ASSESSMENT CRITERIA

Learner name: LALITESH SUTRAVE

Learners Registration No: DL11071

Course title: Unit 2: Managing Financial Resources and Decisions

Unit code: H/601/0548

QCF Level 5

Pass

Distinction

Assessor name : Dr.NEERAJA

Task

LO

Assessment criteria

1.1

1.2

1.3

1.3 evaluate appropriate sources of finance for a business

project

2.1

2.1 analyse the costs of different sources of finance

2.2

2.2 explain the importance of financial planning

2.3

2.4

3.1

3.2

3.3

4.1

4.2

4.3

1.1 identify the sources of finance available to a business

1.2 assess the implications of the different sources

2.3 assess the information needs of different decision

makers
2.4 explain the impact of finance on the financial
statements

M2

D1
M2
D2

4.2 compare appropriate formats of financial statements

for different types of business
4.3 interpret financial statements using appropriate
ratios and comparisons, both internal and external.

1:

M1

4.1 discuss the main financial statements

Review dates

D1

3.2 explain the calculation of unit costs and make pricing

decisions using relevant information
3.3 assess the viability of a project using investment
appraisal techniques

Hand-in date

M2

3.1 analyse budgets and make appropriate decisions

Date set:

Merit

M2

M2
Submitted Date:

2:

3:

4:

Learner declaration I, hereby confirm that this assignment is my own work and not copied or plagiarized. It
has not previously been submitted as part of any assessment for this qualification. All the sources, from
which information has been obtained for this assignment, have been referenced. (Harvard format). I further
confirm that I have read and understood the Roots Business School rules and regulations about plagiarism

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and copying and agree to be bound by them

Learner signature

Date

Tasks
Task
Evidence required for
No
(Include the grading statement from the published specifications)
learning outcome
ASSIGNMENT I
PONNI SUGARS & CHEMICALS LIMITED
1
Ascertain different sources of finance
1.1 identify the sources of finance available to
a business
available in the given case.
2
Enumerate the implications for each source of
1.2 assess the implications of the different
sources
finance
3
Evaluate different sources of finance for the
1.3 evaluate appropriate sources of finance
for a business project
project of Ponni Sugars and Chemicals Ltd
4
For different sources of finance evaluate by
2.1 analyse the costs of different sources of
finance
comparison
5
What is financial planning how does it help the
2.2 explain the importance of financial
planning
organisation
6
Evaluate the information needs of different
2.3 assess the information needs of different
decision makers
decision makers in a organisation
7
Assess the impact of finance on financial
2.4 explain the impact of finance on the
financial statements
statements
ASSIGNMENT II TESCO RETAIL OUTLET & Vishal Mega Mart
8
3.1 analyse budgets and make appropriate
Analyze budgets and recommend actions
decisions
9
3.2 explain the calculation of unit costs and
Assess costing and recommend pricing
make pricing decisions using relevant
decisions
information
10
Ascertain project viability by using investment
3.3 assess the viability of a project using
investment appraisal techniques
appraisal methods
11
Explain financial statements and their purpose.
4.1 discuss the main financial statements
12
Compare financial statements of different
4.2 compare appropriate formats of financial
statements for different types of business
businesses
13
4.3 interpret financial statements using
Compare financial statements both internal and
appropriate ratios and comparisons, both
external using financial ratios.
internal and external.

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ASSIGNMENT 1

Task 1.1
Identify the different sources of finance available to Ponni Sugars &
Chemicals Ltd.
Equity Share capital
Common stocks are equity share capital. It means you paid for a fixed amount of ownership by
buying stock company, and if that company's value and profitability goes up or down, so does
the value of that stock. In short, it means you have "an equal share" in that company's capital.
Equity capital is integral to a company's financing strategies, as it provides the lifeblood
necessary to fund short-term initiatives. Besides, equity helps senior leadership maintain healthy
working capital ratios. Working capital gauges an organization's short-term cash and equals
current assets minus current liabilities. Having a varied group of equity holders helps a company
diversify its financing sources, enabling corporate managers to seek additional funds for longterm expansion plans. (1)
Preference Share Capital
Preference Share Capital is often considered as a hybrid form of financing because it has many
features of both equity shares and debenture. It resembles equity capital in the following ways:
(i) The non-payment of dividend does not force the company to insolvency in other words,
(ii) Preference dividend is not an obligatory payment.
(iii) Dividends are not a tax-deductible payment.
(iv)In some cases, preference shares have no fixed maturity date.
On the other hand, it is similar to debentures are.
(i) Dividend rate of preference shares is usually fixed just like it is fixed on debentures,
(ii) Preference shares don't share in residual earnings,
(iii) Preference shareholders normally don't enjoy the voting right. (2)

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Debentures
A debenture is a document that either creates a debt or acknowledges it, and it is a debt without
collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used
by large companies to borrow money. In some countries the term is used interchangeably
with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond
evidencing the fact that the company is liable to pay a specified amount with interest and
although the money raised by the debentures becomes a part of the company's capital structure, it
does not become share capital. Senior debentures get paid before subordinate debentures, and
there are varying rates of risk and payoff for these categories. Debentures are generally
freely transferable by the debenture holder. Debenture holders have no rights to vote in the
company's general meetings of shareholders, but they may have separate meetings or votes e.g.
on changes to the rights attached to the debentures. The interest paid to them is a charge against
profit in the company's financial statements. (3)
Long term Loan (LTL)
Holding an asset for an extended period of time. Depending on the type of security, a long-term
asset can be held for as little as one year or for as long as 30 years or more. A form of debt that is
paid off over an extended time frame that exceeds one year in duration. Obtaining a long term
loan provides a business with working capital that it can use to purchase assets, inventory or
equipment which can then be used to create additional income for the business. (4)

Retained earning
Retained earnings is an accounting term that means that the amount of money you though you
earned, was not all truly yours. It's your net income minus the percentage "retained" by your
employer In accounting, retained earnings refers to the portion of net income which is retained
by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation
takes a loss, then that loss is retained and called variously retained losses, accumulated losses or
accumulated deficit. Retained earnings and losses are cumulative from year to year with losses
offsetting earnings. Retained earnings are reported in the shareholders' equity section of
the balance sheet. Companies with net accumulated losses may refer to negative shareholders'
equity as a shareholders' deficit. A complete report of the retained earnings or retained losses is
presented in the Statement of Retained Earnings or Statement of Retained Losses. (5)

Venture Capital:
Money provided by investors to startup firms and small businesses with perceived long-term
growth potential. This is a very important source of funding for startups that do not have access
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to capital markets. It typically entails high risk for the investor, but it has the potential for
above Average returns. It is also a way in which public and private actors can construct an
institution that systematically creates networks for the new firms and industries, so that they can
progress. This institution helps in identifying and combining pieces of companies, like finance,
technical expertise, know-how of marketing and business models. Once integrated, these
enterprises succeed by becoming nodes in the search networks for designing and building
products in their domain. (6)

TASK 2
1.2 assess the implications of the different sources
Equity share capital
Legal implications:
1. Equity shareholders are entitled to voting rights by the law. Hence dilution of ownership
and control of the firm. They do not have any preference for payment of dividend or
repayment of capital.
2. Law requires company to give existing equity shareholders the first opportunity to
purchase additional equity shares.
Financial implications:
1. The cost of equity capital is high,
2. Dividends are paid out of profit after tax. This makes the relative cost of equity more.
3. Claims arise only after satisfying the claims of preference shares.

Preference share capital

Preference shares are more prior shares.
Legal implications
1. Payment of dividends is not legal, but if the company skips paying dividends for a long
time, preference shareholders acquire voting rights as per law.
2. They have a prior claim on the assets and earnings of the firm. The laws say that in case
of bankruptcy, preference shareholders are entitled to claim liquidation.
3. Preference share have an preference over equity for re-payment of capital in the event of
winding-up.
Financial implications:
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1. Financial distress on account of redemption obligation is not high.

2. Compared to debt capital, it is a very expensive source of financing because dividend
payable is not tax deductible.

Debentures
Legal implications
1. As per law, Company enjoys greater flexibility in designing the debenture issue but after
the issue, the firm hardly has any freedom in re-negotiating the terms of the issue.
2. Appointment of a trustee through a trust deed is must.
Financial implications
1. Payment of interest is must but it is tax deductible.
2. Redemption of debentures poses a financial distress.
3. Receives fixed rate of interest whether the company makes profit or loss.

Long term loan

Legal implications:
1. Mortgage of all immovable properties of the borrower, both present and future.
2. Financial institutions have a right to appoint nominee directors.
3. Obtain clearance and licenses from various government agencies.
Financial implications:
1. A firm has to reduce the proportion of debt in its capital structure by issuing additional
equity and preference capital. This causes a sizeable amount of expenditure.
2. Payment of interest.

Retained earnings
Legal implications:
1) Less legal implications as it is available internally and do not require talking to lenders.
2) Does not lead to payment of cash.
Financial implications
1. Opportunity cost is quite high as it represents dividends foregone by equity shareholders.
2. Avoid issue of cost.

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TASK 3
1.3 evaluate appropriate sources of finance for a business project
The most preferable option which gives appropriate sources of finance is
Option I: This detail will help us to know which option would be better.

Option I: Equity share Capital (208000 Equity shares of 100 each) Rs. 2, 08, 00,000
10% Preference share Capital (605000 PS of 100 each) Rs. 6, 05, 00,000
8% Debentures (face value Rs.1000) Rs. 12, 50, 00,000
6% Loan from IDBI- Financial Institution Rs. 22, 05, 00,000
Retained Earnings Rs. 2, 82, 00,000
Earnings per share (EPS) = Earning after interest and Tax
Total Equity Shares
Particulars
Rs
Earnings before Interest and Tax

100,00,00,000

Less: Interest on Debentures (12,50,00,000

x 8/100)

(1,00,00,000)
99,00,00,000

Less: Interest on Loan (22,05,00,000 x

6/100)

(1,32,30,000)
97,67,70,000

Less: Corporate tax(97,67,70,000 x 40/100)

(39,07,08,000)
58,60,62,000

Less: Dividends on Preference Shares

(6,05,00,000x10/100)
Earnings after Interest, Tax and Dividends

(60,50,000)
58,00,12,000

EPS = 58, 00, 12,000 = Rs. 2788.5

208000
Capital Gearing Ratio: Inside funds = 2, 08, 00,000 + 2, 82, 00,000
Outside Funds 6, 05, 00,000+12, 50, 00,000 + 22, 05, 00,000

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= 4, 90, 00,000
40, 60, 00,000

= High Geared

Option II: Equity share Capital (605000 Equity shares of 100 each)

Rs. 6, 05, 00,000

10% Preference share Capital (208000 PS of 100 each)
Rs.2, 08, 00,000
8% Debentures (face value Rs.1000) Rs. 22, 05, 00,000
6% Loan from IDBI- Financial Institution Rs. 12, 50, 00,000
Retained Earnings Rs. 2, 82, 00,000

Particulars

Rs

Earnings before Interest and Tax

100,00,00,000

Less: Interest on Debentures (22,05,00,000

x 8/100)

(1,76,40,000)
98,23,60,000

Less: Interest on Loan (12,50,00,000x

6/100)

(75,00,000)
97,48,60,000

Less: Corporate tax(97,48,60,000 x 40/100)

(38,99,44,000)
58,49,16,000

Less: Dividends on Preference Shares

(2,08,00,000x10/100)
Earnings after Interest, Tax and Dividends

(20,80,000)
58,28,36,000

EPS = 58, 28, 36,000 = Rs. 963.3

605000
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Capital Gearing Ratio= 6, 05, 00,000 + 2, 82, 00,000

2, 08, 00,000+22, 05, 00,000+12, 50, 00,000
= 8, 87, 00,000 = High Geared
= 36, 63, 00,000

Option III: Equity share Capital (208000 Equity shares of 100 each)
Rs. 2, 08, 00,000
10% Preference share Capital (2205000 PS of 100 each)
Rs. 22, 05, 00,000
8% Debentures (face value Rs.1000) Rs. 12, 50, 00,000
6% Loan from IDBI- Financial Institution Rs. 6, 05, 00,000
Retained Earnings Rs. 2, 82, 00,000

Particulars

Rs

Earnings before Interest and Tax

100,00,00,000

Less: Interest on Debentures (12,50,00,000

x 8/100)

(1,00,00,000)
99,00,00,000

Less: Interest on Loan (6,05,00,000x

6/100)

(36,30,000)
98,63,70,000

Less: Corporate tax(98,63,70,000 x 40/100) (39,45,48,000)

59,18,22,000
Less: Dividends on Preference Shares (22,
05, 00, 000x10/100)
Earnings after Interest, Tax and Dividends

EPS = 56, 97, 72,000

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(2,20,50,000)
56,97,72,000

= Rs. 2739.2
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208000
Capital Gearing Ratio= 2, 08, 00,000 + 2, 82, 00,000
22, 05, 00,000+ 12, 50, 00,000 + 6, 05, 00,000
= 4, 90, 00,000
= High Geared
40, 60, 00,000

Comment: Pooni and Sugars should go for option I which gives the highest amount of earning
per share i.e. Rs 2788.5. Thus by the above details we can find out the amount of dividend they
get is dependent on the percentage of profit the company gains in the particular financial year. In
terms of capital gearing ratio is concerned all the three options are having high geared ratio.
Hence capital gearing ratio does not make much difference in taking a decision to choose an
appropriate option of finance for Pooni and sugars company. In the option 1 we are getting more
earnings so it is the appropriate choice to make.

TASK 4
2.1 analyse the costs of different sources of finance
Answer:
Kda= I (1-t)
NP
Cost of debt=

12, 50, 00,000 x 2= 25, 00,000

100

Where I= Interest, NP = Net proceeds, Kda= Cost after tax and t= Tax
Interest = 1, 00, 00,000
Cost of flotation (2%) = 25, 00,000
Net proceeds = Principal cost of flotation
= 12, 50,000 25, 00,000
= 12, 25,000
Tax = 40% = 0.40
Kda= I (1-t)
NP
=1, 00, 00,000(1- 0.40)
12, 25, 00,000
Cost of Preference shares:

12, 50, 00,000 x 2= 25, 00,000

100

Kp= Cost of preference shares, D = Annual preference dividend, NP- Net Proceeds
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Cost of flotation (2%) = 12, 10,000

NP= 6, 05, 00,000 12, 10,000 = 5, 92, 90,000
D= 60, 50,000
6, 05, 00,000 x 2= 12, 10,000
100
Kda= I .
NP
=60, 50,000
59290000
= 0.102 or 10.2 %

Kes = D
NP

Cost of equity shares:

D= Expected annual dividend per share, NP = Net proceeds
D = 20% annual dividend and Rs 100 per share value
=20 x 100 = 20
100
NP = Rs 100 per share value Rs 2 cost of issue
= 98
Kes= 20 = 0.204
98

Kes = D (1 t)
NP

= 20.4%
Cost of retained earnings:
D= Expected annual dividend per share, NP = Net proceeds
D = 20% annual dividend and Rs 100 per share value
NP = Rs 100 per share value Rs 2 cost of issue
= 98
= 20 x 100 = 20
100
K es= 20X (1- 0.40)
98
= 0.204 X 0.60
=0.1224

Comment: As per the above analysis the cost of retained earnings is lower compare to cost of
debt, preference shares, equity.
Cost of equity is very high.

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TASK 5
2.2 explain the importance of financial planning
Answer:
Financial planning helps in determining short and long-term financial goals and create a
balanced plan to meet those goals.
Here are ten powerful reasons of financial planning,.
1. Income: It's possible to manage income more effectively through planning. Managing
income helps you understand how much money you'll need for tax payments, other
monthly expenditures and savings.
2. Cash Flow: Increase cash flows by carefully monitoring your spending patterns and
expenses. Tax planning, prudent spending and careful budgeting will help you keep more
of your hard earned cash.
3. Capital: An increase in cash flow, can lead to an increase in capital. Allowing you to
consider investments to improve your overall financial well-being.
4. Family Security: Providing for your family's financial security is an important part of
the financial planning process. Having the proper insurance coverage and policies in
place can provide peace of mind for you and your loved ones.
5. Investment: A proper financial plan considers your personal circumstances, objectives
and risk tolerance. It acts as a guide in helping choose the right types of investments to fit
your needs, personality, and goals.
6. Standard of Living: The savings created from good planning can prove beneficial in
difficult times. For example, you can make sure there is enough insurance coverage to
replace any lost income should a family bread winner become unable to work.
7. Financial Understanding: Better financial understanding can be achieved when
measurable financial goals are set, the effects of decisions understood, and results
reviewed. Giving you a whole new approach to your budget and improving control over
your financial lifestyle.
8. Assets: A nice 'cushion' in the form of assets is desirable. But many assets come with
liabilities attached. So, it becomes important to determine the real value of an asset. The
knowledge of settling or canceling the liabilities, comes with the understanding of your
finances. The overall process helps build assets that don't become a burden in the future.

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9. Savings: It used to be called saving for a rainy day. But sudden financial changes can
still throw you off track. It is good to have some investments with high liquidity. These
investments can be utilized in times of emergency or for educational purposes.
10. Ongoing Advice: Establishing a relationship with a financial advisor you can trust is
critical to achieving your goals. Your financial advisor will meet with you to assess your
current financial circumstances and develop a comprehensive plan customized for you.
Recommendation to Ponni Sugar & Chemicals Ltd:
These recommendations reflect the facts about the reality of new retirement system with a
reduced pension rising in the state which in return is a problem for a normal person. There can be
many problems for an individual and can also have related general insecurity with regard to
individual financial situations, which also may arise with the retirement.

TASK 6
2.3 assess the information needs of different decision makers
Answer:
In an any organization we find different decision makers, the highest decision making authority
for any company is basited on the board of the company. The managing director will be
executing the directions given by the board of directors. Director production, director finance,
director personal, director marketing would be on the top making major decisions in their
respective departments but taking the directions from managing director.
The chief management account looks after the financial aspects concerning the organization. The
management accountant directs management controller, budget controller, internal auditor, head
organization methods and credit control,
The above decision makers who are at different levels taking different decisions requires
different reports to take appropriate decisions. The decisions taken at board are strategic in
nature and requires the figures like sales growth and profitability figures for each quarter and
comparative statements relating to the present and the past.
The managing director who looks after day to day management of the company requires much
more detail reports concerning production, finance, marketing and human resources. Here the
reports depending on the size of the organization may be prepared for monthly or forthnatly to
find divisions from the planed budgets.

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The directors concerning various departments who are heading different departments would like
to get forthnatly reports on the actuals Vs budgeted figures to find divisions and take a
appropriate decisions.
The chief management accountant will be the overall in-charge likes to have different statements
reports concerning expenditures, incomes, specific reports relating to various responsibilities to
control overall finances of the organization.

TASK 7
2.4 explain the impact of finance on the financial statements
Answer:
Financial Statements represent a formal record of the financial activities of an entity. These are
written reports that quantify the financial strength, performance and liquidity of a company.
Financial Statements reflect the financial effects of business transactions and events on the
entity.
Four Types of Financial Statements
The four main types of financial statements are:
1. Statement of Financial Position
Statement of Financial Position, also known as the Balance Sheet, presents the financial
position of an entity at a given date. It is comprised of the following three elements:

Assets: Something a business owns or controls.

Liabilities: Something a business owes to someone.

Equity: What the business owes to its owners. This represents the amount of
capital that remains in the business after its assets are used to pay off its
outstanding liabilities. Equity therefore represents the difference between the
assets and liabilities.

2. Income Statement
Income Statement, also known as the Profit and Loss Statement, reports the company's
financial performance in terms of net profit or loss over a specified period. Income
Statement is composed of the following two elements:

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Income: What the business has earned over a period.

Expense: The cost incurred by the business over a period.

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Net profit or loss is arrived by deducting expenses from income.

3. Cash Flow Statement

Cash Flow Statement, presents the movement in cash and bank balances over a period.
The movement in cash flows is classified into the following segments:

Operating Activities: Represents the cash flow from primary activities of a

business.

Investing Activities: Represents cash flow from the purchase and sale of assets
other than inventories.

Financing Activities: Represents cash flow generated or spent on raising and

repaying share capital and debt together with the payments of interest and
dividends.

4. Statement of Changes in Equity

Statement of Changes in Equity, also known as the Statement of Retained Earnings,
details the movement in owners' equity over a period. The movement in owners' equity is
derived from the following components:

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Net Profit or loss during the period as reported in the income statement

Share capital issued or repaid during the period

Dividend payments

Gains or losses recognized directly in equity.

Effects of a change in accounting policy or correction of accounting error.

Capital + Liabilities
Equity share capital

Rs
208, 00,000

Preference share capital

Debentures
Loan from IDBIFinancial Institution
Retained earnings

605, 00,000
1250, 00,000
2205, 00,000
282, 00,000

Assets
Land and site
development
Buildings
Plant and Machinery
Miscellaneous Fixed
Assets
Fees and Consultants
Preliminary and Preoperative Expenses
Provision for

Rs
102, 00,000
543, 00,000
29, 59, 00,000
176, 00,000
55, 00,000
445, 00,000
210, 00,000
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contingences
Margin money for
working capital
45, 50, 00, 000

60, 00,000
45, 50, 00, 000

Comment: - The cost of capital will increase which is risky for the company. Returns should
increase in proportion to the risk. The incremental cost of capital should have covered by
increasing profitability of the firm.

References:

Task1.1
1. in.answers.yahoo.com/question/index?qid=20120705235242AAjUybN
2. publishyourarticles.net/knowledge-hub/company-accounts/what-is-preference-sharecapital.html
3. en.wikipedia.org/wiki/Debenture
4. investopedia.com/terms/l/longterm.asp#ixzz2BFEoKaFy
5. ask.com/wiki/Retained_earnings
6. investopedia.com/terms/v/venturecapital.asp#ixzz2BFGV0ZIl

Task 2.2
7. businesscasestudies.co.uk/business-theory/finance/financial-analysis-andplanning.html#ixzz2BFLnT4wd
8. businesscasestudies.co.uk/business-theory/finance/financial-analysis-andplanning.html#ixzz2BFKmN9U5

Task 2.3
9. investorwords.com/3775/preference_shares.html#ixzz2BFU7bmpq
10. en.wikipedia.org/wiki/Debenture

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ASSIGMENT 2:
TASK 8
3.1 analyse budgets and make appropriate decisions
Working:
Collection from customers: June sales is collected in July and in August. Therefore June
sales amount includes of Apr and of May sales. Similarly July collection includes of May
and of June sales
June collection: Apr + May = (1,00,000x ) + (1, 20,000x ) = 50000 + 60000= 1, 10,000
July Collection: May + June= (1, 20,000x ) + (1, 40,000x ) = 60000 + 70000 = 1, 30,000
August Collection: June + July = (1,40,000x ) + (1, 60,000x ) =70000 + 80000 =150000
Sales commission: Sales Commission on Apr sales will be paid in June. Similarly Mays
commission is paid in July.
June: 1, 00,000 x 5/100 = 5000

July: 1, 20,000 x 5/100 = 6000 Aug: 1, 40,000 x 5/100 = 7000

-Payments to creditors: Creditors are paid in the following month of supply. May purchases are
paid in June.
June: 80000

July: 90000

August: 1, 00,000

-Plant purchased in the month of June Rs. 78,000 of which Rs. 48,000 paid immediately and the
balance Rs. 30,000 is paid in two equal installments Rs. 15,000
June: 48,000

July: 15,000

August: 15,000

-Wages paid on the due date while during next month.

(Considering the due date to be in the same month, i.e. June payment in June and in July)
June: (9500x ) + (9500x ) = 7125 + 2375 = 9500
July: (12,00x ) + (9500 x ) = 9000+ 2375 = 11375
August: (14,000x ) + (12,000x ) = 11500 + 3000 = 14500
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-Selling expenses and overheads are one month lag. Apr payment in May and May in June.
Cash Budget:
Particulars
Opening Balance
Receipts
- Collection from
customers
Total receipts (A)

June
10,000

July
(30,500)

August
(32,375)

1,10,000

1,30,000

1,50,000

1,20,000

99,500

1,17,625

6,000
90,000

7,000
1,00,000

15,000
11,375
3,500
6,000

15,000
14,500
3,500
6,000

1,50,500

1,31,875

1,46,500

Closing Balance (A- (30,500)

B)

(32,375)

(28,875)

Payments:
-Sales Commission
5,000
-Payment to credit 80,000
(Purchase)
-Plant
48,000
-Wages
9,500
-Selling expenses
3,500
-Overheads
4,500
Total Payments (B)

Comment: After subtracting the income from expenditure we get the closing balance of June as
RS30,500 which means the company has incurred with loss of Rs.30,500. After subtracting
receipts and payment the cash balance at the end of the month is again a loss.

TASK 9
3.2 explain the calculation of unit costs and make pricing decisions using relevant
information

Unit contribution for Rs. 1500 units @ price of Rs 10/unit

Direct Cost:
Per unit
Direct material
5
Direct Wages
3
Prime Cost ( Direct material + wages)
8
Variable Cost:
Factory overheads
0.5
Selling overheads
0.5
Marginal Cost (Prime cost +Factory, 9
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Selling overheads)
Selling price

10

Contribution/unit (Selling price Marginal 1

Cost)

Comparative analysis to accept or not to accept selling 15,000 units to foreign buyer
Particulars
Profit without accepting
Profit for accepting
Direct material
250000 (50000 x 5)
3,25,000( 65000x 5)
Direct Wages
150000 (50000x 3)
1,95,000(65000x 3)
Prime cost
400000
5,20,000
Factory overheads
Selling overheads
Marginal Cost (PC
Overheads)
Fixed Cost
Total Cost (MC + FC)
Sales
Profit (Sales Cost)

25000
25000
+ 4,50,000

32,500
32,500
5,85,000

37500
487500

37500
622500

600000
112500

750000
127500

Comment: They can their 15000 units of surplus goods to foreign and increase their profits. By
this the Tesco Company can spread the business in global market.

TASK 10
3.3 assess the viability of a project using investment appraisal techniques
Project- Mumbai (Worli)
Initial Investment- 2, 00,000
Estimated life- 5 yrs
Scrap- 10,000
Year
I
II
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Cash flow
50,000
1,00,000

PV factor
0.909
0.826

PV
45450
82600
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III
IV
V
V (scrap)
Present Value of all
cash inflows
Less:
Initial
Investment
Profit

1,00,000
30,000
20,000
10,000

0.751
0.683
0.621
0.621

75100
20490
12420
6210
242270
200000
42270

Project- Mumbai (Virar)

Initial Investment- 300000
Estimated Life- 5 yrs
Scrap- Rs. 20000

Year
I
II
III
IV
V
V (scrap)
Present Value of all
cash inflows
Less:
Initial
Investment
Profit

Cash Flow
2,00,000
1,00,000
50,000
30,000
20,000
20,000

Rate of Returns = Total profits

PV factor
0.909
0.826
0.751
0.683
0.621
0.621

PV
181800
82600
37550
20490
12420
12420
347280
3,00,000
47280

x 100

Initial Investment
Project Mumbai (Worli): 42270 x 100 =21.135 %
2, 00,000
Project Mumbai (Virar): 47280 x 100 = 15.76%
300000
Comment:

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Project Worli and Project Virar they both are making high profits but project Worli is preferable
for Tesco Co. Investment on project Worli is 2,00,000 where as project Virar has 3,00,000
investment. For Project Worli present value of all cash inflows is 242270 and for project Virar
347280 and benefits are 42270 and 47280.Though project Virar has more profit than project
Worli but the initial investment is also greater.
Both the projects resulted into positive figures. But by comparing the rate to returns of both the
projects it is found that project Worli is better than Project Virar.
Rate of returns: Worli =21.135 %Virar = 15.76%
Therefore taking up project Worli, it will be profitable for Tesco Co.

TASK 11
4.1 discuss the main financial statements
A financial statement is a formal record of the financial activities of a business, person, or other
entity. In British law including a financial statement is often referred to as an account, although
the term financial statement is also used, particularly by accountants. For a business enterprise, all
the relevant financial information, presented in a structured manner and in a form easy to
understand, are called the financial statements. They typically include four basic financial
statements, accompanied by management:
1. Statement of Financial Position: also referred to as a balance sheet, reports on a
company's assets, liabilities, and ownership at a given point in time.
2. Statement of Comprehensive Income: also referred to as Profit and Loss statement
reports on a company's income, expenses, and profits over a period of time. A Profit &
Loss statement provides information on the operation of the enterprise. These include
sale and the various expenses incurred during the processing state.
3. Statement of Changes in Equity: explains the changes of the company's equity
throughout the reporting period
4. Statement of cash flows: reports on a company's cash flow activities, particularly its
operating, investing and financing activities.
Simply put, the income statement measures all your revenue sources vs. business expenses for a
given time period. To help explain things easily, let's consider an apparel manufacturer as an
example in outlining the major components of the income statement:

Sales This is the gross revenue generated from the sale of clothing less returns and
allowances (reduction in price for discounts taken by customers).

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Cost of goods sold. This is the direct cost associated with manufacturing the clothing.
These costs include materials used, direct labor, plant manager salaries, freight and other
costs associated with operating a plant (for example, utilities, equipment repairs, etc.).
Gross profit: The gross profit represents the amount of direct profit associated with the
actual manufacturing of the clothing. It's calculated as sales less the cost of goods sold.
Operating expenses: These are the selling, general and administrative expenses that are
necessary to run the business. Examples include office salaries, insurance, advertising,
sales commissions and rent.
Depreciation: Depreciation expense is usually included in operating expenses and/or
cost of goods sold, but it is worthy of special mention due to its unusual nature.
Depreciation results when a company purchases a fixed asset and expenses it over the
entire period of its planned use, not just in the year purchased.
Operating profit: This is the amount of profit earned during the normal course of
operations. It is computed by subtracting the operating expenses from the gross profit.
Other income and expenses: Other income and expenses are those items that don't occur
during the normal course of business operation. For instance, a clothing maker doesn't
normally earn income from rental property or interest on investments, so these income
sources are accounted for separately. Interest expense on debt is also included in this
category. A net figure is computed by subtracting other expenses from other income.
Net profit before taxes: This figure represents the amount of income earned by the
business before paying taxes. The number is computed by adding other income (or
subtracting if other expenses exceed other income) to the operating profit.
Income taxes: This is the total amount of state and federal income taxes paid.
Net profit after taxes: This is the "bottom line" earnings of the business. It's computed
by subtracting taxes paid from net income before taxes. (1)

TASK 12
4.2 compare appropriate formats of financial statements for different types of business
Format for Retail Business:
Trading and Profit and Loss A/c
Particulars
Rs
To Opening Stock
Xxx
To purchases
Xxx
To Other Direct Expenses
Xxx
To Gross Profit
Xxx
Xxx
To salaries
Xxx
To Trade expenses
Xxx
To Rent and taxes and interest Xxx
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Particulars
By sales
By Other direct Income
By closing Stock

Rs
Xxx
Xxx
Xxx
xxx

By Gross Profit
By Commission received
By discount received

Xxx
Xxx
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To Commission allowed
To Other indirect expenses
To Net profit
Balance Sheet
Capital + liabilities
Capital: Opening capital
Less: Drawings
Add: interest on capital
Less: interest on drawings
Add: Net profit
Long Term Loans
Short Term loans
Current liabilities
Sundry creditors
Outstanding items
B/P
Commission in advance

Xxx
Xxx
Xxx

By Interest on drawings
By other indirect incomes

Rs
xxx
xxx
xxx
xxx
xxx

Assets
Fixed Assets

Rs
Xxx

Investment

Xxx

Xxxx
Xxx
Xxx

Xxx
Xxx
Xxx
Xxx

Current assets/Advances and loans

A. Current assets
Sundry debtors
Cash in hand/bank
Closing stock
B/R
B.Loans and advances
Prepaid items
Fictitious Assets

Format for manufacturing business:

Manufacturing, Trading and P & L account
Particulars
Rs
To Raw material consumed
Opening stock of RM
xxx
Add: Purchases of RM
xxx
Less: Closing stock of RM xxx Xxx
To Wages
Xxx
PRIME COST
Xxx
To factory rent
Xxx
To factory salary
Xxx
Xxx
To cost of goods manufactured
Xxx
To Opening stock of Finished Xxx
goods
To purchases of FG
Xxx
To gross profit
Xxx
Xxx
To Office expenses

Xxx
Xxx
Xxx
Xxx
Xxx
xxx
Xxx

Xxx

MFRD

Xxx
Xxx
xxx

Particulars
By cost of goods manufactured

Rs
xxx

By sales
By Closing stock

Xxx
Xxx
Xxx

By Gross Profit

Xxx
Xxx
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To Other indirect expenses

To net profit

Balance Sheet
Capital + liabilities
Capital: Opening capital
Less: Drawings
Add: interest on capital
Less: interest on drawings
Add: Net profit
Long Term Loans
Short Term loans
Current liabilities
Sundry creditors
Outstanding items
B/P
Commission in advance

By other indirect incomes

Xxx
Xxx

Rs
xxx
xxx
xxx
xxx
xxx

Xxx

Assets
Fixed Assets

Rs
Xxx

Investment

Xxx

Xxxx
Xxx
Xxx

Xxx
Xxx
Xxx
Xxx

Current assets/Advances and loans

A. Current assets
Sundry debtors
Cash in hand/bank
Closing stock
B/R
B.Loans and advances
Prepaid items
Fictitious Assets

Xxx
Xxx
Xxx
Xxx
Xxx
xxx
Xxx

Xxx

In a retail business final accounts consist of trading, P& L account and Balance sheet.

Trading account includes Opening stock, purchases and all the direct expenses of the
company like carriage inwards, factory rent, wages etc on the debit side and all the direct
incomes like sales on the credit side.
After Trading, P & L (profit and loss) account a financial statement that summarizes
the revenues, costs and expenses incurred during a specific period of time - usually a
fiscal quarter or year. These records provide information that shows the ability of a
company to generate profit by increasing revenue and reducing costs. The P&L statement
is also known as a "statement of profit and loss", an "income statement" or an "income
and expense statement".
After ascertaining the net profit, it is carried to the capital side in the balance sheet.
Further balance sheet is tallied.

For manufacturing company, some like to ascertain the cost of goods manufactured by them
during the year distinctly before they prepare the trading and ascertain the gross profit this kind
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of account is called the manufacturing account and is prepared in addition to the trading account.
Manufacturing account is an accounting statement that is an integral part of the final accounts
of a manufacturing organization. For any particular period, it indicates, among other things,
prime cost of manufacturing, manufacturing overhead, the total manufacturing cost, and the
manufacturing costs of finished goods. This figure is obtained by adjusting the purchase of
materials for the opening and closing stock of materials. In the manufacturing concern there will
always be some unfinished goods or work-in-progress. The cost of work-in-progress at the end
of the year is credited to this account, shown in the balance sheet and debited to the
manufacturing account of next year as on opening balance. (2)
Treatment of stock
Raw material

Work in progress
Finished goods

Opening
Include
as
cost
in
calculation of material
consumed
Include
as
cost
in
manufacturing account
Include as cost in trading
account

Closing
Deduct from opening stock +
purchases and include in balance
sheet.
Deduct from manufacturing account
and include in balance sheet
Deduct from trading account and
include in balance sheet

Manufacturing A/c
1. Manufacturing a/c is part of trading a/c

Trading A/c
1. Trading a/c is one of the most important
accounts of final account.
2.Manufacturing a/c is prepared by 2.Trading a/c is prepared by both
productive industries only
productive and non productive industries
3. Inventories a/c are taken into 3. Direct the cost of product is taken in
consideration in manufacturing a/c
trading a/c

FORMAT OF BALANCE SHEET AND PROFIT & LOSS ACCOUNT

Sub-section (1) of section 29 of the Banking Regulation Act, 1949 requires every banking
company to prepare a balance sheet and a profit and loss account in the forms set out in the Third
Schedule to the Act or as near thereto as the circumstances admit.
It has two part A- Balance sheet and Part B Profit and loss account. Format of both is as under
Form of Bank Balance Sheet
Balance Sheet of Bank
Schedule

As on 31.3__
(current year)

As on 31.3__
(previous year)

Capital & Liabilities

Capital

Reserves & Surplus

Deposits

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Borrowings

Other liabilities and provisions

Total
Assets
Cash and Balances with Reserve
Bank of India

Balances with banks and money at

call and short notice

Investments

Advances

Fixed Assets

10

Other Assets

11

Total
Contingent Liabilities
Bills for Collection

12

TASK 13
4.3 interpret financial statements using appropriate ratios and comparisons, both internal
and external.
To compare the financial statements of Tesco Co and Vishal Mega Mart we need to extract
profitability, liquidity and solvency ratios. Based on that ratios financial statement is determined.
Profitability ratios: Tesco Co
1. Gross Profit Ratio: Gross Profit 100
Net Sales
= 5, 00,000 x 100
10,00,000

= 50%
2. Net Profit Ratio: Net Profit after tax x 100
Net Sales

= 4, 15,000 x 100
10, 00,000

= 41.5%
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3. Earnings per share: Profit after tax

Total Equity shares

= 4, 15,000
1,000

= Rs 415
Profit before Interest and Tax

4. Time Interest Earned Ratio: Interest expenses

= 4, 15,000 (profit after interest) + 10,000 (interest)

= 4, 25,000 (profit before interest)
= 4, 25,000
10,000

= 42.5
Net profit after tax
5. Return on share holders equity:

x 100
Average amt of share holders equity

Avgamt = 1, 00,000 (equity capital) + 1, 00,000 (reserves)

= 2, 00,000
= 4, 15,000 x 100
2, 00,000

= 207.5
Liquidity Ratios:
1. Working Capital turnover: Net sales

Working capital

Working Capital= current assets current liabilities

(Tesco)= 4, 00,000 1, 50,000 = 2, 50,000
= 10, 00,000
2, 50,000

= 4:1

2. Current Ratio:

MFRD

Current Assets
Current Liabilities
= 4, 00,000
1, 50,000

Page 27

Quick Assets
Current Liabilities

= 2.6:1
3. Quick Ratio:
Quick Assets = All current assets except stock and prepaid
=1, 50,000
=1, 50,000
1, 50,000

= 1:1
4. Average receivable turnover: (debtors turnover ratio)
= Net sales x 100
Debtors
= 10, 00,000 x 100
1, 00,000

= 1000
= 10:1
5. The days sale in account receivable ratio: (Debtors conversion period)
=No of days of yr
Debtors turnover ratio
= 365
10

= 36.5 days

6. Inventory Turnover ratio: Cost of sales

Avg Stock

Cost of sales = Sales- Gross profit

=10, 00,000 5, 00,000
= 5, 00,000
Average Stock= Opening stock + Closing stock
2
= 1, 50,000 + 2, 50,000
2
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= 2, 00,000
= 5, 00,000
2, 00,000

= 2.5
7. Inventory Conversion Period: No of days in yr

Inventory conversion
ratio
= 365
2.5

= 146

Solvency Ratios:
1. Debt of equity ratio:

Total Liabilities
Equity share funds

Total liabilities = current liabilities + long term loans

= 1, 50,000 + 2, 00,000
= 3, 50,000
=3, 50,000
2, 00,000

= 1.75:1
The following are Vishal Mega Mart Ratios:
Profitability ratios:
1. Gross Profit Ratio:Gross Profit 100
Net Sales
= 7, 20,000 x 100
11, 00,000

= 65.45%
2. Net Profit Ratio: Net Profit after tax x 100
Net Sales
= 6, 15,000 x 100
11, 00,000

= 55.9%
3. Earnings per share:Profit after tax
Total Equity shares
= 6, 15,000
2000
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= Rs. 307.5
4. Time Interest Earned Ratio:Profit before Interest and Tax
Interest expenses

= 6, 15,000 (profit after interest) + 35,000 (interest)

= 6, 50,000 (profit before interest)
= 6,
50,000
35,000
= 18.57

5. Return on share holders equity: Net profit after tax

x 100
Average amt of share holders equity

Avgamt (Vishal mega mart) = 2, 00,000(equity capital) + 1, 00,000(reserves)

= 3, 00,000

= 6, 15,000 x 100
3, 00,000

= 205

Liquidity ratios:
1. Working Capital turnover:Net sales

Working capital

Working Capital= current assets current liabilities

(Vishal Mega Mart) = 5, 00,000 2, 50,000
= 2, 50,000
= 11, 00,000
2, 50,000

= 4.4: 1
2. Current Ratio: Current Assets

Current Liabilities

=5, 00,000
2, 50,000

= 2:1
3. Quick Ratio:
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Quick Assets
Current Liabilities
Page 30

Quick Assets = All current assets except stock and prepaid

=2, 50,000
= 2, 50,000
2, 50,000

= 1:1
4. Average receivable turnover: (debtors turnover ratio)
= Net sales x 100
Debtors
= 11, 00,000 x 100
1, 00,000

= 1100
= 11:1
5. The days sale in account receivable ratio: (Debtors conversion period)
=No of days of yr
Debtors turnover ratio
=Cost of sales
= 365
Avg
Stock
11

= 33.1
6. Inventory Turnover ratio:
Cost of sales = Sales- Gross profit
=11, 00,000 7, 20,000
= 3, 80,000
Average Stock= Opening stock + Closing stock
2
=2, 50,000+3, 70,000
2

= 3, 10,000
=3, 80,000
3, 10,000

= 1.2

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No of days in yr
Inventory conversion
ratio

Page 31

7. Inventory Conversion Period:

= 365
2.5

= 304.1

Solvency Ratios:
Total Liabilities

1. Debt of equity ratio: Equity share funds

Total liabilities = current liabilities + long term loans

= 2, 50, 00 +3, 00,000
= 5, 50,000
=5,
50,000
3, 00,000

= 1.83:1

Comment:
After finding out all the ratios the following analysis done:
1. The funds for day to day activity which is termed as working capital of both Tesco and
Vishal Mega Mart is equal, hence we can say that both has same working capital.
2. The relationship between current assets and current liabilities i.e. current ratio of Tesco
is more than Vishal Mega Mart which has an ideal ratio 2:1 but Tesco has 2.1:1.
3. The relationship between quick asset and current liabilities shows the quick ratio,
therefore 1:1 is consider as the ideal ratio and Tesco and Vishal Mega Mart both has 1:1
ratio which means they dont have sufficient assets to meet the liabilities.
4. Account receivable ratio indicates the numbers of times the account receivable can be
converted into cash, account receivable of Tesco is 10:1 and Vishal Mega Mart has 11:1,
hence we can say that Vishal Mega Mart can convert account receivable into cash more
than Tesco.

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5. The number of days required to convert accounts receivable into cash is indicated by
days sales in this case Tesco took around 36.5 days and Vishal Mega Mart took 33.1
days which means here also Vishal Mega Mart is more capable to convert their account
receivables into cash.
6. Inventory converted into sales is indicated through inventory turnover ratio from the case
we can say that Tesco has better inventory turnover ratio than Vishal Mega Mart as the
Tesco took 2.5 times and Vishal Mega Mart took 1.2 times.
7. Days sales in inventory ratio indicate the number of days took to convert inventory into
cash, hence in the above cash Tesco took 146 days which is better than Vishal Mega Mart
which took 304 days.
From the above analysis we can say that both Vishal Mega Mart and Tesco have almost similar
liquid position, we come to this conclusion that:
a)
b)
c)
d)
e)

Tesco has more inventory conversation ratio

Vishal Mega Mart has more current ratio and account receivable ratio.
Comparatively Vishal Mega Mart has more gross profit and net profit ratio than Tesco.
Earnings per share of Tesco are greater than Vishal Mega Mart.
Tesco has better solvency than Vishal Mega Mart.

Reference:
Task 4.1
1. en.wikipedia.org/wiki/Financial_statement
Task 4.2
2. investopedia.com/terms/p/plstatement.asp#axzz2BWImfLVV

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FEEDBACK TO LEARNER
Outcome/Grading Criteria
LO1 Understand the sources of
finance available to a business

Comments on evidence produced

Feedback

1.1 identify the sources of finance

available to a business

1.2 assess the implications of the

different sources

1.3 evaluate appropriate sources

of finance for a business project

LO2 Understand the

implications of finance as a
resource within a business
2.1 analyse the costs of different
sources of finance

2.2 explain the importance of

financial planning

2.3 assess the information needs

of different decision makers

2.4 explain the impact of finance

on the financial statements

LO3 Be able to make financial

decisions based on financial
information
3.1 analyse budgets and make
appropriate decisions

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3.2 explain the calculation of unit

costs and make pricing decisions
using relevant information

3.3 assess the viability of a

project using investment
appraisal techniques

LO4 Be able to evaluate the

financial performance of a
business
4.1 discuss the main financial
statements

4.2 compare appropriate formats

of financial statements for
different types of business

4.3 interpret financial statements

using appropriate ratios and
comparisons, both internal and
external

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