AFE7511-A Accounting and Finance Assignment Sample

 

Module Code And Title : AFE7511-A Accounting and Finance Assignment Sample

 

AFE7511-A Accounting and Finance Assignment Sample 1
AFE7511-A Accounting and Finance Assignment Sample

Question 1

A. Cash Flow Statement

Importance of Cash Flow Statements

Cash flow statements are an important source of financial accounting for various reasons. It is justified with the following points.

  • Cash flow statements will provide the stakeholders with an insight over different expenses that a company had to make during one particular year. It shall specify those expenses which might not have been included in profit and loss statements.
  • These statements are useful for learning and planning short term budgets. Firms will be able to ascertain their short term needs by evaluating their cash inflows and outflows (Soboleva et al., 2018). It shall give them a holistic review of their budgetary requirements.
  • Companies shall be able to monitor their expenses by looking into this statement. It will categorically show where such inflows and outflows are contemplated (Afiezan et al., 2020). Using this knowledge, they shall equip particular measures to control their expenses and increase their scope of income.
  • In case, finance manager finds out any shortage of cash while viewing such statements, they will be able to arrange for the same within quick succession. There will be plenty of scope for such people to plan their financial requirements during upcoming periods.

Operating Activity

In case of operating activities, finance managers will be able to understand their extent of cash flow during one particular financial year. As suggested by Liman and Mohammed (2018), they will be enabled to compare such values with previous years for detailed understanding. For instance, increase or decrease in working capital shall alert them to monitor such items with typical control over current liabilities. They shall aim to reduce such items that affect their working capital.

Investment Activity

This activity will inform the finance manager about different profits and losses incurred by purchase or sale of assets during one year. As per Nikulina et al. (2019), excavating this part shall help that company’s management to equip profitable collections through sale of assets over purchasing any. In case they notice any loss incurred in this category, it will be appropriately planned to recover such during next financial year.

Financing Activity

This region of information shall help managers to understand their incoming capital along with outgoing capital. According to Dierker et al. (2019), it will help them to ascertain any incoming capital that is raising their cost of capital. Alongside, such managers will be able to ensure their payment of dividends and interest during that period. It will particularly cite them with amounts spent for such items.

B. Methods of evaluating investments

Accounting Rate of Return

This calculation is particularly aimed at computing percentage of return that could be expected from any particular investment. It will divide such average return on such investment or asset by initial capital invested for such an item.

Advantages

  • This computation is considered to be simpler than other modes of evaluating any investment. Easy approach of calculation and understanding helps investors to learn about potential returns from an investment (Bader et al., 2018). It does not involve any complexity and caters to such people with least knowledge of finance.
  • Unlike other modes of calculation, ARR will categorically consider profits while computing such ratio. Moreover, profitability of companies are efficient indicators of their performance.
  • Since this calculation concentrates on profitability, it will directly sponsor information on management of income and expenses of an organisation. It will be able to comment on their capability to monitor those similar items.

Disadvantages

  • ARR completely ignores cash flow while computing such ratio. It will necessarily project accounting figures to calculate by considering overall payments made by that company during such year.
  • Phenomenon of time value is also ignored while computation of this ratio (Shrotriya, 2018).
  • Outcomes of this calculation are often stated as unusual and undesirable. In many cases, application of ARR has proved inappropriate allocation in loss making projects.

Payback Period

This phenomenon could be explained as amount of time taken by a project to return the initial cost of such an investment. In other words, it will foretell such break-even point where an investor can ensure to recover their invested capital.

Advantages

  • It is one easy mode of computation without any scope of complexity.
  • Using this method to calculate returns is a quick option for investors to learn their frequency of being paid back (Bin et al., 2019).
  • Risk involved in any investment can be analysed through computation of such payback period. Longer periods imply increased amount of risk in such investment.

Disadvantages

  • This computation typically ignores time value of money thereby not appreciating increase in money value with gradual growth of time for such investment.
  • This computation will also ignore any inflow of cash post such payback period. It will only consider incoming cash flow until such initial investment is recovered (Polovnikova et al., 2018).

Discussion

Evaluating both processes of monitoring investments, payback period and ARR operate in similar ways. In both cases, time value of money is not appreciated. Alongside, both provide scope for easy analysis of such investments. Application of ARR considers accounting profits but payback periods will not ascertain anything as such. As appropriated by Villar et al.(2021), it will only concentrate on revealing amount of time required to recover such investment. Therefore, ARR could be sorted as an efficient mode of evaluating investments. Since it considers realistic value of returns throughout the lifetime of an investment, ARR shall be chosen over payback period.

C. Budget

Concept

Budget could be defined as estimation for any future period. It can be particularly interpreted as a financial plan for computing potential income and expenses during any period (Samuel, 2018). Various companies use this computation to understand their future requirements with assessed outputs. Appropriating available capital with future components could be done through preparation of budgets.

Importance

  • Timely preparation of budgets will inform managers about any capital requirements during future periods of operating in that company. It will necessarily classify different months with appropriate incomes and expenses explaining particular income and expenditures during such periods.
  • Preparing budgets in timely manner will help financial managers to plan their finances accordingly. In many cases, where such person concludes any shortage of funds due to expected expenditures during such period, appropriate finances can be arranged (Lev, 2018). They will be facilitated to borrow and negotiate with particular branches that can provide them with adequate funding.
  • This application helps to ascertain coordination amongst different departments. Managers will be able to study requirements of various departments. Accordingly, they can allocate funds to such authorities for appropriate management of funds. Any kind of misappropriation can be prevented through this approach.
  • Companies will be able to compare their mission with their cited vision. Their targets can be categorically arranged which will provide better insight of their operating capacities along with their future accountabilities. Different departments will be aware of their designated roles to propagate efficient results.

Limitations

  • Budgets are entirely dependent on assumptions and estimates. They are prepared in association with previous data along with increasing trends. Future operations cannot be ascertained with substantial reliance. There is plenty of scope for such assumptions to go wrong in upcoming periods. Any uncertain event will define such figures as irrelevant.
  • Budgeting processes are often considered as expensive. At the same time, it is also appropriated as time taking. Both these defamations heavily hamper preparation of budgets. As stated by Brouwer et al. (2019), it requires an ample amount of time to acquire necessary information before allocating particular amounts to typical items. This makes it a tedious compilation. Small and medium sized companies are often unable to prepare budgets for these reasons.
  • It may be very difficult to assess budgetary forms for new projects. New types of investments hardly project any scope for future predictions. Moreover, there is no amount of accuracy in these preparations. As described by Ngwakwe (2020), there is high chance of such figures being derailed after practical market application. Future periods may be subject to different scenarios which are difficult to address.

Question 2

A. Preparation of Financial Statements for TAN Plc for the year ended 31st December 2021

Income Statement

TAN Plc
Income Statement for the year ended 31st December 2021
Particulars Notes Amount (£) Amount (£)
Revenue Collected 150000
Less: Cost of Goods Sold 1 35000
Gross Income for that period     115000
Expenses during that period
Prepayments 75000
Expenses for Salaries 33000
Bills of Expense 2 38000
Total Expense     146000
Operating Income
Accrued Revenue 37500
Net Profit for that period     6500

Balance Sheet

TAN Plc
Balance Sheet for the year ended 31st December 2021
Particulars Notes Amount (£) Amount (£)
Assets
Non-Current Assets
Machine 30000
Property 45000
Total Non-Current Assets     75000
Current Assets
Stock in Hand 40000
Sundry Debtors 22000
Prepaid Rent 6000
Cash in Hand 37500
Total Current Assets     105500
Total Assets     180500
Liabilities
Non-Current Liabilities Nil
Total Non-Current Liabilities Nil
Current Liabilities
Creditors 55000
Outstanding Salaries 6500
Total Current Liabilities     61500
Shareholder’s Capital
Share Capital 112500
Add: Profit during that period 6500
Total Capital Employed     119000
Total of Share Capital and Liabilities     180500

Notes on Accounts

Note 1: Cost of Goods Sold
Particulars Amount (£)
Opening Stock 15000
Purchase 60000
Less: Closing Stock 40000
Total Cost of Goods Sold 35000
Note 2: Bills of Expense
Particulars Amount (£)
Bills of Expense 37500
Late Salary of November and December 2021 6500
Less: Prepaid Rent 6000
Total Cost of Goods Sold 38000

B. Analysing financial position for TAN plc

Financial position can be assessed as current balance of recorded profitability, assets, liabilities and equities of a company. Maintaining sound financial position helps in fulfilling demands of stakeholders.  Financial position of TAN plc has been evaluated by ratio analysis. Accounting or financial ratios are calculated by taking numerical data from financial statements of the company (Pantelidis and Zezou, 2018). Calculation of financial ratio has been made for understanding profitability, efficiency, and liquidity position of TAN plc.

Profitability position

Net profit margin

Net Profit Margin
Details Sum (£)
Net Profit 6500
(/) Revenue 150000
Net Profit Margin 4%

One of the crucial profitability ratios is net profit margin. This financial ratio compares net profit of a company with total revenue with an aim to assess the proportion of profit generated from total revenue.  Net profit margin is calculated as net profit/total revenue*100 (Hosaka, 2019). Calculation of net profit margin for TAN plc indicates 4% profitability at end of 2021, where industry average is 20%. Such profitability has been generated by securing £6500 net profit from £150000 total revenue.

Return on capital employed

Return on Capital Employed
Details Sum (£)
Operating Profit 119000
(/) Capital Employed 119000
Total Assets 180500
(-) Current Liabilities 61500
Total Cost of Goods Sold 32%

This profitability ratio has an aim to assess profitability of company by determining its ability to utilise capital employed for generating profit. Maintaining effective use of capital employed brings ample profitability in business. Calculation of this ratio takes place as operating profit/capital employed*100. Calculation of return on capital employed for TAN plc shows 32%. This shows ineffective use of capital employed by the company.

Return on equity

Return on Equity
Details Sum (£)
Net Profit 6500
(/) Shareholder’s Capital 150000
Return on Equity 4%

This ratio determines financial performance of company by measuring ability to utilise equity balance effectively. As opined by Nariswari and Nugraha (2020), appropriate use of equity balance brings sound profitability in the business. Return on equity is calculated as net profit/equity*100. TAN plc has 4% returns on equity. It means the company has made ineffective use of equity and generated low profitability.

Liquidity position

Current ratio

Current Ratio
Details Sum (£)
Current Assets 105500
(/) Current Liabilities 61500
Current Ratio 172%

One of the crucial liquidity ratios is current ratio. Current ratio is calculated by comparing figures of current assets and current liabilities (Nuryani and Sunarsi, 2020). Formula of this ratio is current assets/current liabilities. As per calculations, TAN plc has 172% current ratio whereas industry average is 120%. This means the company has a greater liquidity position than industry average. Also, it signifies ability of TAN plc to pay off current liabilities by use of current assets.

Quick ratio 

Quick Ratio
Details Sum (£)
Current Assets 105500
(-) Inventories 40000
(/) Current Liabilities 61500
Quick Ratio 107%

Similar to current ratio, quick ratio helps in determining liquidity position of company. Quick ratio is calculated by comparing figures of current assets less inventories with current liabilities. Formula of this ratio is current assets-inventories/current liabilities. As per calculations, TAN plc has 107% quick ratio. This indicates a sound liquidity position of TAN plc. Besides, this ratio signifies the sound ability of TAN plc in maintaining lower stock in hand that ultimately boosts current assets.

Cash ratio 

Cash Ratio
Details Sum (£)
Cash 37500
(/) Current Liabilities 61500
Cash Ratio 0.61

Calculation of cash ratio sheds light on cash position of company. It is calculated by dividing cash balance with current liabilities. As per this ratio, TAN plc has 0.61times liquidity position. This shows sound ability of TAN plc to maintain cash balance that further helps it in fulfilling short-term and long-term business needs.

Efficiency position

Receivable period

Receivable Period
Details Sum (£)
Receivables 22000
(*) Operating days [365] 8030000
(/) Revenue 150000
Receivable Period 54

Receivable period is an efficiency ratio that can help in understanding ability of company to collect dues in less time. Receivable period is trade receivables*365/total revenue. Having a lower receivable period is efficient for companies (Jikia and Kharabadze, 2018). TAN plc has 54days in receivable period where industry average is 110days. This shows good efficiency position of TAN plc.

Payable period

Payable Period
Details Sum (£)
Payables 55000
(*) Operating days [365] 20075000
(/) Cost of Sales/Goods sold 35000
Payable Period 574

Payables period is an efficiency ratio that can help in understanding ability of company to pay dues in less time. Payables period is trade payables*365/cost of sales. Having a lower payable period is efficient for company (Killingsworth and Mehany, 2018). TAN plc has 547days in payable periods where the industry average is 130days. This shows inadequate efficiency of TAN plc.

Inventory period 

Inventories Period
Details Sum (£)
Inventories 40000
(*) Operating days [365] 14600000
(/) Cost of Sales/Goods sold 35000
Inventories Period 417

Inventory period is an efficiency ratio that can help in understanding ability of company to convert inventories into sales. Inventory period is inventories*365/cost of sales. Having a lower inventory period is efficient for companies (Abdukarimovich and Tursunpulotovich, 2022). TAN plc has 417days in inventory period that shows inadequate efficiency of TAN plc.

C. Advising current and potential shareholders of TAN plc for selling or keeping shares

As per ratio analysis of TAN plc, it has been found that the company has inadequate financial performance. A declined profitability and efficiency position of TAN plc has been found in 2021. According to industry average, the company has taken higher time to collect and pay dues. It has lower profitability and ineffectively utilised equities capital employed. Only, the company has a better liquidity position than industry average. Overall, TAN plc has an inadequate financial position. So, it can be advised to potential shareholders of TAN plc that they should sell shares of this company.

Question 3

A. Preparing cash budget for AMF Ltd for six-month period

Cash budget for AMF Ltd
For 1st October 2022-31 March  2023 [six-month period]
Details Oct(£) Nov(£) Dec(£) Jan(£) Feb(£) Mar(£)
Cash (Opening) 10,000 5,000 3,000 -7,000 -10,000 -10,000
Receipts
Planned sales income 0 12,000 12,000 12,000 12,000 16000
Receipts (Total) 10,000 17,000 15,000 5,000 2,000 6,000
Payments
Purchases 5000 10000 10000 10000 10000 10000
(-) 10% discount 1000 1000 1000 1000 1000
Purchases (Net) 9000 14000 9000 9000 9000
Bills 1000 1000 1000 1000 1000 1000
Rent 4000 4000 4000 2000 2000 2000
Equipment 3000 3000
Payments (Total) 5000 14000 22000 15000 12000 12000
Cash available 5,000 3,000 -7,000 -10,000 -10,000 -6,000
Cash (Closing) 5,000 3,000 -7,000 -10,000 -10,000 -6,000

Cash budget can be defined as cash estimation of cash flows of business for a specified time-period. Cash budget can be prepared for weekly, monthly, quarterly, or annual (Bandiyono and Mayangsari, 2021). Calculation of cash budget for AMF Ltd shows closing cash balance £5000 in October, £3000 in November, -£7000 in December, -£10000 in January, -£10000 in February, and -£6000 in March.

Note:- AMF Ltd has the policy to receive cash discounts when available. Cash discount of 10% is agreed for immediate cash purchases over £8,000. Amount less than £8,000 can be paid on two months credit. Thus, payment of £5,000 would be paid after two months of purchase. Further, planned sales income for March 2022 £16000 would not be considered in the six-month period cash budget as it would be received in April 2022.

B. Advising management of AMF Ltd for cash management

Analysis of six-month budget for AMF Ltd indicates negative cash balance from December 2021 to March 2022. This indicates ineffective management of cash in the company. Thus, the company needs to take suitable cash management steps for properly managing their cash in next six months i.e., from October 2022 to March 2023. Steps for effective cash management in AMF Ltd are:

Reducing inventory and increasing inventory turnover

Reducing inventories and increasing inventory turnover can be a helpful approach for boosting working capital. The company can achieve high net working capital by reducing slow-moving inventories, avoiding stockpiling and increasing inventory turnover cycle (Boisjoly et al., 2020).

Managing debtors effectively and paying suppliers on time

Cash position of company can be enhanced by enforcing payment discipline, so that payment from customers can be received in time. Besides, paying suppliers within time will allow the company to maintain lower current liabilities. It would act as best way for ensuring that company has enough working capital.

Converting to electronic receivables and payables 

For shortening receivable period, AMF Ltd would have to maintain good collection system. One crucial aspect for boosting working capital is sending out inventories as soon as possible (Prasad et al. 2019). Thus, conversion to electronic transaction would transform payment system of AMF Ltd and will boost cash position.

Maintaining adequate finance

For boosting cash position, the company needs to maintain enough liquidity. Receiving adequate proportion of working capital financing would be helpful for AMF Ltd. By assessing working capital requirements and working capital KPIs, the company would be able to maintain an adequate finance position.

Ensuing well managed working capital  

Maintaining sound working capital management policy can be helpful for AMF Ltd to boost cash position and at the same time allow the company to grow further. It would allow AMF Ltd to boost operational efficiency, profitability and potential business growth.  

Reference List

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