Unit 4 Managing Financial Resources Decisions

Introduction

I will recommend project A because the net present value is £39,053 which is higher compared to project B which have NPV of £ 34,117

I will recommend project A because the ARR is 160 % this shows that it will recover more than the investment while Project B has ARR of 50% which shows one could only get half of the return. The Payback period of Project A is 1.5 years which shows the money will be recovered in 1.5 years while it will take project B 2.5 years to recover his money, I will recommend project A.

The profitability index of research project A is 0.78 while the P-I of B is 1.68.

Conclusion: Considering all the factors above, I will recommend Project A Business is an organization in which basic resources, called inputs, are assembled and processed to provide goods or services to customers for the purpose of earning profits. Also, Business is an organization or enterprising entity engaged in commercials, industrial or professional activities. (Dyson, J R   2010)

1.BALANCE SHEET:  The purpose of a balance sheet is to report the financial position which are an amount of assets, liabilities, and stockholder’s equity of an accounting entity at a particular point in time. If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach.

2.STATEMENT OF COMPREHENSIVE INCOME: This reports the accountant’s primary measure of performance of a business, revenues fewer expenses during the accounting period. The components of another comprehensive income include:

  • Change in revaluation surplus
  • Actuarial gains and losses arising from translating the financial statements of a foreign operation (IAS 21)

An entity has a choice of presenting:

  • A single statement of comprehensive income or
  • Two statements
  • An income statement displaying components of profit or loss land
  • A statement of comprehensive income that begins with profit or loss.
  1. STATEMENT OF CASH FLOWS: This is a financial statement that shows how to changes in balance sheet accounts and income cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. Its particular focus is on the types of activities that create and use cash, which are operations investments, and financing.
  1. STATEMENT OF CHANGES IN EQUITY: A statement of changes in equity presents an entity’s profit or loss for a reporting period, items of income and expense recognised in other comprehensive income for the period. Total comprehensive income for the period showing the amounts attributed to owners of the parent and to non-controlling interests.
  1. 5. NOTES TO THE FINANCIAL STATEMENTS: This is also referred to as footnotes. These provide additional information system pertaining to a company’s operational and financial position and are considered to be an integral part of the financial statements. The notes must be Present information about the basis of preparation of the financial statements and the specific accounting policies used.

R. Riggs are operating sole trader, the company was owned by an individual and the decision about the company lied solely on him, this could be seen in the financial statement of the account

  1. R. Riggs operates just single account balance sheet this is due to the fact that the company was owned by a just single person.
  2. Also, we could see that balance sheet shown no salary paid to anyone which is what normally happened if a company belong to just one person.

1.While the J &B associate operates partnership company. The company was owned by 2 individual and the decision of the company lied on the 2 individual that owned it. This could be seen on the balance sheet of the company

  1. The company also operates 2 separate account statement which indicates the company was owned by more than one person this can be seen in the balance sheet of the company.

3.A closer look at the balance sheet shown salary of 30,000 pounds was paid to J while B received none. All the evidence above showed that j and b associates are into partnership

For R. Riggs:

Gross Profit Margin = Revenue – Cost of goods sold /Revenue x100%

From the financial statement of R. Riggs

£157,165 –  £94,520 = £62,645

62,645/157,165 x 100%

= 0.398 x 100

= 39 %

Net Profit Margin = Net profit/Net sales x100%

£23,937/ £157,165 x 100%

0.152 x 100%

=15.23%

Current Ratio = Current Assets/Current Liabilities

£18,874/5,657

=3.33 x 100 %

= 333

Quick Ratio = Current Asset – inventory/Current Liabilities

£18,874 – 2400/5,657 =16,474/5,657 = 2.9

For J&B Associates:

Gross Profit Margin = Revenue – Cost of goods sold /Revenue x100%

363,111 – 198,530/363,111 x 100

363,111 –  198,530 =164,581

164,581/363,111 x100

=0.45 x100 % = 45%

Net Profit Margin = Net profit/Net sales x100%

860,065/363,111 x100

860,065/363111 = 2.368

=2.368 x100% 23.7%

Current Ratio = Current Assets/Current Liabilities

140,490/72525 x100 1.93 x 100 = 194

Quick Ratio = Current Asset – inventory/Current Liabilities

Current Assets = 140,490

 Inventory =74,210

Current Liability = 72,525

140,490 -74,210/72,525 x100

66,280/72,525= 0.91

Conclusion:

The investors and creditors make use of Current Ratio to understand the liquidity of a company before investing in them or given out a loan.

This gives them the knowledge to know whether a company will be able to pay off its current liabilities or not. This express a company current debt in terms of current assets.

  1. Riggs has a ratio 3.33 while J & B associates has a current ratio of 1.9.

It shows that R. Riggs has 3 times more currents assets than liabilities while J & B Associates has 1.9 times more current assets than current liabilities.

It means R. Riggs is good in paying his liabilities than J & B Associates.

Liabilities should be covered by the asset 2: 1 before the company could be approved for a loan.

  1. Riggs would be able to get approval for a loan from the bank while J & B Associates will find it very difficult to get a loan.
  • Gearing:

Gearing = Long term Debt /Capital Employed x100

Capital Employed = Total Assets – Current Liabilities

Long term Debt =7880000

7880000/ 13800000 + 478600+597680 – 1187600

13800000+478600+597680 = 14,876,280

14,876,280 – 11876000 = 13,688,680

7,880000/13,688,680 x100

0.57 x100 = 57%.

 (ii) Earnings Per Share (EPS):

Earnings Per share = Dividend/Number of issued ordinary shares

750,000/5,000,000 = 0.15p

(iii) Dividend per share:

Dividend per share =   Dividend /number of ordinary share issues.

200,000/5,000,000 = 0.04 (DPS)

(iv) Dividend Yield:

Dividend yield: Dividend per share /price per share x100

Dividend per share = 0.04

0.04/1 = 0.04

0.04 x100 = 4 %

(v) Dividend Cover:

Dividend Cover: Earning per share /Dividend per share

EPS =0.15p

Dividend per share =0.04

0.15/0.04 = 3 .75 times

Price/Earnings Ratio: 

Price/earnings ratio: Market price per share/Earnings per share

EPS =0.15

0.80/0.15 = 5.33

To: jane

From: Gbenga

Subject: A report advising Jane whether or not she should invest in Staton Plc

Introduction: A brief Report to Advise Jane whether to invest in Staton PLC.

 Body:

From the account published by Staton Plc, after calculating the Gearing, I found that it is 57 percentages which means the company is running 57 percentage debt.

Earnings per share is 0.15p which is a little lower when investing in a company.

Dividend per share is 0.04p which show jane could only receive 0.04 pence on every 80 p invested which is too low compared to the previous year.

Dividend yield is 4 % which means Jane will be receiving 0.04p on every 80p she invested.

Dividend cover is 3.75 which implies that Staton Plc has sufficient earning to pay dividend in 3 times during the next dividend pay-out.

For a company to be profitable to invest it must be able to pay dividend cover for 2 times or more. This indicate that Staton Plc is retaining a higher portion of its earning to meet subsequent pay out.

Price/Earnings ratio is 5.33 which means Jane would be 5 times getting out her earning to cover the price. Company that are losing money will either have Nil or negative Price/ Earnings Ratio.

Conclusion: It is advisable for Jane not to invest in Staton Plc because the company is 57 percentages in debt which implies the company could go bankrupt and not be able to pay subsequent share price.

REFERENCE

Atrill, p. and Mclaney, E (2012). Accounting and finance for Non- specialist, 8th edition.

Dyson, J.R. (2010). Accounting for Non-Accounting Learners,8th edition

Atrill, p (2009) Management Accounting for Decision Makers 6th

Edition. Prentice Hall.

BPP Managing Financial Resources core book unit 2. Order Now

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