12328 | 100.00% | |
| Current liabilities | 5398.7 | 97.36% | 3526.9 | 75.90% | |
| Trade payables | 1029 | 18.56% | 336 | 7.23% | |
| Current maturities of debt | 1224.5 | 22.08% | 1725.9 | 37.14% | |
| Current lease liability | 56.9 | 1.03% | 52.5 | 1.13% | |
| Non-current liabilities | 4205.8 | 75.84% | 4154.5 | 89.41% | |
| Trade payables | 49.2 | 0.89% | 179.9 | 3.87% | |
| Non-Current maturities of debt | 3714.6 | 66.99% | 3517.8 | 75.71% | |
| Non-Current lease liability | 81.4 | 1.47% | 130.6 | 2.81% | |
| Shareholder’s equity | 5545.3 | 100.00% | 4646.6 | 100.00%” | |
Table 4: Common-size statement of balance sheet
(Source: Self-developed)
As per the common-size balance sheet statement, it has been found that compared to 2021, the financial performance of Ryanair potentially declined in 2022 reflecting decline in the assets value and increase in the liabilities value. The asset percentages of the company in both the years have been calculated by considering total assets as the base item with a percentage of 100. Furthermore, the liabilities of the company have been evaluated considering shareholder equity as the base with 100%. As depicted above, in 2021, the non-current asset and current assets possession of the company reflected to be 71. 95% and 98.05% respectively. This reflected that the company has been efficiently managing its assets as well as has been highly liquid to pay off the short term liabilities. In contrast, in 2022, the company reflected a percentage of 63.86% and 36.14% for non-current and current assets respectively. This denotes that there has been a drastic decline in the company’s asset management system reflecting weaker financial performance in 2022.
Upon further evaluation, it has been observed that compared to 2021, the percentage of current liabilities significantly increased, and depicting 97.36% in 2022 from 75.90% in 2021. This indicates that the liabilities growth has been comparatively higher than the assets reflecting potential cash flow challenges for the company in 2022. Furthermore, it has been found that compared to 2021, the non-current liabilities value of the company declined reflecting a reduction in the financial risk (Shrotriya, 2019). In other words, it can be stated that the management of the long-term debts of the company has been effective and has significantly resulted in lowering the risks. However, it can be stated that on an overall basis, the financial health of the company reduced in 2022, however, the company benefited from lower risks with respect to capital structure.
Case study 3
Answer 1: Justification of statement
Stockholder equity represents the balance sheet of a company in regards to capital portion. Being an equity investor it represents the value of a company that can be distributed among the shareholder in case of any challenge. One of the significant components of stockholder equity is the amount of money that the business raises through the sales of shares of stock. It is possible for a company however very uncommonly to have negative stockholder equity values (Vasista, 2022). The stockholder equity represented a difference between the liability and asset investors and analysts scrutinised the balance sheet of the company for evaluating the financial health. On the equity of stock holders the impact of dividend is dictated by the type of dividend that has been issued (Triani and Tarmidi, 2019). The value of the dividend when a business issues the dividend to the shareholder is the used from the retained earnings. The dividends are not always part of stockholder equity but the pay-out of the cash dividend reduces the amount of stockholder equity on the balance sheet of the company. Dividends for the shareholder are considered as a significant asset as they add up value to the portfolio of the investor increasing the net worth.
Answer 2: Agreement with the statement
The investor loans funds while investing in corporate bonds to corporations issuing the bond. The corporation in exchange for the loan promises the holder of the bond for a fixed amount of money in a specific period of time. Periodic interest payment in addition to that is also paid until the maturity date. Including the risk of the investment the interest rate of the bond earns very depending on other significant factors (Nozawa and Qiu, 2021). The risk level of a bond is also known as default risk is one of the most important components and factors which determine the interest rate of the bond. Irrespective of the size all corporate Bonds have a certain level of default risk. That Treasury bond on the other hand is used as the benchmark to buy a market as they do not have default risk. Compared to the Treasury bond, therefore, the corporate Bondare on higher interest rate. During the time of recession or economic uncertainty the spread between the junk or corporate bond yield and the yield of treasury typically increases. This type of situation contributes to increasing the rate of business failure leading to the bond buyer demanding higher interest rate as compensation for the risk that they have taken while investing in the bond of the company (Brunnermeier and Krishnamurthy, 2020). In addition to that corporate Bond scandals are also evident which have contributed to increase the spread between the treasury and low grade Bonds. The bond investors in addition to the default risk however need to consider the risk associated with the interest rate that is resulting from the possibility that the rate of interest can significantly change and therefore the prices of the bond can also get affected
Answer 3: Account balance
| “Compound interest | ||
| Particulars | Amount | |
| Principle amount | 10000 | |
| Annual interest rate | 4.5 | |
| Number of times interest (Assumed) | 1 | |
| Number of years | 15 | |
| Account balance | 19353” | |
Table 5: Account balance
(Source: Self-developed)
Concerning the compound interest calculation, the formula of “A= P(1+r/n)^(n*t)” has been integrated where A represents the future balance, P is the principal amount, r is the rate of interest, n is the number of interest times and t is the time or the number of years (Luderer, 2021). However, with the calculation, it has been found that after 15 years Mrs. William can be liable to receive an amount of €19,353 when the interest is compounded annually.
Answer 4: Difference in theories
The pure expectation theory asserts the fact that the forward rate exclusively represents the expected future rate. The term structure reflects the expectation of the market in future shorter rate (Angeletoset al., 2021). Increasing slope for the term structure which highlights increasing interest rate in the short term is a significant example. One of the simplest theories is the applied for interest rate that assumes that the term structure of the interest contract significantly depends on the shorter term segment for determining the interest rate and pricing of long majority. The yield at higher maturity according to theory responds to the future realised rate. The pure expectations of theory also support the fact that the expectations of future rate coincide with the future rate realised in a particular time. For the future demand and supply according to theory the market is a significant and perfect predictor.
The liquidity preference Theory on the other hand suggests that the investor should demand a higher rate of interest on security having long majority terms that carry greater risk as all other factors being equal the investors can prefer highly liquid holding or cash (Culham, 2020). According to theory the investors demand progressively medium or long term securities as opposed to the short term security. Cash is one of the most commonly accepted and most liquid assets according to theory. The interest rates are lower on short term security as the investors are not sacrificing the liquidity for Greater period of time compared to long and medium term security
Case study 4
Answer 1: NPV and IRR
NPV or Net Present Value refers to the investment appraisal technique that investors and organisations consider mostly for evaluating the profitability of the investments or projects (Marchioni and Magni, 2018). It helps organisations and investors in understanding the present values of the cash flows. Furthermore, Interest rate of return (IRR) is also considered to be a significant investment appraisal technique that is used that sheds light on the returns that can be generated by investors or organisations with the reflection of the percentages (Wang, 2021). The major difference between IRR and NPV is that IRR reflects the percentage of return whereas NPV showcases the amount of return that can be generated at the end of the investment period.
| “NPV Analysis | ||||
| Period | Cash flow | PV (8%) | PV | |
| 0 | -20,000 | 1 | -20000 | |
| 1 | 6500 | 0.925 | 6012.5 | |
| 2 | 6500 | 0.857 | 5570.5 | |
| 3 | 6500 | 0.793 | 5154.5 | |
| 4 | 7500 | 0.735 | 5512.5 | |
| 5 | 3000 | 0.68 | 2040 | |
| NPV | 7820.5 | |||
| IRR | 8%” | |||
Table 6: Analysis of NPV and IRR
(Source: Self-developed)
The NPV value of the investment has been 7820.5 and the IRR value has been 8%. This implies that as the NPV value has been greater than zero, it can be stated that the project or the investment can be beneficial for the company reflecting the potential of the same in generating positive returns for the company for five years. However, the return generated can be 8% for the company after the five years of investment.
Answer 2: Project appraisal
Concerning the NPV evaluation for Shabbir Co, it has been assumed that the discounting factor for both the projects has been 10%. The assumption has been made based on the information that both the projects are divisible in nature. Following the results as reflected above, it has been found that the NPV value of Project 1 has been lower than the Project 2. With respect to the first project, the NPV value has been 65,590 whereas for the second project, the value has been 112,496. This indicates that the return generation potential of the second project has been comparatively higher than the first one and in future years, the company can benefit with financial growth with the selection of the second project. In this regard, the company can be recommended to select the second project as the present value of the cash flows has been higher compared to project 1 reflecting higher potential of Project 2 in delivering returns to the company in the future years.
Reference List
Angeletos, G.M., Huo, Z. and Sastry, K.A., 2021. Imperfect macroeconomic expectations: Evidence and theory. NBER Macroeconomics Annual, 35(1), pp.1-86.
Ball, R., Gerakos, J., Linnainmaa, J.T. and Nikolaev, V., 2020. Earnings, retained earnings, and book-to-market in the cross section of expected returns. Journal of Financial Economics, 135(1), pp.231-254.
Brunnermeier, M. and Krishnamurthy, A., 2020. Corporate debt overhang and credit policy. Brookings Papers on Economic Activity, 2020(2), pp.447-502.
Correa-Mejía, D.A. and Lopera-Castaño, M., 2020. Financial ratios as a powerful instrument to predict insolvency; a study using boosting algorithms in Colombian firms. Estudios gerenciales, 36(155), pp.229-238.
Culham, J., 2020. Revisiting the concept of liquidity in liquidity preference. Cambridge Journal of Economics, 44(3), pp.491-505.
Eryatna, E.N., Eltivia, N. and Handayawati, K.U., 2021, July. The Effect of Cash Turnover, Receivable Turnover, and Inventory Turnover Towards Profitability of Consumer Goods Companies in Indonesia. In 2nd Annual Management, Business and Economic Conference (AMBEC 2020) (pp. 191-197). Atlantis Press.
Ferrouhi, E.M., 2018. Determinants of banks’ profitability and performance: an overview.
Haralayya, B., 2021. Financial Statement Analysis Using Common Size on Mahindra Sindol Motors. Iconic Research And Engineering Journals, 5(1), pp.150-159.
Investor Ryanair, 2022, Annual Report 2022, Available at https://investor.ryanair.com/wp-content/uploads/2022/07/Ryanair-2022-Annual-Report.pdf [Accessed on 01/07/23]
Kohlscheen, E., Murcia Pabón, A. and Contreras, J., 2018. Determinants of bank profitability in emerging markets.
Luderer, B., 2021. How to Pay Interest?. In Classical Financial Mathematics: Basic Ideas, Central Formulas and Terms at a Glance (pp. 7-14). Wiesbaden: Springer Fachmedien Wiesbaden.
Marchioni, A. and Magni, C.A., 2018. Investment decisions and sensitivity analysis: NPV-consistency of rates of return. European Journal of Operational Research, 268(1), pp.361-372.
Mulyadi, D. and Sinaga, O., 2020. Analysis of Current Ratio, Net Profit Margin, and Good Corporate Governance against Company Value. Systematic Reviews in Pharmacy, 11(1).
Nozawa, Y. and Qiu, Y., 2021. Corporate bond market reactions to quantitative easing during the COVID-19 pandemic. Journal of Banking & Finance, 133, p.106153.
Obeki, O.S., 2018. Income statement preparation by small and medium enterprises. In Income statement preparation by small and medium enterprises: Obeki, OS.
Patin, J.C., Rahman, M. and Mustafa, M., 2020. Impact of total asset turnover ratios on equity returns: Dynamic panel data analyses. Journal of Accounting, Business and Management (JABM), 27(1), pp.19-29.
Rashid, C.A., 2018. Efficiency of financial ratios analysis for evaluating companies’ liquidity. International Journal of Social Sciences & Educational Studies, 4(4), p.110.
Robinson, T.R., 2020. International financial statement analysis. John Wiley & Sons.
Sharma, V., Jain, Y.K., Jangir, K. and Pathak, N., 2022. Key Financial Ratios Analysis for Manufacturing Companies-A Bibliometric Analysis. Journal of Algebraic Statistics, 13(3), pp.451-467.
Shrotriya, D.V., 2019. Common Size Statement: a Technique of Financial Analysis. Int. J. Res. Anal. Rev, 6(2).
Triani, N. and Tarmidi, D., 2019. Firm value: impact of investment decisions, funding decisions and dividend policies. International Journal of Academic Research in Accounting, Finance and Management Sciences, 9(2), pp.158-163.
Vasista, K., 2022. Role Of a Stock Exchange In Buying And Selling Shares. International Journal of Current Science (IJCSPUB), 12(1), pp.2250-1770.
Wang, Y., 2021, December. The development and usage of NPV and IRR and their comparison. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021) (pp. 2044-2048). Atlantis Press.
Wizzair, 2022, ANNUAL REPORT AND ACCOUNTS 2022, Available at https://wizzair.com/static/docs/default-source/downloadable-documents/corporate-website-transfer-documents/annual-reports/wizz_air-annual-report-and-accounts-f22_final—pwc-confirmed_061d7bd2.pdf [Accessed on 01/07/23]
Yemi, A.E. and Seriki, A.I., 2018. Retained earnings and firms’ market value: Nigeria experience. The Business & Management Review, 9(3), pp.482-496.
Zdanovskis, K. and Pilvere, I., 2019. Methods of financial statement analysis for non-governmental organisations. Research for Rural Development, 2.
Zorn, A., Esteves, M., Baur, I. and Lips, M., 2018. Financial ratios as indicators of economic sustainability: A quantitative analysis for Swiss dairy farms. Sustainability, 10(8), p.2942.
Know more about UniqueSubmission’s other writing services:
