Managing Financial Resources and Decisions - Essay Example

Task a) The cash budget for the period covering from July to September (grey shaded columns) is given as follows. Cash Budget Months JulyAugust September October November December Revenues 30,000 35,000 25,000 15,000 30,000 35,000 Receipts         Advance 30% 10,500 7,500 4,500 9,000 10,500 - Current 70% 21,000 24,500 17,500 10,500 21,000 24,500 Total Receipts 31,500 32,000 22,000 19,500 31,500 24,500           Payments         General Expenses 8,000 8,000 8,000 8,000 8,000 8,000 Wages 12,500 12,500 12,500 12,500 12,500 12,500 Rent       1,200   Insurance 3,000     3,000   Interest       5,000   Printing Cost 20% 400 400 400 400 400 400 Total Payments 23,900 20,900 20,900 30,100 20,900 20,900           Surplus/Deficit 7,600 11,100 1,100 (10,600) 10,600 3,600 Bank Overdraft       5,000   Op. Cash Bal 5,000 12,600 23,700 24,800 19,200 29,800 Closing Cash Bal 12,600 23,700 24,800 19,200 29,800 33,400               1) If the above cash budget is closely analyzed, it can be noted that the closing cash balance is quite low in the month of July mainly due to making half-yearly or quarterly payments. Similar trend can also be observed in the month of October. Apart from these two months, the PLC can buy the intended asset in any of the remaining four months because of availability of excess cash. Among those four months, the best month can be December 2011, which results in the highest available amount of cash at the end of the month. 2) The cash budget helps in taking critical financial decisions in the upcoming period such that it mainly describes the flow of overall cash in the upcoming periods. Not only this, cash budget also assists the financial manager about the cash balances at the beginning and closing of any period. In case if the business wish to make any non-routine expenditure, cash budget can help in meeting this cause. In case of any cash shortages, overdraft facility from the bank can be arranged in or order to meet the necessary expenditures of the business. b) In order to calculate the price per batch of the ice creams the individual cost per batch in terms of material, labour and overheads are estimated. Direct material and labour calculations are relatively simpler than factory overhead. For factory overheads, the cost of service department is absorbed into the cost of factory departments and apportioned on the basis of floor area in sq. m. Factory overhead rate is then computed in order to calculate the factory overhead per batch. The total cost of producing a batch of ice creams is found to be $371. Therefore, the selling price of the batch should be in between $500 and $600 range giving a profit of at least 25%. c)   Factory Sub-Total Service Sub-Total   Mixing Packing Canteen     7500 4500 Floor Area in sq. m 1000 500 500       Apportionment of Factory OH 5000 2500 7500   Apportionment of Service OH 3000 1500 4500 - Total Factory Overhead 8000 4000 12000       Machine Hours Available 6000   Direct Labour Hours Available 3000   FOH Rate 1 1.33   Machine Hours required for 1 batch 60   Direct Labour Hours required for 1 batch 25   FOH per Batch 80 33 113       Mixing Packing Total FOH per Batch 80 33 113     Direct Labour   DL Rate 5 4   Direct Labour Hours required for 1 Batch 20 25   DL per Batch 100 100 200     Direct Material per Batch 58 Cost of 1 Batch     371 d) The following is the investment appraisal calculation in which the appraisal of the new project is made. NPV, IRR, Payback, and ARR are calculated in order to check out the viability of the project. Project A Years 0 1 2 3 4 5 Initial Investment (400,000)       Revenues 120,000 140,000 180,000 210,000 250,000 Costs (95,000) (105,000) (115,000) (125,000) (130,000) Cash Inflows 25,000 35,000 65,000 85,000 120,000 Loss in Bar (20,000) (20,000) (25,000) (25,000) (25,000) Residual Value 50,000 Net Cash Flows (400,000) 5,000 15,000 40,000 60,000 145,000 Depreciation (80,000) (80,000) (80,000) (80,000) (80,000)     Accounting Income (75,000) (65,000) (40,000) (20,000) 65,000     Cost of Capital 12% 1.0000 0.8929 0.7972 0.7118 0.6355 0.5674 Discounted Cash Flows (400,000) 4,464 11,958 28,471 38,131 82,277 Cumulative Cash Flows (400,000) (395,536) (383,578) (355,107) (316,976) (234,699)               Payback Period more than 5 years         NPV (234,699)   IRR -9%   Average Accounting Income (27,000)   ARR -7%           From the above calculations, it can be observed that all the investment appraisal techniques reflect that the project is not viable at all. The initial investment of the project, which is $4,000, cannot be recovered in the project’s life. Negative Net Present Value also shows that the project will not enhance the overall cash flows of the company. Internal rate of Return is also quite negative, which suggests that the project is unable to provide healthy returns to the shareholders. Accounting rate of return is also negative which means that project will not increase the overall income of the company in the upcoming period of five years. Task 2 Financial statements overall, provide the users of financial statements a summarized yet comprehensive insight to the different financial aspects of the business in a given reporting period. For a business entity, which acts a profit making concern mainly deals in five components of a complete set of financial statements. Following are the five fundamental components of a mainstream financial statement of a business entity. 1. Statement of Comprehensive Income (Profit and Loss Account) 2. Statement of Financial Position (Balance Sheet) 3. Statement of Cash Flows 4. Statement of Changes in Owners’ Equity 5. Notes to the Financial Statements Statement of Comprehensive Income Statement of comprehensive income mainly provides the financial information regarding the operational performance of the business in financial and monetary terms. In a simpler way, this statement depicts about the profits or losses made by the business entity. Single step and multi step statements are the two basic kinds of statement of comprehensive income. In a single step statement, all the costs and expenditures are deducted from the total revenues to provide the net profit or loss figure. However, in multi-step statement of comprehensive figures, step- by-step figures for different sorts of net income or loss are presented. Statement of Financial Position This statement mainly describes the particular financial position of a business at a specific point of time. Monetary value of the assets, liabilities, and equity of the business are reflected by the statement of financial position at a certain reporting date. Some entities adopt the traditional format of balance sheet such that in which the total assets, total liabilities, and total equity are shown separately. However, some entities prefer the net assets approach in which net assets are shown by deducting the liabilities from the assets such that net assets figure should be equal to total equity of the business. Statement of Cash Flows Cash flow statement reflects the movement of cash inside and outside the business entity during a certain reporting period. Cash outflows and inflows are shown in this statement. Overall cash flows are mainly separated into three activities namely as Operating Activities, Investing Activities and Financing Activities. In operating activities, cash flow movements from routine operations of business are reflected. For investing activities, entity‘s investment decisions in terms of acquisition of assets, investing in a project, acquisition of other business, etc are shown. Financing activities shows how that assets are financed either in the form of long-term debt or raising new equity capital etc. Statement of Changes in Owners’ Equity This statement reflects any changes in the equity invested in the business. Since the profits earned by the business increase the equity of the owners. However, any drawings or appropriation of profits in the form of dividends reduces the owners’ equity in the business. Notes to the Financial Statements These are the accompanying notes, which provide the explanations and details in arriving at a net figure of any head of account in other components of financial statement. In order to investigate the figure reflected in the any of the four other statements, the accompanying notes explain how the figure is arrived. Formats of Financial Statements for Different Types of Business There are different types of businesses. These types can be differential into different forms such that business can be different from each other based on regulatory framework, size of the business, nature of the business etc. a) If regulatory framework is taken into consideration, some businesses follow International Financial Reporting Framework (IFRS) and some of them follow Generally Accepted Accounting Principles (GAAP). Financial Statements prepared under each framework have slight discrepancies in terms of their disclosure and presentation. However, major differences can be found between the two in respect of the accounting principles. b) On the business of size, business may have either form of sole proprietorship, partnership, or company. The balance sheets of sole proprietors have a very simple equity, as there is only one single owner. In terms of partnership business, current accounts of each partner are maintained and the movements from those accounts are reflected in the statement of changes in owner’s equity as well as in balance sheets. For company accounts, Earning per share (EPS) is reflected in the Statement of Comprehensive Income. In equity portion of balance sheet of the company, number of share issues, authorized, par value of each share also presented. c) Nature of the business may differentiate business either in the form of trading concern, or manufacturing concern or service concern. Mainly the Statement of Comprehensive Income is affected under this differentiation such that for a trading concern, cost of goods sold is computed whereas in manufacturing concerns, cost of goods manufactured and produced, are computed first. For a service entity, only business expenses reflected, as there is no cost of goods sold or manufactured is present in service entities. References Wood, Frank. and Sangster, Alan., 2008. Frank Woods Business Accounting 2, Volume 1 (11th ed.). New York, NY: Financial Times Prent. Int. Read More