Finance Assignment sample PDF

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Finance Assignment sample...

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Title of the Assignment: Name of the Student: Student Id: Date of Submission: Supervisor Name:

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EXECUTIVE SUMMARY Financial management and control plays an important role in evaluating the performance of any organization across a financial year. A perfect financial and management control plan used across any organization has a significant importance in analyzing the key ratios that can be used over planning the current and future decision making process as well. Based on the balance sheets and costing structure of the organization, the required financial management and control parameters can be calculated at different levels. Profit and Loss accounts for the financial years and the balance sheets are analyzed in this report for the overall organizational performance and different aspects as listed below are calculated and performance of the organization is analyzed at various levels 

Liquidity

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Profitability

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Gearing and Asset utilization

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Working capital cycle

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Breakeven point comparison for 2012 and 2013 financial years

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Safety margin analysis

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Investment appraisal of projects

Based on the problem definition and financial and accounting data the desired values are calculated for the case of Prospect Plc. organization and a detailed financial management and control analysis is given in the below sections.

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Table of Contents PART A: PROFITABILITY AND LIQUIDITY ANALYSIS.....................................................5 Profitability Ratios.......................................................................................................................5 Gross profit margin ratio for the year 2013..............................................................................5 Gross profit margin ratio for the year 2012..............................................................................5 Net Profit margin ratio for the year 2013.................................................................................6 Net Profit margin ratio for the year 2012.................................................................................6 Return on equity ratio for the year 2013..................................................................................7 Return on equity ratio for the year 2012..................................................................................7 Return on total assets ratio for year 2013.................................................................................7 Return on total assets ratio for year 2012.................................................................................8 Gearing Ratio...........................................................................................................................8 Liquidity Ratios........................................................................................................................9 Quick Ratio...............................................................................................................................9 Current Ratio..........................................................................................................................10 Asset utilization ratio..............................................................................................................10 Inventory turnover ratio..........................................................................................................11 Sales to net working capital....................................................................................................11 Analysis..................................................................................................................................12 Working Capital Cycle...........................................................................................................13 PART B: BREAKEVEN POINT AND SAFETY MARGIN....................................................14 Breakeven point analysis and safety margin for the year 2012:.............................................14 Breakeven point analysis and safety margin for the year 2013:.............................................15 PART C: INVESTMENT APPRAISALS..................................................................................17 PART D: CRITICAL EVALUATION........................................................................................19

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CONCLUSION AND RECOMMENDATIONS.......................................................................20 REFERENCES............................................................................................................................21

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PART A: PROFITABILITY AND LIQUIDITY ANALYSIS Profitability Ratios As per the views of ALShubiri (2011) profitability ratios plays significant role in analyzing the overall investors or organizational capability against estimating the profits earned through owners investments and existing corporate assets against the financial management aspects. In general the profitability ratios can be calculated under various categories like 

Return on equity ratio

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Gross profit margin ratio

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Return on total assets ratio

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Net profit margin ratio

Thus the profitability can be calculated using any of the above mentioned ratios and the required ratio calculation and respective analysis is as given below and entire calculations are assumed to be done in pounds Gross profit margin ratio for the year 2013 Gross profit margin ratio can be used to estimate organizational capability against deciding the price of the products and how to control the production costs. From the profit and loss account for the year ending 31st December 2013 the gross profit margin can be calculated using the formula Gross profit margin = Overall sales – Cost of goods sold / Overall sales From the profit and loss statement for the year 2013 below are the desired value Overall sales = 12650 Cost of goods sold = 6780 Now the Gross profit margin = 12650 – 6780/12650 = 5870/12650 = 0.464 Thus the gross profit margin for the year 2013 is 0.464 Gross profit margin ratio for the year 2012 Gross profit margin = Overall sales – Cost of goods sold / Overall sales 5|Page

From the profit and loss statement for the year end 31st December 2012 the desired values are listed below Overall sales = 11000 Cost of goods sold = 5150 Gross profit margin = 11000-5150/11000=5850/11000= 0.532 Thus the gross profit margin ratio for 2012 is 0.532 Net Profit margin ratio for the year 2013 Net profit margin ratio of any organization for a particular period indicates the selling prices and expenses analysis and from the problem statement the desired net profit margin ratio can be calculated using the formula Net profit margin ratio = Net profit after taxes / Overall sales From the profit and loss statement for the year end 31st December 2013 the desired values are Net profit after taxes = 1000 and Sales = 12650 Net profit margin ratio = 1000/12650 = 0.079 Thus the Net profit margin ratio for the year 2013 is 0.079 Net Profit margin ratio for the year 2012 Net profit margin ratio = Net profit after taxes / Overall sales From the profit and loss statement for the year end 31st December 2012 the desired values are Net profit after taxes = 1850 and Sales = 11000 Net profit margin ratio = 1850/11000 = 0.168 Thus the Net profit margin ratio for the year 2012 is 0.168

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Return on equity ratio for the year 2013 Return on equity ratio always indicates the overall investment ratios across an organization made by the respective owner and the required return on equity ratio can be calculated using the below formula Return on equity = Net profit after taxes / Total equity From the profit and loss statement for the year end 31st December 2013 the value of net profit after taxes = 1000 From the balance sheet provided Equity for yearend 31st December 2013 Equity = 5350 Return on equity = 1000/3700 = 0.27 Thus the return on equity ratio for the year 2013 is 0.2 Return on equity ratio for the year 2012 Return on equity = Net profit after taxes / Total equity From the profit and loss statement for the year end 31st December 2012 the value of net profit after taxes = 1850 From the balance sheet provided Equity for yearend 31st December 2012 Equity = 3000 Return on equity = 1850/3000 = 0.61 Thus the return on equity ratio for the year 2012 is 0.61 Return on total assets ratio for year 2013 Return on total assets ratio can be used to estimate the organizational capacity towards the assets utilization against generating the required profits and it can be calculated using the below formula Return on total assets = Net profit after taxes / Total assets

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From the profit and loss statement for the yearend 31st December 2013 Net profit after taxes = 1000 From the balance sheet for the year end 31st December 2013 Total assets = 5350 Return on total assets = 1000/5350 = 0.187 Thus the return on total assets ratio for the year 2013 is 0.187 Return on total assets ratio for year 2012 Return on total assets = Net profit after taxes / Total assets From the profit and loss statement for the yearend 31st December 2012 Net profit after taxes = 1850 From the balance sheet for the year end 31st December 2012 Total assets = 3650 Return on total assets = 1850/3650 = 0.506 Thus the return on total assets ratio for the year 2012 is 0.506 Gearing Ratio Gearing ratio can be used to performance of an organization against the equity to the funds borrowed. Overall risk or financial leverage of an organization can be estimated using the gearing ratio and can be calculated with the debt to equity ratio as well using the below formula Debt to equity or gearing = Total debt / Total shareholders’ equity From the balance sheet of yearend 31st December 2013 total debt = 1850 Shareholders equity = 3700 Gearing ratio = 1850/3700= 0.5

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Thus the gearing ratio for the year 2013 is 0.5 From the balance sheet of yearend 31st December 2012 total debt = 650 Shareholders equity = 3000 Gearing ratio = 650/3000=0.21 Thus the gearing ratio for the year 2012 is 0.21 Liquidity Ratios Liquidity ratios are useful in analyzing the organizational current liquidity options to meet the demands and also the current debts. The required liquidity ratios can be calculated using some ratios and they are listed below 

Quick Ratio

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Current Ratio

Quick Ratio Quick ratio can be used to estimate the ability of any organization to meet the current and short time obligations and can be calculated using the below formula Quick ratio = (Current Assets – Total inventories)/Current liabilities From the balance sheet for the yearend 31st December 2013 Current Assets = 4850 Total inventories = 350 Current Liabilities = 3000 Quick ratio = 4850-350/3000= 1.5 Thus the quick ratio for the year 2013 is 1.5 From the balance sheet for the yearend 31st December 2012 Current Assets = 3050

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Total inventories = 250 Current Liabilities = 2400 Quick ratio = 3050-250/2400= 1.16 Thus the quick ratio for the year 2012 is 1.16 Current Ratio Current ratio can be used to estimate the ability of the organization to payback the few liabilities like short time liabilities and can be calculated using the below formula Current Ratio = Current Assets / Current Liabilities From the balance sheet as of the yearend 31st December 2013 Current Assets = 4850 Current Liabilities = 3000 Current Ratio = 4850/3000 = 1.61 Thus the current ratio for the year 2013 is 1.61 From the balance sheet as of the yearend 31st December 2012 Current Assets = 3050 Current Liabilities = 2400 Current Ratio = 3050/2400 = 1.27 Thus the current ratio for the year 2012 is 1.27 Asset utilization ratio Asset utilization can be used to estimate the required ability of the organization against utilizing the available assets to generate the desired profits and it can be calculated using couple of ratios as listed below 

Inventory turnover ratio

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Sales to net working capital

Inventory turnover ratio Inventory turnover ratio can be used to estimate the number of time the inventory is sold across a time period and can be calculated using the formula Inventory turnover = Cost of goods sold / inventory From the balance sheet as yearend 31st December 2013 Cost of goods sold = 6780 Inventory = 350 Inventory turnover ratio = 6780/350= 19.3 Thus the inventory turnover ratio for the year 2013 is 19.3 From the balance sheet as yearend 31st December 2012 Cost of goods sold = 5150 Inventory = 250 Inventory turnover ratio = 5150/250= 20.6 Thus the inventory turnover ratio for the year 2012 is 20.6 Sales to net working capital Sales to net working capital ratio can be used to estimate the organizations ability to generate the required sales using the current capital and can be calculated using the below formula Sales to net working capital = Overall sales / (Current assets – Current liabilities) From the balance sheet as of the yearend 31st December 2013 Overall sales = 12650 Current assets = 4850

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Current liabilities= 3000 Sales to net working capital = 12650/4850-3000= 6.83 Thus the sales to net working capital for the year 2013 is 6.83 From the balance sheet as of the yearend 31st December 2012 Overall sales = 11000 Current assets = 3050 Current liabilities= 2400 Sales to net working capital = 11000/3050-2400= 16.92 Thus the sales to net working capital for the year 2012 is 16.92 Analysis From the entire ratios calculated against profitability, liquidity, asset utilization and gearing ratio the required analysis is given in this section. From the profitability ratios like gross profit margin, net profit margin, return on equity ratio and return on total assets ratio it is clear that the profitability index across the year 2012 when compared to the year 2013.From the ratio analysis it can be analyzed that the profit after taxes is low in the year 2013 and it has affected the overall profitability a lot in this context. Bad debts return off and closing stock is also high in the year 2013 and it has affected the profitability as well. When the case with gearing ratio is considered it is high across the year 2013 and it clearly indicates the financial risk against the industry averages as the shareholders equity is more with the year 2014. Liquidity ratio analysis done with the current ratio and quick ratio clearly indicates that the ability of the organization to meet the current and short time debts is more across the year 2013 when compared to 2012. As the value of current assets is more across the year 2013, organization can perform against the current labile conditions. Asset utilization ratio is more across the year 2012 when compared to 2013 and it clearly indicates the organization has better ability towards generating the sales against the current assets in the ear 2012.

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Working Capital Cycle Working capital cycle is used to measure the actual time incurred between goods supplied and the final cash receipt. This value can also be used to determine the actual number of days taken for an organization in converting the actual working capital into required revenue and this can be calculated in days using the below formula Working capital cycle = Inventories / cost of sale * 365 From the balance sheet as of yearend 31st December 2013 Working capital cycle = 350/6780 * 365 = 19 days Thus the working capital cycle in days for the year 2013 is 19 days From the balance sheet as of yearend 31st December 2012 Working capital cycle = 250/5150 * 365 = 18 days Thus the working capital cycle in days for the year 2012 is 18 days Thus from the working capital cycle calculated the organization has the ability of converting the current assets as liquidity in 18 days for the year 2012 and 19 days for the year 2013. From the overall analysis the liquidity ability is high in the year 2012 and the organizational performance is more in this case.

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PART B: BREAKEVEN POINT AND SAFETY MARGIN Khan.et.al (2011) stated that breakeven point can be defines as the desired point where the actual income earned from the organization’s overall sales becomes equal to the expenses which includes overheads and cost of sales and also includes the amount of money taken from the business for the survival of organization. In this report breakeven point analysis is done for Norfolk Ltd which is specialized in selling air conditioners and the breakeven point for the year 2012 and 2013 is derived and given below Breakeven point analysis and safety margin for the year 2012: Breakeven point can be calculated using the formula given below BEP = Fixed costs / PV ratio PV ratio is the profit volume ratio PV ratio = Contribution / Sales per unit * 100 Contribution = Sales per unit – variable cost Variable cost = direct material + direct labor + variable manufacturing overhead From the given data direct material = 200 + direct labor + 50 Direct labor is given as 90 per hour and it taken 20 minutes per unit Total number of units produced is 275000 and thus the total minutes incurred = 275000*20= 5500000 minutes i.e. 91667. Thus the total hours is 91677 hours and the direct labor is 30 Thus the variable cost = 280 Thus the contribution = 400-280 =120

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PV ratio = 120/400 * 100= 30 Fixed costs = 4000000 BE ratio in sales = 4000000/30 * 100 = 13333333 BE ratio in units = 13333333/400= 33333 units Thus the Breakeven point is 33333 units. Thus the breakeven point for the year 2012 is 33333 units. Safety margin can be calculated using the below formula Safety margin = Total sales –Breakeven sales Total sales = 275000*400=110000000 Break even sales= 13333333 Safety margin = 110000000-13333333= 96666667 Thus the safety margin for the year 2012 is 96666667 Breakeven point analysis and safety margin for the year 2013: Same data is used for estimating the breakeven point in units and safety margin for the year 2013 as well. From the problem definition it is clear that that sale is increased by 15% and thus the new sales value per unit for the year 2013 is 460 and the fixed cost has increased by 2440000 and thus the total fixed cost for the year 2013 is 6440000. Now the BEP = Fixed costs / PV ratio PV ratio= Contribution/Sales per unit * 100 As per the given data the contribution is same for the year 2013 as of 2012 and is 120 PV ratio=120/460*100 = 26 BEP for sales=6440000/.26= 24769230

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BEP in units =24769230/460= 53846 Thus the Breakeven point in units for the year 2013 is 53846 Safety margin = Total sales –Breakeven sales Total sales = 275000*460=126500000 Breakeven sales = 24769230 Safety margin = 101730770 Thus the safety margin for the year 2013 is 101730770 From the analysis of breakeven point and safety margin it is clear that for the year 2012 is at the optimal level when compared to 2013. When the price is increased by 10% in the year 2013 the breakeven point and safety margin has increased and thus it is always required to control the fixed costs and also maintain different contribution as well for the years. Variable costs can also be reduced against increasing the selling price and this is clear from the safety margin analysis. If the companies need to increase the price by 15% in the year 2013 the breakeven sales or breakeven units will further increase and this leads to more cost of production or low sales as well. Thus to optimize the Breakeven sales and safety margins following policies can be adopted 

Fixed costs like selling and distribution can be reduced further

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Fixed administration costs can be reduced further

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Company should produce more units with the more labor and affordable wage rates

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