Assignment

on
Managing Financial Resources &
Decisions

Table of Contents
SI

Particulars

Pag
e

P1.
1
P1.
2
P1.
3

Identify the sources of finance available to the new business you have chosen.

Select Appropriate sources of finance for a business project you have chosen e.g.
opening new store, developing IT system, buy new machines etc.

P2.
1
P2.
2
P2.
3
P2.
4
P3.
1
P3.
2

Analyse the cost of different sources of finance.

P3.
3

Assess the viability of project using at least two investment appraisal techniques 8
using the case study provided.

P4.
1

Discuss the main financial statements (the discussion should focus on basic form 10
& purpose of main financial statements)

P4.
2
P4.
3

Compare appropriate formats of financial statements for different types of

business.
Interpret financial statements using appropriate ratios and comparisons, both
internal and external using the given data.

13

Reference

16

Assess the implications of different sources of finance for your chosen business. 3

Explain the importance of financial planning to the business organization you

have chosen.
Assess the information needs of different decision makers in your chosen
business.
Explain the impact of finance on the financial Statement of your chosen
business.
Analyse budgets and make appropriate decisions from the given case study.

Explain the calculation of unit costs and make pricing decisions using relevant
given information.

6
6
7

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Task 1:
LO1 - Understand the sources of finance available to a business.

P1.1 - Identify the sources of finance available to the new business you have chosen.
Answer: Considering the overall economic condition & own financial ability I have decided to
start a venture in the form of sole proprietorship. The possible sources of finance of my business
are: Personal Funds, Borrowings from Friends and Relatives, Credit Cards, Bank Loans.

P1.2 - Assess the implications of different sources of finance for your chosen business.
Answer:
a) Personal Funds: Personal savings is the key source of finance for sole proprietorship
business. The business plans & strategies are made on the basis of personal wealth in
such type of business because the owner has the greatest personal and financial stake in
the business, so it is natural to use personal funds such as savings to start and build the
business.
b) Friends & Relatives: As the sole proprietorship business has less sources of financing
available compared to the other forms of business, family & friends are considered as
importance source of finance. Friends and relatives are common sources of investment
for sole proprietorship businesses. Individuals who know the owner well and believe in
owners vision are likely sources of funding. Borrowings from friends and relatives tend
to have relatively low interest rates because the lender makes the investment out of
confidence in the individual and belief in the vision rather than a desire to make money
c) Credit Cards: Credit card is another source of finance in this type of business. It
provides fund through cash advances as well as by covering the cost of expenditures.
Credit card is a comparatively easy source of business funding to receive but interest
rates on credit cards is higher than on the other sources of finance.
d) Bank Loans: Banks also invest in sole proprietorship business. Loans can be taken from
bank against collateral, or personal resources that can be pledged as a guarantee against a
loan. Bank loans have less-stringent criteria but bears higher interest rates. While
providing loan, banks consider the previous track records of credit and the condition of
the business which makes it a little difficult for the young businesses to go for bank loan.

P1.3 - Select Appropriate sources of finance for a business project you have chosen e.g.
opening new store, developing IT system, buy new machines etc.
Answer: Now a days bicycle is becoming popular among the people for environment
friendliness and easiness as a mean of transport. This has encouraged me to set a bicycle parts
store. For purchasing the bicycle parts, I have considered two sources of finance.
a) Personal Savings: For funding the project, I will invest my own savings of 50000. This
will prevent me from the burden of paying interest and will allow me to retain full control
over the business.
b) Family & Friends: As my own investment is not enough for the project, I will convince
my family members to invest 25000 in my business & collect 25000 more from my
friends. Financing my project in that way will provide me the advantage of paying less
interest than the other sources & enough time to pay the money back.
Task 2:
LO2 - Understand the implication of finance as a resource within the business
Using the same business you have chosen

P2.1 Analyse the cost of different sources of finance.

Answer:
Cost of different sources of finance has been analysed below:
Cost of Personal Fund: Personal fund is the most important source of finance in a sole
proprietorship business. Opportunity cost is associated with personal savings/wealth. That means
the owner of the business will be deprived from the income which could be earned from
investing the money in anywhere else.
Example: A person a person may purchase share or deposit money to the bank. But without
doing so, if he invests own saving to start a sole proprietorship business, he will be deprived
from the dividend from share or interest from bank deposit. That is the opportunity cost faced by
the owner of a sole proprietorship business.
Cost of borrowings from Friends & Relative: Friends, family members & relatives are another
source of finance for sole proprietorship business. They provide capital to the business because
of having faith on the owner, not being driven by intention of earning more money. For this
reason, cost of borrowing from family and friends is comparatively less than the other sources
like bank, credit card.

Example: If the owner borrows 10000 from his friend with a commitment of paying 2%
interest, then at the time of paying back, the owner needs to pay only 200 as interest which is
much less than the other financial institutions.
Cost of Loan: A sole proprietor can take loan from bank or other financial institution to arrange
capital. In that case he will have to pay interest at a higher rate. Compound interest rate is
another factor to be considered. It may increase the interest if the payment of installment is
delayed. Tax rate is also a factor in calculating the cost of loan.
Cost of financing with Credit Card: Credit card also carries similar cost like bank loans. But
along with the interest, it extra charges an additional amount of money.

P2.2 Explain the importance of financial planning to the business organization you have
chosen.
Answer:
For a sole proprietorship business financial planning is very much important. The purpose of
financial planning is elucidated below:
Arranging capital
The scope of obtaining capital being limited in sole proprietorship, how the funds will be
collected is to be planned carefully. This decision will make a significant impact on the business.
If equity is considered as the only source of finance, business may suffer from paucity of capital
and many business opportunities might be lost. Again if the base of the business is not strong
enough and major portion of funding is done through debt financing, it might be difficult for the
business to bear the burden of interest. So, a good combination must be made between different
sources of finance while designing the capital mix for which financial planning is very necessary.
Proper utilization of fund
After obtaining necessary capital, how to use it is to be planned carefully. The amount of capital
is limited in a sole proprietorship business and a business might need money for many different
purposes. That is why, to meet which need how much money is to be allocated is to be planned to
ensure the proper utilization of available funds.
Project Appraisal
For a business it is needed to determine from different projects, which business project is to be
undertaken. Before undertaking a project if it is feasible enough to invest should be evaluated
carefully.

Dealing with Changes

Nothing but the change is constant. To deal with the future changes financial planning is a must.
What changes the business may face in future is to be predicted by assessing the current trends
and plans should be prepared in order to manage them. How much capital might be needed in
future under different conditions and how those needs will be met is required to be forecasted by
the financial manager.

P2.3 Assess the information needs of different decision makers in your chosen business.
Answer: Information is needed to the different parties involved with the business for making
financial decisions. The decision makers in sole proprietorship business and their information
needs are explained below:

Owner: Owner is the main user of business information. He prepares plans and
formulates strategies according to the business information. To analyze the viability and
profitability of the investment and to determining the future course of action, information
is required by an owner.

Investors: The investors analyze the feasibility of investing in the business at first. They
look forward to ensure a reasonable return on their investment before they commit any
financial resources to the business. For that investors require relevant information.

Creditors: To determine if the organization is credit worthy, the creditors require

business information. Terms of credit are set by creditors according to the assessment of
the financial health of the business. Creditors include suppliers as well as lenders of
finance.

Tax Authorities: Tax authorities are another user of business information. To determine
the credibility of the tax returns filed on behalf of the business, authority requires
financial information.

P2.4 Explain the impact of finance on the financial Statement of your chosen business
Answer: The sources used to finance the business have significant impact in its financial
statement. If the business is financed mostly with equity, less interest will have to be paid. This
will allow the owner to make more profit. The amount which would be required for paying
interest of debts can be used in other purposes. Again a debt based financing will provide more
capital to the business. Asset base of the business can be extended with the additional capital.
Along with such advantages, debt financing will increase the interest amount to be paid. This
may cut profit.
6

Task 3
LO3 Be able to make financial decision based on financial information.

P3.1 Analyze budgets and make appropriate decisions from the given case study.
Answer:
Analyzing the budgeted profit and loss account, it is observed that things are going well for Easy
Electronics ltd. Their sales revenue is good enough to make a gross profit of 16, 952. Again,
meeting other expenses and paying the tax, the company still makes a good amount of profit
which eliminates all doubts about its profitability.
From its cash budget, it is seen that the company has made surplus cash flows in June, July and
August constantly. But because of paying corporation tax and making capital expenditure, the
company failed to earn a positive cash flow. As these costs are unavoidable, management does
not have many things to do with it. Even though is causes a deficit in cash flow, it is better for
long term. It is also observed that revenue earning is increasing steadily but the expenses and
distribution cost is also increasing. Management must pay attention to that in order to increase
revenue an cutting the cost.

P3.2 Explain the calculation of unit costs and make pricing decisions using relevant
information given below:
You are required to use budgeted profit and loss account to explain how unit costs are calculated.
It is estimated that Easy Electronics Ltd. will manufacture and sell 650,036 mother boards for the
six months period ending on 31st December 2013. The finance director of Easy Electronics ltd.
has asked you to evaluate a proposal to reduce the selling price by 10% from the current price of
55.12 per unit and as results sales are expected to increase by 20%. Cost of sales will also
increase by 20%. All other costs will remain constant. You are required to make pricing decision
based on the above information.

Answer:

Easy Electronics Ltd.

Estimated Sales (650,036 units 55.12)

35829984

New Sales (780043 units 49.608)

38696373.1

Increase in sales revenue

2866389.1 or 7% (approx.)

It is observed from the above calculation that with the increase in sale by 20% & reducing price
per unit by 10%, the overall sales revenue increases by 7%. So, despite of the increase in the
selling expense the new pricing strategy can be taken because of its profitability.

P3.3 Assess the viability of project using at least two investment appraisal techniques using
the case study provided below:
Easy Electronics ltd. is considering diversifying into manufacturing Aluminum computer cases
or housing from October 2014. The companies cost of capital is 10%. The net cash flows are
given below:
Year
0
1
2
3
4
5
6

Project A: Aluminum Housing

(000)
(8000)
2000
2800
3200
1200
800
500

Answer:
Viability of the project can be assessed by using NPV method.
NPV =

] -C

A1 + A2 + A3 +
A4 + A5 + A6
(1+K)1 (1+K)2 (1+K)3 (1+K)4
(1+K)5 ( 1+K)6

2000 +
(1.10)1

2800 +
(1.10)2

3200 +
(1.10)3

1200

(1.10)4

800

(1.10)5

] - 8000

500
(1.10)6

= 135.028
Viability of the project can also be assessed by using IRR method.
NPV at 10%
NPV =

] -C

A1 + A2 + A3 +
A4 + A5 + A6
1
2
3
(1+K)
(1+K) (1+K)
(1+K)4
(1+K)5 ( 1+K)6

2000 +
(1.10)

2800 +
(1.10)

3200 +
(1.10)

1200
(1.10)

800
(1.10)

+
5

] - 8000

500
(1.10)

= 135.028
NPV at 15%
NPV =

] -C

A1 + A2 + A3 +
A4 + A5 + A6
1
2
3
(1+K)
(1+K) (1+K)
(1+K)4
(1+K)5 ( 1+K)6

2000 +
(1.15)

2800 +
(1.15)

3200 +
(1.15)

1200
(1.15)

800
(1.15)

+
5

] - 8000

500
(1.15)

= -739.60

Now IRR have to be calculated using Trial & Error Method

Here,
A= Lower Discount Rate = 10
B= Higher Discount Rate = 15
C= NPV of Lower Discount Rate = 135.028
D= NPV of Higher Discount Rate = -739.60
9

Therefore IRR = A+ C (B-A)

C-D

= 10+

135.028

(15-10)

135.028-(-739.60)

=10+0.15445
=10.772
Using NPV & IRR technique, it is found the Net Present Value of the project is positive, and
internal rate of return is more than the cost of capital. Hence the project is viable enough.

Task 4
LO4- Be able to evaluate the financial performance of a business.
P4.1 Discuss the main financial statements (the discussion should focus on basic form &
purpose of main financial statements)
Answer: There are four main financial statements used by the business organization. These are,
balance sheet, income statement, owners equity statement & cash flow statement.
The four basic statements summarize the financial activities of the business. They can be
prepared at any point in time (such as the end of the year, quarter, or month) and can apply to any
time span (such as one year, one quarter, or one month).
The Balance Sheet
The purpose of the balance sheet is to report the financial position (amount of assets, liabilities,
and stockholders' equity) of an organization at a particular point in time. Balance sheet allows
someonelike a creditorto see what a company owns as well as what it owes to other parties
as of the date indicated in the heading. This also provides information to the banker who wants to
determine whether or not a business deserves additional credit. Others users of balance sheet
include current investors, potential investors, company management, suppliers, some customers,
competitors, government agencies, and labor unions. Basic elements of a balance sheet are,
1) Assets
Economic resources owned by the company can be termed as asset. Assets also include
costs paid in advance that have not yet expired, such as prepaid advertising, prepaid
insurance, prepaid legal fees, and prepaid rent.

10

Examples of asset accounts that are reported on a company's balance sheet are Cash,
Petty Cash, Temporary Investments, Accounts Receivable, Inventory, Supplies, Prepaid
Insurance, Land, Land Improvements, Buildings, Equipment, Goodwill, Bond Issue
Costs etc. Every asset on the balance sheet is initially measured at the total cost incurred
to acquire it. Balance sheets do not generally show the amounts for which the assets
could currently be sold.
2) Liabilities
Organization's debts or obligations can be called its liability. Liabilities include amounts
received in advance for future services. The amount received which has not yet been
earned, the company defers the reporting of revenues and instead reports a liability. It
also includes the amounts owed to creditors for a past transaction and they usually have
the word "payable" in their account title.
Examples of liability accounts reported on a company's balance sheet: Notes Payable,
Accounts Payable, Salaries Payable, Wages Payable, Interest Payable, Other Accrued
Expenses Payable, Income Taxes Payable, Customer Deposits, Warranty Liability.
Lawsuits Payable, Unearned Revenues, Bonds Payable, Etc.
3) Stockholders' Equity
It indicates the amount of financing provided by owners of the business and earnings. The
investment made by the owners is called contributed capital. The amount of earnings
reinvested in the business is called retained earnings. "Owner's Equity" are the words
used on the balance sheet when the business is a sole proprietorship. If the business is a
corporation, the words Stockholders' Equity are used instead of Owner's Equity. An
example of an owner's equity account is Mary Smith, Capital (where Mary Smith is the
owner of the sole proprietorship). Examples of stockholders' equity accounts, Common
Stock, Preferred Stock, Paid-in Capital in Excess of Par Value, Paid-in Capital from
Treasury Stock, Retained Earnings etc.

Income Statement
Income statement is one of the financial statements of a business which shows the income and
expenses of a business at a particular time. It highlights different sources of earning revenue &
sources of expenditure. The income statement provides the investor/manager a view of whether
the organization is making profit or loss throughout a particular period.

11

Elements in their income statements:

A. Revenues and Gains
1. Revenues from primary activities
2. Revenues or income from secondary activities
3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)
B. Expenses and Losses
1. Expenses involved in primary activities
2. Expenses from secondary activities
3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)
Cash flow statement
Cash flow statement shows how changes in balance sheet accounts and income affect cash and
cash equivalents. It deals with the flow of cash in and out of the business. The statement captures
current operating results and the accompanying changes in the balance sheet. As an analytical
tool, cash flows statement determines the short-term viability of a company, particularly its
ability to pay bills.
People and groups interested in cash flow statements include:
a. Accounting personnel, who need to know whether the organization will be able to cover
payroll and other immediate expenses
b. Potential lenders or creditors, who want a clear picture of a company's ability to repay
c. Potential investors, who need to judge whether the company is financially sound
d. Potential employees or contractors, who need to know whether the company will be able to
afford compensation
e. Shareholders of the business.
Statement of Owners' Equity
The owners equity statement highlights the changes in retained earnings. Retained earnings
appear on the balance sheet and most commonly are influenced by income and dividends. The
Statement of Retained Earnings therefore uses information from the Income Statement and
provides information to the Balance Sheet.
The following equation describes the equity statement for a sole proprietorship:
Ending Equity = Beginning Equity + Investments - Withdrawals + Income
12

For a corporation, substitute "Dividends Paid" for "Withdrawals". The stockholders' equity in a
corporation is calculated as follows:
Common Stock (recorded at par value)
+ Premium on Common Stock (issue price minus par value)
+ Preferred Stock (recorded at par value)
+ Premium on Preferred Stock (issue price minus par value)
+ Retained Earnings
---------------------------------------------------------------= Stockholders' Equity
P4.2 Compare appropriate formats of financial statements for different types of business.
Answer:
Formats of financial statements for different types of business such as sole proprietorship,
partnership and limited company are different from each other.
Each business has different economic sectors. That is why different financial statements with
different format are used to satisfy those sectors.
Sole Proprietorship
Financial statements for sole proprietorship traders are simple. It may not have the balance sheet
and income statement. The report just needs to show the profit and loss account compared to a
public limited liability company which requires being prepared based on international financial
reporting standard (IFRS) and generally accepted accounting principle (GAAP).
Partnership
The financial statements are prepared to show the profit, income, outcome and the loss of the
business. The income statement is prepared first because the net income or loss becomes a part of
the statement of partners capital. The statement of partners capital is prepared second because
the ending partners capital balances become part of the balance sheet. The statement focuses on
analyzing the capital and profits of the company that are is circulated inside the company.
Limited Company
The financial statement requires reflecting the current, non-current assets, liabilities, sales,
profits, cost of income tax payable and earnings per share. On the basis of those information

13

decisions are made by the manager about future management strategies. Investors make the
investment decision by analyzing this information.
P4.3 Interpret financial statements using appropriate ratios and comparisons, both internal and
external using the given data.
Answer:
Particulars

Turnover ( Mill)
Profit (Loss) before Taxation
Return on Shareholders Funds %
Gross Margin %
EBIT Margin %
Profit Margin %
Barry Ratio
Return on Capital Employed %
Return on Total Asset %
Net Asset Turnover (x)
Current Ratio (x)
Liquidity Ratio (x)
Stock Turnover (x)
Debtor Collection Days
Creditors Payment Days
Gearing %
Interest Cover (x)
Earnings Per Share ()
Dividend Per Share ()
Market Capitalization ( Mill)
Total Assets ( Mill)
Working Capital
Shareholders Fund ( Mill)

WM Morrisons
Supermarkets PLC
2011
2010
Change
17663 16479
1184
947
874
73
17.55 16.13
1.42
6.89
6.97
-0.08
5.51
5.49
0.02
5.36
5.3
0.06
3.95
3.79
0.16
12.53 12.44
0.09
9.61
9.59
0.02
2.34
2.35
-0.01
0.57
0.55
0.02
0.24
0.24
0
23.27 25.83
-2.56
3.95
4.36
-0.41
29.12 31.31
-2.19
42.02 29.61
12.41
6.09
21.33
-15.24
0.27
0.24
0.03
0.12
0.08
0.04
7236
7083
153
9859
9111
748
-981
-948
-33
5397
5420
-23

J Sainsbury PLC
2011
22294
799
14.19
5.43
3.92
3.58
3.09
8.68
6.47
2.42
0.65
0.35
23.77
1.8
31.16
66.18
6.79
0.32
0.15
5846
12340
-1104
5629

2010
21102
827
15.25
5.5
4.03
3.92
3.04
9.78
7.26
2.5
0.58
0.31
25.99
1.61
31.76
57.28
8.13
0.34
0.14
6257
11399
-1221
5424

Change
1192
-28
-1.06
-0.07
-0.11
-0.34
0.05
-1.1
-0.79
-0.08
0.07
0.04
-2.22
0.19
-0.6
8.9
-1.34
-0.02
0.01
-411
941
117
205

From the current ratio and liquidity ratios of WM Morrisons we can see that its current ratio has
been increased by 0.02% and liquidity ratio is same as 2010. From the profitability ratio we see
that its profit margin has been increased by 0.06% from 2010. Asset turnover has been decreased
a bit but return on asset is increased by some percentage. Return on shareholders fund is also
increased. Earnings per share has also increased. So it can be said that WM Morrisons has made
14

a better profit in 2011 than 2010. Its interest covering has decreased a lot that means the
company has to pay some attention to their debt. Debtor collection has become lower which
means it is going well in this collection terms. This is a good sign. Dividend per share is
increased, so the shareholders will think well about the firm too. Considering these factors it can
be concluded that WM Morrisons co has performed better than 2010 in 2011.

From the current & liquidity ratio J Sainsbury PLC we can say that the firm has earned more
abilities to pay its short term debts. From the profitability ratio, it is observed that the profit
margin has decreased significantly. Asset turnover and return on asset has also been decreased.
As the return on shareholders fund & EPS are decreased, it can be said that J Sainsbury PLC has
made worse performance in recent year regarding its profit. Its interest covering has decreased
which means the company needs to pay more attention in their debt management. An increase in
debtors collection days suggests that it is not making good performance in collecting from
debtors. Dividend has raised but without making good profit raising dividend is not a good sign.
Company should pay more attention in raising profit. So, we can conclude that, J Sainsbury PLC
has failed to perform better than 2010 in 2011

15

Reference
http://yourbusiness.azcentral.com/sources-investment-sole-proprietorship-12432.html
http://www.ehow.com/list_6799727_sources-finance-sole-trader.html
http://www.fao.org/
http://accounting-simplified.com/financial/
http://www.is4profit.com/business-advice/finance-and-money/
http://www.entrepreneur.com/article/41520
http://www.accountingcoach.com/
http://www.bayt.com/
Accounting Principles by Weygandt, Kieso, Kiemel
Fundamentals of Financial Management by Eugene F. Brigham & Joel F. Houston
Entrepreneurship Strategies and Resources by Marc J. Dollinger

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