Source of Finance Certain Project-Btechnd

An approach that will assist participants in their choice of appropriate source of finance certain project.

Following are different sources of finance that can be used under different types of projects that business organisation can use:

Finance working capitalWorking capital is the net effect of current assets and current liabilities of the business organisation. Working capital is used by the business organisation for day to day operations and management. For working capital management mostly short term source of finance is used by the business organisation that is having higher cost i.e. interest rate. For working capital management bank overdraft, short term loan, trade credit internal source of funds, revenue generating activities, etc. are used for financing working capital(Wolff 2014).

Business expansion- Business organisation can use different types of finance for financing business expansion of the organisation. Long term or medium term sources of finance will be used for financing business expansion because huge funds will be required for the same. Issue of equity or preference shares, issue of debentures, venture capital, hire purchase, etc. are some sources of finance that can be used for business expansion projects.(Wolff 2014) Cost of capital is at moderate side in terms of financing expansion projects.

Investment- For making investment business organisation requires different sources of finance as per the type of investment i.e. short term, medium term or long term investment. Sale of division, retained earnings, sale of insured assets, etc. are some sources of finance that can be used for making investment.

Explain the importance of financial planning and assess the information need of different decision making

To

Management Accountant

XYZ Manufacturing Company

Date: 4th July, 2016

Subject: Importance of financial planning and information need of decision makers

Following is the importance of financial planning:

Management of liquidity- Financial planning has the capability of managing liquidity in the working capital of the organisation. Liquidity is measured with the help of financial planning i.e. financial planning makes analysis of current assets and liabilities of the organisation. Management of cash is included in the management of liquidity i.e. inflow and outflow of cash in the business operation is analysed with the help of financial planning(Wohlner 2013). When funds are needed and when to pull back funds is determined by financial planning.

Identification of cash surplus and deficient- Financial planning helps finance manager to manage cash resources by making cash budgets. Cash budget helps in calculating analysis of closing cash surplus or closing cash deficient. On the basis of cash budget, management or finance mange of business organisation can take decisions related to procurement of funds or application of idle cash in working capital.

Planning- Financial planning is the plan that is implemented in the business organisation and helps in making plan like to tax planning, investment planning, cost management and other aspects of business management. With the help of financial planning, management can earn better return on capital employed or return on investment since systematic investment will be made on the basis of financial planning(Wohlner 2013).

Information need of different decision makers:

Following are decision makers in the business organisation and their information need:

Management- Management including board of directors is the top most level of management that requires various information for preparing strategic and overall plan for the business organisation. For this purpose, information related to availability of market, business expansion opportunity, information of government policies, etc. are required(Hatch 2010).

Investors- Investors are main element for business organisation that provides financial assistance to business organisation for their operations. Investors require information related to profitability, availability of funds, cash availability, position of working capital, etc. are information need of investors(Hatch 2010).

Creditors- Creditors are provider of goods on credit to the organisation during the normal course of business. Therefore creditor requires information related to cash position, overdue history of organisation, profitability, creditworthiness of organisation, etc. are some information need of creditor for their decision making process.

Explain the impact of finance in the financial statements

(a)- Obtaining a 5-year loan of £10,000 at 10% interest per annum

Statement of financial position

 Amount £Amount £
Fixed assets5,020
Current assets  (Working note 1)42,974
Current liabilities(5657)37,317
Net Assets42,337
Long term liabilities(Working note 2)(8,000)
Net Assets34,337
Financed by
Capital
Share Capital11400
Add: Net profit (Working capital 3)22,93734,337

Working note 1

Calculation of current assets

Current assets = 35,974

Add: Loan obtained = 10,000

Less: Interest paid = 1,000

Less: repayment of loan = 2,000

Balance of current assets = 42,974

Working note 2:

Calculation of long terms liabilities

Long terms liabilities = 0

Add: Loan obtained = 10,000

Less: Repayment of loan = 2,000

Balance of long terms liabilities = 8,000

Working note 3:

It is assumed that net profit does not have effect of interest cost and therefore it is reduced from the net profit.

Profit and Loss account

ParticularsAmountParticularsAmount
Interest Charges1,000By Gross Profit23,937
To Net Profit22,937
(b)- Obtaining a 1 year line of credit with a major supplier for purchase amounting 5,500
 Amount £Amount £
Fixed assets5,020
Current assets  (Working note 4)41,474
Current liabilities(Working note 5)(11,157)30,317
Net Assets35,337
Long term liabilities
Net Assets35,337
Financed by
Capital
Share Capital11400
Add: Net profit23,93735,337

Working note 4

Calculation of current assets

Current assets = 35,974

Add= Stock = 5,500

Total current assets = 41,474

Working note 5

Calculation of current liabilities

Current liabilities = 5,657

Add= Creditors = 5,500

Current liabilities = 11,157

(c)- Issue of additional 1,000 shares at 4.50

 Amount £Amount £
Fixed assets5,020
Current assets (Working note 6)40,474
Current liabilities(5,657)34,817
Total Assets39,837
Long term liabilities
Net Assets39,837
Financed by
Capital
Share Capital  (Working note 7)12,400
Securities Premium (Working note 8)3,50015,900
Add: Net profit23,937
39,837

Working note 6

Calculation of current assets

Current assets = 35,974

Add: Issue of shares = 4,500

Current assets = 40474

Working note 7

Share capital = 11,400

Add: Issue of shares = 1,000

Share capital = 12,400

Working note 8

Shares are issued at securities premium i.e. of 3.50 and therefore separate account of securities premium will be opened.

(d)- Selling some office furniture worth 3,000 at their net releasable value, with no profit made in disposal.

 Amount £Amount £
Fixed assets (Working note 9)2,020
Current assets (Working note 10)38,974
Current liabilities(5,657)35,337
Total Assets35,337
Long term liabilities
Net Assets35,337
Financed by
Capital
Share Capital11,400
Add: Net profit23,937
35,337

Working note 9

Calculation of fixed assets

Fixed assets = 5,020

Less: Sale of furniture = 3,000

Fixed assets = 2,020

Working note 10

Calculation of current assets

Current assets = 35,974

Add: cash from sale of furniture= 3,000

Current assets = 33,974

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