Contents

INTRODUCTION:....................................................................................................2
Task A (LO 3: 3.1).................................................................................................2
3.1. Analyse budgets and make appropriate decisions:.....................................2
Task B (LO 3: 3.2).................................................................................................5
3.2. Explain the calculation of unit costs and make pricing decisions using
relevant information:.........................................................................................5
Task C (LO 3: 3.3).................................................................................................6
Task D (LO 4: 4.1, 4.2, 4.3).................................................................................10
4.1. Assuming the role of the Chief Accountant, draft a brief report to be
submitted to the Managing Director based on the ratios of Yamcha Ltd. for
2013 to 2015 and the industry averages for 2015............................................10
4.2. Discuss the main financial statements and explain the purpose and
structure of each statement..............................................................................14
4.3. Compare appropriate formats of financial statements for different types of
business:..........................................................................................................17

INTRODUCTION:
This paper is a business report about Managing Financial Resources and Decisions. This report
presents how to make financial decisions based on financial information. Sources of data used in
the report are from the internet and references. This paper will explain how to analyse budgets
and make suitable decisions. Moreover, it will explain the calculation of unit costs. Finally, it
will show how business uses investment appraisal techniques.

Task A (LO 3: 3.1)

3.1. Analyse budgets and make appropriate decisions:

3.1.1. Explain how budget can be a decision-making tool for businesses:
A budget is a useful tool for planning and controlling the finance of the company. The budget
consists of the forecast of the revenues and expenditures. Based on that, the managers can set out
a suitable plan; apply the strategy to control the finance effectively. In addition, the actual
performance of the company can be compared. It provides the opportunity to review the
performance and make improvement. In anykind of business, budgeting is essential, especially
for the start-up business. A practical budget can help develop the business.
3.1.2. Prepare a budgeted income statement for Printer Rite Ltd:
Sale budget (For the year ending December 31, 2017):

Production budget (For the year ending December 31, 2017):

Direct Material Budget (For the year ending December 31, 2017):

Direct Labour Budget (For the year ending December 31, 2017)

Overhead Budget (For the year ending December 31, 2017):

Manufacturing overhead rate per unit:

Total overhead/ Total production unit = 319,000/ 110,00= 2.9

Selling and Administrative Budget (For the year ending December 31, 2017):

Budgeted Selling Expenses:

Sale commission (Unit sale x
Sale price per unit x 3%)
Budgeted Admin. Expenses:
Rent
Office Salaries
Advertising
Utilities
Total Selling & Admin.
Expense

Quarter 1

Quarter 2

Quarter 3

Quarter 4

108,000

189,000

135,000

162,000

18,000
105,000
1,200
3,600

18,000
105,000
1,200
3,600

18,000
105,000
1,200
3,600

18,000
105,000
1,200
3,600

235,800

316,800

262,800

289,800

Year

1,105,2
00

A budgeted income statement for Printer Rite Ltd:

Task B (LO 3: 3.2)

3.2. Explain the calculation of unit costs and make pricing

decisions using relevant information:
3.2.1. Determine the break-even point in sales pounds.
The breakeven point of a company can be defined as the accounting period that generates enough
revenue to cover all of a company's expenses for that accounting period.

Contribution Margin Ratio = (Selling price per unit Variable cost per unit)/ Selling price
per unit = [(240,000/12,000) (96,000/ 12,000)]/ (240,000/ 12,000) = 0,6%
Breakeven point in sales pounds = Fix cost/ Contribution Margin Ratio
= 120,000/ 0.6 = 200,000

3.2.2. After several discussions, the sales manager has decided that if Manchester Ltd can spend
an extra of 15,000 on advertisement, the company could increase sales by 1,000 units. Given
this information, will net profit increase or decrease if Manchester Ltd follows the sales
managers recommendation?

 Sale price per unit = 240,000/ 12,000 = 20

Variable costs of 1 unit = 96,000/ 12,000 = 8
Variable costs when increasing 1000 unit = 8 x 1,000 = 8,000
Total expensive after increasing 1,000 unit = Total variable + Total fixed costs + Extra on
advertisement = 96,000 + 8,000 + 120,000 + 15,000 = 239,000 (1)
Revenue when increasing 1,000 unit = 13,000 x 20 = 260,000 (2)
Net profit after increasing 1,000 unit = (2) (1) = 260,000 - 239,000 = 21,000
The net proifit decrease 3,000 (net profit before increasing 1000 unit is 24,000).
3.2.3. Determine the maximum amount of advertising expense the company could spend if the
advertising would increase sales by 1,000 units?

Sale price per unit = 20

Total sales when increasing 1,000 units: 1,000 x 20 = 20,000
Because Fixed cost is unchanged.
Variable cost when increasing 1,000 units: 8 x 1,000 = 8,000
The maximum amount of advertising that Printer Rite Ltd could spend:
20,000 8,000 = 12,000

Task C (LO 3: 3.3)

Accounting rate of return:

Initial costs
Estimated Scrap Value
Estimated life
Estimated future cash flows
Year 1
Year 2
Year 3
Year 4
Year 5
Total cash flow
Total depreciation
Total profit after depreciation
Average profit (5 years)

Project
Paper
200,000
0
5 years

235,000
0
5 years

Project
Rock
190,000
0
5 years

Project
Scissor
210,000
0
5 years

93,000
93,000
93,000
0
0
279,000
0
279,000

90,000
85,000
75,000
55,000
50,000
355,000
0
355,000

45,000
55,000
65,000
70,000
75,000
310,000
0
310,000

40,000
50,000
60,000
65,000
75,000
290,000
0
290,000

93,000

71,000

62,000

58,000

Project Quilt

ARR =

( Average Annual Profit )

Initial Investment

x 100%

ARR Project Paper =

93,000
200,000

x 100% = 46. 5%

ARR Project Quilt =

71,000
235,000

x 100% = 30. 2%

ARR Project Rock =

62,000
190,000

x 100% = 32. 6%

ARR Project Scissor =

58,000
210,000

x 100% = 27. 6%

ARR is a measure of accounting profitability of investments. Through calculation above

I will recommend you should not pick ARR Project Scissor because it just generate an
average 27.6% annual accounting profit over the investment period based on th average
investment. (1)
Net present value (NPV):
Outlay cost
Estimated future cash flows
Year 1
Year 2
Year 3
Year 4
Year 5
Discount rate/ Cost of capital/
Required rate of return

Project Paper
200,000

Project Quilt
235,000

Project Rock
190,000

Project Scissor
210,000

93,000
93,000
93,000
0
0

90,000
85,000
75,000
55,000
50,000

45,000
55,000
65,000
70,000
75,000

40,000
50,000
60,000
65,000
75,000

12%

12%

12%

12%

Project Paper
Years
0

Cash Flow ()
(200,000)

Present value factor

1.000

Prsent value
(200,000)

1
2
3
4
5

93,000
93,000
93,000
0
0
NPV

0.892
0.797
0.711
0.635
0.567

82,956
74,121
66,123
0
0
23,200

Present value factor

1.000
0.892
0.797
0.711
0.635
0.567

Prsent value
(235,000)
80,280
67,745
53,325
34,925
28,350
29,625

Present value factor

1.000
0.892
0.797
0.711
0.635
0.567

Prsent value
(190,000)
40,140
43,825
46,215
44,450
42,525
29,155

Present value factor

1.000
0.892
0.797
0.711
0.635
0.567

Prsent value
(210,000)
35,680
39,850
42,660
41,275
42,525
(8010)

NPV > 0: Accepted the project

Project Quilt
Years
0
1
2
3
4
5

Cash Flow ()
(235,000)
90,000
85,000
75,000
55,000
50,000
NPV
NPV > 0: Accepted the project
Project Rock
Years
0
1
2
3
4
5

Cash Flow ()
(190,000)
45,000
55,000
65,000
70,000
75,000
NPV
NPV > 0: Accepted the project
Project Scissor
Years
0
1
2
3
4
5

Cash Flow ()
(210,000)
40,000
50,000
60,000
65,000
75,000
NPV

NPV < 0: Reject the project

 Net Present Value (NPV) is a formula used to determine the present value of an
investment by the discounted sum of all cash flows received from the project. Through
the calculation, the Project Siccsor has NPV < 0 this is present that present value of
benefit < present of cost to the project earn lower return than the cost of capital.
Therefore Project Siccosr must be reject. (2)

Discount Payback period:

Project Paper
Year

Net cash flow

Present value

0
(200,000)
(200,000)
1
93,000
82,956
2
93,000
74,121
3
93,000
66,123
4
0
0
5
0
0
Discounted payback period = 2 Years + 42,983/ 66,123 = 2.650 Years

Cumulative PV

(200,000)
(117,044)
(42,983)
23,140
23,140
23,140

Project Quilt
Year

Net cash flow

Present value

0
(235,000)
(235,000)
1
90,000
80,280
2
85,000
67,745
3
75,000
53,325
4
55,000
34,925
5
50,000
28,350
Discounted payback period = 3 Years + 33,650/ 34,925 = 3.963 Years

Cumulative PV

(235,000)
(154,720)
(86,975)
(33,650)
1,275
29,625

Project Rock
Year
0
1
2

Net cash flow

(190,000)
45,000
55,000

Present value

(190,000)
40,140
43,825

Cumulative PV

(190,000)
(149,860)
(106,035)

3
65,000
46,215
4
70,000
44,450
5
75,000
42,525
Discounted payback period = 4 Years + 15,370/ 42,525 = 4.361 Years

(59,820)
(15,370)
27,155

Project Scissor
Year
0
1
2
3
4
5

Net cash flow

(210,000)
40,000
50,000
60,000
65,000
75,000

Present value

(210,000)
35,680
39,850
42,660
41,275
42,525

Cumulative PV

(210,000)
(174,320)
(134,470)
(91,810)
(50,535)
(8,010)

Discounted payback period > 5 Years.

Discounted Payback Period is the time required to recover the present value of cash flows
equal to the cost of investment. In this calculation, ignoring Project Scissor was rejected
above, the Project Rock has the longest of time is 4 years to recover. I think Project Rock
should not pick.(3)
Recommend: From (1), (2) and (3) I recommend to you that the Project Paper and Project Quilt
has more advantage for your company to investment.

Task D (LO 4: 4.1, 4.2, 4.3).

4.1. Assuming the role of the Chief Accountant, draft a

brief report to be submitted to the Managing Director
based on the ratios of Yamcha Ltd. for 2013 to 2015 and
the industry averages for 2015.
To: Managing Director of Kamekameha Limited
From: Chief Accountant
Subject: Analyze ratio of Yamcha Limited from 2013 to 2015
Sale growth ratio: this ratio show the the growth in sales of the company. In the company, the
ratio has an increasing from 30% to 40% but in 2015, it has a significant drop down 9.52%. This

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represents the company had a serious problem at this time, but compared to the industry average,
it still has a higher proportion
Asset Turnover ratio (Sale/ Total assets): The ratio in 3 years lower than average. In 2014, there
is a fairly high ratio but it still can not equal to industry average. This show that the company is
weak in generating revenue from its assets.
Fix Assets Turnover (Sales/ net fixed assets): This ratio indicates how well the company is using
fixed assets to generate sales. In 3 years, the company has just generated lower 5% than 16.85%
of industry average.
Working Capital Turnover (Sales/ working capital): This ratio show how effectively the
company is using its working capital to generate sales. In 2013 and 2014, the ratio of the
company is negative show that the company has to fund more money for the sales but can not
gain enough sales but in 2015 the company has overcome miraculously with the ratio is 38.3%
exceeding the industry average ratio is 10.81%.
Sale/ debtor

Gross Profit Margin (Gross profit/ Sales): The ratio should be high because higher the ratio,
higher will be the companys ability to produce goods and service at low cost with high sales.
But, in the table throught 3 years, the all ratio also lower than industry average ratio.
Pretax Profit Margin (Profit before tax/ Sales): The ratio is used to compare the profitability and
operational efficiency of the company, it allows the company to monitor profitability trend and to
compare current margins with historical records. In the table, the all ratio of 3 years are higher
than industry average ratio. This represents the company is still profitable extremely high in the 3
years.
Time Interest Earned Ratio (Profit before interest/ Interest): In 2014 the company has a ratio of
26.57 which is a large increase from 2013 when the ratio was 6.45. This mean that they have a
comfortable coverage of interest, and that the coverage has increased from the previous year.

11

Howerver, in 2015 had a remarkable decrease to 14.5% but it still much highter than industry
average ratio was 4.95.
Return on Assets (Profit after tax/total assets): The ratio of 3 years are 62.2%, 56.07% and
58.54% that much higher than industry average ratio is 19.12%. This show that the company is
generating much profit from all of its resources. It is a great prosperity of the company in this
specific years.
Return on Equity (Profit after tax/ Equity): it is the amount of net income returned as a
percentage of shareholders equity. It reveals how much profit a company earned in comparison
to the total amount of shareholder equity found on the balance sheet. Starting from 2013, the
ratio was 57.14% and goes up in 2014 to 75% but in 2015, the ratio had a slightly reduced to
39.58%. The ratio of 2015 is still highger than industry average ratio, it is a good thing for
stockholders during this specific year effectively and using it to generate more equity for the
owner.
Net fixed assets/total assets

Fixed assets to equity ratio (Net fixed assets/ Equity): If fix assets to equity ratio is more than 1,
it mean that stockholerss equity is less than the fixed assets and the company is using debts to
finance a portion of fixed assets. If the ratio is less than 1, it means that stockholders equity is
more than the fixed assets and the stockholders equity is financing not only the fixed assets but
also a part of the working capital. In the table, from 2013 to 2015 the ratios are higher than 1.
Therefore all fixed assets and a portion of working capital of the company is being financed by
using debts.
Shareholder Equity Ratio (Equity/ Total assets): it is used to determine how much shareholders
would receive in the event of a company-wide liquidation.

Debt ratio (Total liabilities/ Total assets): The ratio shows the companys ability to cover its
debts through its local assets. The ratio in 2014 is highest had risk of the company but until 2014

12

and 2015 the ratio was decrease, it lower than industry average ratio. This is a good sign for the
company to be able to fix debt.
Debt to Equity Ratio (Total liability/equity): it shows the percentage of company financing that
comes from creditors and investors. A higher debt to equity ratio indicates that more creditor
financing (bank loans) is used than investor financing (shareholders). A lower debt to equity ratio
usually implies a more financially stable business. In the table, the ratio in 2013 was highgest but
from 2014 to 2015 the ratio were decrease reamarkably and it lower than industry average ratio.
Long term debt to total asset ratio (Long-term debt/ Total assets): It is an indicator of the longterm solvency of a company. The higher the level of long term debt, the more important it is for a
company to have positive revenue and steady cash flow.
Liabilities To Assets Ratio (Current liabilities/ Total assets): The liabilities to assets ratio is a
solvency ratio that examines how much of a company's assets are made of liabilities. In three
years, the ratio of the company were lower than industry average. This is a good sign because a
high liabilities to assets ratio can be negative; this indicates the shareholder equity is low and
potential solvency issues. Rapidly expanding companies often have higher liabilities to assets
ratio (quick expansion of debt and assets).
Liquidity ratio (Current assets/ Current liabilities): The liquidity ratio measures a company's
ability to pay short-term and long-term obligations. All three years had lower ratio than industry
average, it mean that the company is facing difficulties in paying the liabilities.
Quick/ Acid Test Ratio ([Current assets Stock]/ Current Liablities): The acid-test ratio is a
strong indicator of whether a firm has sufficient short-term assets to cover its immediate
liabilities. In 2013 and 2014, the ratio are 0.43 and 0.54 respectively. Two year ratio was lower
than the average industry rate show a good condition but in 2015 the rate was goes up higher
than industry average. From the ratio of 2015, the company cannot pay its debts without its
inventory. In this time, the company is a somewhat risky business.
Stock/ Total assets

13

Inventory Turnover (Cost of sales/ stock): Inventory turnover is a ratio showing how many times
a company's inventory is sold and replaced over a period. The ratio of 3 years are 8.71, 8.55 and
8.81 much higher than industry average was 4.29. This represent the companys strong sales, the
larger amounts of inventory are purchased during the year, the company will have to sell greater
amounts of inventory to improve its turnover.
Cost of sales/ creditors:

Cash Flow on Total Assets Ratio (Cash/ Total assets): it use to estimate when cash will be
available and how much cash will be available for future operations. In 3 years, the ratio was
15.85% in 2013, 21.46% in 2014 and 25.08% in 2015, all ratio was much higher than industry
average ratio is 9.6%. It is a good thing because the company can estimate the vailability of cash
in future periods based on projected operations.

4.2. Discuss the main financial statements and explain the

purpose and structure of each statement.
There are four main financial statements used by the business organization. These are, balance
sheet, income statement, owners equity statement & cash flow statement.
The four basic statements summarize the financial activities of the business. They can be
prepared at any point in time (such as the end of the year, quarter, or month) and can apply to any
time span (such as one year, one quarter, or one month).
The Balance Sheet
The purpose of the balance sheet is to report the financial position (amount of assets, liabilities,
and stockholders' equity) of an organization at a particular point in time. Balance sheet allows
someone like a creditor to see what a company owns as well as what it owes to other parties as of
the date indicated in the heading. This also provides information to the banker who wants to
determine whether or not a business deserves additional credit. Others users of balance sheet
include current investors, potential investors, company management, suppliers, some customers,
competitors, government agencies, and labor unions. Basic elements of a balance sheet are:
1. Assets.

14

Economic resources owned by the company can be termed as asset. Assets also include costs
paid in advance that have not yet expired, such as prepaid advertising, prepaid insurance, prepaid
legal fees, and prepaid rent.
Examples of asset accounts that are reported on a company's balance sheet are Cash, Petty Cash,
Temporary Investments, Accounts Receivable, Inventory, Supplies, Prepaid Insurance, Land,
Land Improvements, Buildings, Equipment, Goodwill, Bond Issue Costs etc. Every asset on the
balance sheet is initially measured at the total cost incurred to acquire it. Balance sheets do not
generally show the amounts for which the assets could currently be sold.
2. Liabilities.
Organization's debts or obligations can be called its liability. Liabilities include amounts received
in advance for future services. The amount received which has not yet been earned, the company
defers the reporting of revenues and instead reports a liability. It also includes the amounts owed
to creditors for a past transaction and they usually have the word "payable" in their account title.
Examples of liability accounts reported on a company's balance sheet: Notes Payable, Accounts
Payable, Salaries Payable, Wages Payable, Interest Payable, Other Accrued Expenses Payable,
Income Taxes Payable, Customer Deposits, Warranty Liability. Lawsuits Payable, Unearned
Revenues, Bonds Payable.
3. Stockholers Equity.
It indicates the amount of financing provided by owners of the business and earnings. The
investment made by the owners is called contributed capital. The amount of earnings reinvested
in the business is called retained earnings. "Owner's Equity" are the words used on the balance
sheet when the business is a sole proprietorship. If the business is a corporation, the words
Stockholders' Equity are used instead of Owner's Equity.
An example of an owner's equity account is Maria, Capital (where Maria is the owner of the sole
proprietorship). Examples of stockholders' equity accounts, Common Stock, Preferred Stock,
Paid-in Capital in Excess of Par Value, Paid-in Capital from Treasury Stock, Retained Earnings.

15

Income Statement
Income statement is one of the financial statements of a business which shows the income and
expenses of a business at a particular time. It highlights different sources of earning revenue &
sources of expenditure. The income statement provides the investor/manager a view of whether
the organization is making profit or loss throughout a particular period.
Elements in their income statements:
A. Revenues and Gains
1. Revenues from primary activities
2. Revenues or income from secondary activities
3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)
B. Expenses and Losses
1. Expenses involved in primary activities
2. Expenses from secondary activities
3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)
Cash flow statement
Cash flow statement shows how changes in balance sheet accounts and income affect cash and
cash equivalents. It deals with the flow of cash in and out of the business. The statement captures
current operating results and the accompanying changes in the balance sheet. As an analytical
tool, cash flows statement determines the short-term viability of a company, particularly its
ability to pay bills.

People and groups interested in cash flow statements include:

16

Accounting personnel, who need to know whether the organization will be able to cover

payroll and other immediate expenses

b Potential lenders or creditors, who want a clear picture of a company's ability to repay
c Potential investors, who need to judge whether the company is financially sound
d Potential employees or contractors, who need to know whether the company will be able to
e

afford compensation
Shareholders of the business.

Statement of Owners' Equity

The owners equity statement highlights the changes in retained earnings. Retained earnings
appear on the balance sheet and most commonly are influenced by income and dividends. The
Statement of Retained Earnings therefore uses information from the Income Statement and
provides information to the Balance Sheet.
The following equation describes the equity statement for a sole proprietorship:
Ending Equity = Beginning Equity + Investments - Withdrawals + Income
For a corporation, substitute "Dividends Paid" for "Withdrawals". The stockholders' equity in a
corporation is calculated as follows:

+
+
+
+
=

Common Stock (recorded at par value)

Premium on Common Stock (issue price minus par value)
Preferred Stock (recorded at par value)
Premium on Preferred Stock (issue price minus par value)
Retained Earnings
Stockholders' Equity

4.3. Compare appropriate formats of financial statements

for different types of business:
Formats of financial statements for different types of business such as sole proprietorship,
partnership and limited company are different from each other.
Each business has different economic sectors. That is why different financial statements with
different format are used to satisfy those sectors.
Sole Proprietorship

17

Financial statements for sole proprietorship traders are simple. It may not have the balance sheet
and income statement. The report just needs to show the profit and loss account compared to a
public limited liability company which requires being prepared based on international financial
reporting standard (IFRS) and generally accepted accounting principle (GAAP).
Partnership
The financial statements are prepared to show the profit, income, outcome and the loss of the
business. The income statement is prepared first because the net income or loss becomes a part of
the statement of partners capital. The statement of partners capital is prepared second because
the ending partners capital balances become part of the balance sheet. The statement focuses on
analyzing the capital and profits of the company that are is circulated inside the company.
Limited Company
The financial statement requires reflecting the current, non-current assets, liabilities, sales,
profits, cost of income tax payable and earning per share. On the basis of those information
decisions are made by the manager about future management strategies. Investors make the
investment decision by analyzing these information.

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