Accounting and finance

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Accounting and finance

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Table of Contents
Introduction................................................................................................................................1
Task 1Business Performance & decision making process.........................................................1
1. Performance report of two companies ...............................................................................1
2. Information required for final decision making.................................................................2
Task 2 Capital budgeting decision.............................................................................................3
1 Annual cash flow for five years..........................................................................................3
2 Capital budgeting techniques..............................................................................................4
3 Suggestion for project acceptance or rejection ...................................................................6
Task 3 Cash budget & budgeting...............................................................................................6
1. Cash budget for four months..............................................................................................6
2 Benefits of budgeting and aspects for improvement...........................................................8
Conclusion .................................................................................................................................8
References................................................................................................................................10

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List of tables
Table 1: Net cash flow ...............................................................................................................3
Table 2: Accounting rate of return.............................................................................................4
Table 3: Cumulative cash flow ..................................................................................................5
Table 4: Internal rate of return...................................................................................................5
Table 5: Net present value .........................................................................................................6
Table 6: Cash budget with depreciation.....................................................................................6
Table 7: Cash budget without depreciation ...............................................................................7

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INTRODUCTION
The proper management of financial resources is highly essential element for
success of the business unit. Moreover, the business unit needs to take various
financial decisions from time-to-time. It is essential for the organization to adopt
appropriate financial and analysis techniques for the purpose of supporting
appropriate decision making process (Lewellen, 2004). The report proposed herewith
emphasizes on application of various financial techniques. The report helps in
developing a deep understanding of various financial techniques and manner in which
financial decisions within the organization are supported. The report deals with
various cases and financial techniques to be adopted so as to support the analysis.
TASK 1BUSINESS PERFORMANCE & DECISION MAKING PROCESS
1. Performance report of two companies
The case presented herewith deals with acquisition of Kensington & Wimbledon
on part of Chelsea Plc. It is essential for the business unit to select better acquisition
option on basis of financial indicators. The performance of both of two business unit
needs to be analysed through various ratios such as profitability, activity and liquidity
ratios. On the basis of various ratios estimated, an in-depth analysis is conducted so as
to select the better option. The analysis of different

economical rates.
Profitability ratios: The profitability ratios indicate organization’s capacity to earn
more amount of return (Weil, 2012). It is seen that business units should earn
minimum of 20% as a return on capital employed as per industry average. Moreover,
both of the organizations are able to meet industry standards. Nevertheless,
Wimbledon is earning return of 28% as compared to that of Kensington who earns
return of approximately 22%. Return on equity is said to be earned at 22% by
Wimbledon and 18% by Kensington. The industry average is met by both of the
organizations. It is seen that Wimbledon on one hand is earning sufficient amount of
return on the amount invested. On other hand, the business unit is unable to meet
industry standard for net profit margin and gross profit ratio. The industry average for
net profit margin is 7%. Kensington earn net profit margin of 11% which is above
industry standard. Wimbledon on other hand earns net profit margin of 5% that is
below industry average. The same is case with gross profit margin which is earned at
adequate levels on part of Kensington. As per the analysis, it is seen that the
Wimbledon is able to earn sufficient level of return on capital employed and equity.
However, the organization is unable to meet industry standards for net profit margin
and gross profit margin. On the basis of profitability ratios, it is suggested that the
Chelsea Plc should acquire Kensington. It is the organization that is able to meet
industry standards in all of the cases. The business unit although
lacks behind Wimbledon in case of return on capital employed and return on equity. It
is highly efficient in conducting operations as indicated from net profit and gross

economical rates.
profit margin. Henceforth, Kensington ltd. is regarded as highly valuable for
acquisition purpose on part of Chelsea Plc.
Activity ratios: The activity ratios such as total assets turnover, non-current assets
turnover, receivables collection period and inventory holding period are estimated in
order to understand efficiency with which business unit is operating (Helfert, 2004). It
is seen that Kensington is unable to meet industry standards for total assets turnover
and noncurrent assets turnover ratio. However, the business unit has highly efficient
in collecting payments and managing inventory as indicated from receivables
collection period and inventory holding period. On other hand Wimbledon is able to
meet industry standards for total assets turnover and noncurrent assets turnover ratio.
The organization is unable to meet industry standards for receivables collection period
and inventory holding period. It can be said that the Wimbledon is efficient in making
utilization of its assets. Kensington on other hand is efficient in managing its
operations. The business unit should therefore decide to acquire Kensington which is
highly efficient in conducting its operations.
Liquidity ratios: These are the ratios that help in analysing amount of liquid cash
available with the business unit. It is seen that current ratio is higher in case of
Kensington due to adequate level of liquidity (Drake and Fabozzi, 2012). In case of
liquidity ratios both of the organizations are unable to meet industry standards. It is
seen that liquidity is optimum in case of Kensington and Wimbledon. As per the
debt-equity ratio it can be said that Kensington has employed sufficient amount of
equity. It can be therefore suggested that the Chelsea plc should acquire Kensington
due to high efficiency associated with the business unit.

economical rates.
2. Information required for final decision making
The acquisition strategy of organization is said to be highly important in nature.
In order to take appropriate decision the range of financial information is required on
part of the business unit. The financial information that helps in supporting decision
making process of the organization is described below in detail.
Forecasted cash flows: The business unit needs to estimate cash flows generated
as a result of acquisition strategy. It can be claimed that the organization is able to
judge the feasibility of acquisition strategy through appropriate estimation of
forecasted cash flows. Henceforth, the business unit needs to have access to
information related to forecasted cash flows.
Trend in profitability: The organization needs to ascertain profitability of the
businesses that are planned to be acquired. It is through proper estimation of trend
followed for profitability in past that the business unit is able to take appropriate
decisions (Arnold, 2005). It can be therefore said that the organization needs to
analyse trend for profitability for businesses. This in turn helps in supporting
acquisition decision for Chelsea Plc so as t support efficiency in long run.
Legal obligations: Chelsea Plc needs to gather information related to all pending
suits for the businesses into consideration. The pending legal obligations and suits
help in selecting the suitable option for the acquisition purpose.

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TASK 2 CAPITAL BUDGETING DECISION
1 Annual cash flow for five years
The annual cash flow for five years of duration is estimated for Riverside
Motorcycle Components Ltd. It is through estimation of net cash flow earned on
annual basis that the business unit is able to effectively support its investment
decisions (Anderson and Coleman, 2000). The cash flow that is estimated for five
years of duration is presented in table underneath.
Table 1: Net cash flow
(Amount in £’s)
Ye
ar
Number of
units sold
Selling
price per
unit
Total
revenue
Variable
cost per
unit
Total cost
per unit
Net cash flow
(Revenue - Cost)
1 5000 12 60000 8 40000 20000
2 10000 12 120000 8 80000 40000
3 15000 12 180000 8 120000 60000
4 15000 12 180000 8 120000 60000
5 5000 12 60000 8 40000 20000
It is seen that the business unit is earning sufficient amount of annual cash
flow during five years of time. The investment in machine is going to generate
adequate level of cash inflow for the organization into consideration.
2 Capital budgeting techniques
The capital budgeting techniques are devised as a tool to support investment
decisions of the organization. It is through adoption of capital budgeting techniques
that the business unit is able to make appropriate investment decision. The outcomes

economical rates.
generated by way of adoption of various capital budgeting techniques are presented
below in detail.
Accounting rate of return: The accounting rate of return aims at estimating
annual return that is to be generated by making
investments into the project selected (Dayananda, 2002). It is through adoption of
formula mentioned below that the accounting rate of return for new project can be
estimated.
Table 2: Accounting rate of return
(Amount in £’s)
Year Net cash flow
1 20000
2 40000
3 60000
4 60000
5 40000
Average accounting profit 44000
Average investment 100000
Accounting rate of return 44%
The table presented above indicates that the investment into new project is
going to generate sufficient amount of cash flow. The positive and adequate amount
of return indicates that the business unit should make investment in project into
consideration.
Payback period: The payback period is calculated in order to ascertain
duration in which initial investment is recovered (Anthony, 2012). The formula
through which payback period can be estimated is presented underneath.

economical rates.
Table 3: Cumulative cash flow
(Amount in £’s)
Year Net cash flow Cumulative cash flow
0 -100000 -100000
1 20000 -80000
2 40000 -40000
3 60000 20000
4 60000 80000
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5 20000 100000
5 (Residual value) 20000 120000
Where,
A is the last year with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
The business unit is going to recover initial investment within 2.67 years as estimated
through payback period. The organization since is able to recover investment in short
duration, it is suggested to make purchase of machinery into consideration.
Henceforth, the lower payback period indicates that the business unit should purchase
new machinery so as to expand business operations.
Internal rate of return: The internal rate of return is estimated in order to
ascertain rate of return at which net present value equals zero (Leung, 2011). It is the
rate that is generated on part of business unit through investment into new machinery.
Table 4: Internal rate of return
Year Net cash flow
0 -100000
1 20000
2 40000
3 60000
4 60000
5 40000
Internal rate of return (IRR) 29%

economical rates.
As per the values estimated, it can be said that the organization is able to
earn internal rate of return of 29%. The sufficient level of return supports business
decision to make investment into new project or machinery.
Net present value: Net present value is estimated to ascertain value of the
project into consideration at present date (Gibson, 2008). The net present value that is
estimated for present project is indicated in table underneath.
Table 5: Net present value
(Amount in £’s)
Year Net cash flow PV factor at 12% Present value
1 20000 0.89 17857.14
2 40000 0.80 31887.76
3 60000 0.71 42706.81
4 60000 0.64 38131.08
5 20000 0.57 11348.54
5 (Residual value) 20000 0.57 11348.54
Total present value 153279.87
As per the table proposed herewith, the business unit should make investment and
purchase new machinery. The project into consideration is said to generate sufficient
amount of positive cash flow. Henceforth, it can be said that investment decision is
highly feasible in nature.

economical rates.
TASK 3 CASH BUDGET & BUDGETING
1. Cash budget for four months
The cash budget for four months is prepared for Pedrosa Plc. in two forms:
considering the amount of depreciation as non-cash and cash expenditure. The cash
budgets in two forms are presented underneath.
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Table 6: Cash budget with depreciation
(Amount in £’s)
July August September October November
Opening balance £15,400.00 £37,710.00 £58,410.00 £51,070.00
Cash sales £39,180.00 £40,590.00 £36,240.00 £35,100.00 £33,300.00
Credit sales – (One month
credit is allowed) £0.00 £26,120.00 £27,060.00 £24,160.00 £23,400.00
Income from rent £9,000.00 £9,000.00 £9,000.00 £9,000.00 £9,000.00
Total cash inflow £48,180.00 £91,110.00 £110,010.00 £126,670.00 £116,770.00
Payment to creditors £35,400.00 £33,600.00 £32,600.00 £34,750.00
Wages £18,000.00 £18,000.00 £18,000.00 £18,000.00 £19,080.00
Payment for machinery £25,000.00
Total cash outflow £18,000.00 £53,400.00 £51,600.00 £75,600.00 £53,830.00
Closing cash balance £30,180.00 £37,710.00 £58,410.00 £51,070.00 £62,940.00
Table 7: Cash budget without depreciation
(Amount in £’s)
August September October November
Opening balance £15,400.00 £35,209.00 £53,407.00 £43,564.00
Cash sales £40,590.00 £36,240.00 £35,100.00 £33,300.00
Credit sales – (One month
credit is allowed) £26,120.00 £27,060.00 £24,160.00 £23,400.00

economical rates.
Income from rent £9,000.00 £9,000.00 £9,000.00 £9,000.00
Total cash inflow £91,110.00 £107,509.00 £121,667.00 £109,264.00
Payment to creditors £35,400.00 £33,600.00 £32,600.00 £34,750.00
Wages £18,000.00 £18,000.00 £18,000.00 £19,080.00
Depreciation £2,501.00 £2,502.00 £2,503.00 £2,504.00
Payment for machinery £25,000.00
Total cash outflow £55,901.00 £54,102.00 £78,103.00 £56,334.00
Closing cash balance £35,209.00 £53,407.00 £43,564.00 £52,930.00
The cash budget presented above indicates that cash balance increases on continuous
basis. The business unit is generating sufficient amount of cash on monthly basis
which in turn indicates that the operations are conducted in an efficient manner.
2 Benefits of budgeting and aspects for improvement
Budgeting is considered to be highly important element for the business unit. The
process of budgeting is regarded to support operations in long run. The importance of
budgeting is described below in detail.
Guidance to business operations: The budgets prepared at beginning of year is said
to provide guidance to operations of the organization (Shim, Siegel and Shim, 2011).
The process of budgeting is considered to be highly significant in nature since it
provides guidance to all operations within business unit.
Optimum utilization of resources: The budgeting process helps in making
optimum utilization of resources. The business unit is able to allocate resources in an

economical rates.
efficient manner and make optimum utilization of resources (Irani and Love, 2002). It
can be therefore said that the budgeting process helps in making optimum utilization
of resources.
Future forecasting: The organization is able to appropriately forecast profits and
cash flows for future operations. It can be said that budgeting techniques help in
making appropriate estimations and forecasts for supporting future operations within
the organization.
In order to make improvement in business operations, the organization needs to
consider following areas.
Reviewing previous financial condition: It is through analyzing past trend that the
business unit is able to prepare appropriate budget. Henceforth, the organization needs
to review past data for purpose of formulation of effective budget.

economical rates.
CONCLUSION
The report proposed herewith emphasizes on evaluating various aspects related to
financing and investment decisions. It is seen that the business unit needs variety of
monetary and non-monetary information for the purpose of undertaking effective
decisions. Moreover, the organization needs to adopt appropriate capital budgeting
techniques for the purpose of selecting suitable investment option.
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REFERENCES
Books and Journals
Anderson, L. and Coleman, M., 2000. Managing Finance and Resources in
Education. SAGE.
Arnold, G., 2005. Corporate Financial Management. 3rd ed. Financial Times/Prentice
Hall.
Brigham, E.F. and Houston, J.F., 2009. Fundamentals of Financial Management. 12th
ed. Cengage Learning.
Cafferky, M., 2010. Breakeven Analysis. Business Expert Press.
Dayananda, D.,2002. Capital Budgeting: Financial Appraisal of Investment Projects.
Cambridge University Press.
Drake, P.P. and Fabozzi, F.J. 2012. Analysis of Financial Statements. 3rd ed. John
Wiley & Sons
Gibson, G., 2008. Financial Reporting and Analysis: Using Financial Accounting
Information. Cengage Learning.
Helfert, A. E., 2004. Techniques of Financial Analysis. Tata McGraw-Hill Education.
Irani, Z. and Love, P. E., 2002. Developing a frame of reference for ex-ante IT/IS
investment evaluation. European Journal of Information Systems. 11(1).
pp.74-82.

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