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UGB163 Understanding of Fundamental Concepts, Techniques, and Models - Gravepals PLC

University: University of Sunderland

  • Unit No: 5
  • Level: Undergraduate/College
  • Pages: 21 / Words 5371
  • Paper Type: Assignment
  • Course Code: UGB163
  • Downloads: 556
Question :

This assessment will cover the following questions:

  • Financial accounting provides help in investments made by the business and builds a report that explains the benefits and limitations of different investment appraisal techniques in CLARKE PARK Ltd.
  • Develop a report that elaborates on the important advantages and disadvantages of using budgets as a tool for strategic implementation of financial accounting in GRAVEPALS PLC.
  • A financial account is the concept of accounting and summarising all the financial aspects of an organisation.  Elaborate what is break-even point and margin of safety in the context of both units and revenue.
  • Identifying the underpinning assumptions that are attached to the breakeven model including analysation that whether the model can successfully be utilised by a range of differing boundaries.
Answer :
Organization Selected : Gravepals PLC

INTRODUCTION

Accounting is considered a comprehensive and systematic tracing of numerous financial transactions related to business. It is also referred to as the process of classifying, summarizing, and analyzing reports to transactions for over sighting agencies, tax collection entities, and regulators. In a similar aspect, finance is a business term on basis of creation, investments, the study of money along other financial instruments. The present report will give a brief discussion about appropriate understanding of fundamental concepts, techniques, and models with the application of financial accounting along with management accounting. Further, it will reflect the role of finance at the global and local levels with reference to financial statements, Break even, and margin of safety analysis. In this similar aspect, there will be the introduction of various investment appraisal techniques with recommendations and analyses to purchase a new machine or not.

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PART A

Preparing Income statement for year 2017 along with statement of Financial position

Income statement of Gravepals Plc as on 31 December 2017

Income statement

Particulars

Details

Figures

Revenue (Credit sales) [A]

 

504000

Revenue (cash sales) [B]

 

129000

Total Revenue [A + B]

 

633000

Less: Cash Sales

243000

 

Less: Credit Sales

54000

 

Cost of Goods Sold

297000

 

[GP] Gross profit

 

633000

Operating expenses

 

 

Salaries and wages

117000

 

Less: Payment of wages [last week]

2175

114825

Electricity [first 3 quarters]

5700

 

Electricity bill [last quarter]

2025

7725

Rent received

 

112500

Payment of tax on business premises [1 January]

2400

 

Payment of tax on business premises [1 April]

4500

6900

Delivery van depreciation

 

16320

Bad debts

 

1500

Sum of operating expenses

 

259770

Net profit

 

373230

Balance sheet of Gravepals Plc as on 31 December 2017

Particulars

Details

Amount

Current assets

 

 

Accounts receivables

438000

 

Less: Bad debts

1500

436500

Total stock

 

525000

Sum of current assets

 

961500

Fixed assets

 

 

Delivery van Cost

60000

 

Add: costs of operating

33600

 

Less: Sales

12000

 

Total van cost

81600

 

Residual life

5

 

Depreciation expense

16320

 

Valuation of van

65280

65280

Sum of fixed assets

 

65280

Total assets

 

1026780

Liabilities

 

 

Current liabilities

 

 

 

 

 

Accounts payables

 

393000

Total current liabilities

 

393000

Rent advance

 

22500

Non-current liabilities

 

58050

Total liabilities

 

473550

Shareholders fund

 

180000

Net Income

 

373230

Total equity and liabilities

 

1026780

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PART B

A. Extracting contribution per unit

Particulars

Figures (in £)

Raw Materials

5.25

Labour

2.95

Variable o/h

1.85

TVC per unit

10.05

Particulars (per unit)

Figures (in £)

Selling price

13

TVC

10.05

Contribution

2.95

Total fixed expense

 

Particulars

Figures (in £)

Cost of Production

59000

Selling cost

47600

Total fixed expense

106600

B. Margin of safety and Break-even point

Break-even point

Particulars

Formula

Figures (in £)

TFC (total fixed cost)

 

106600

Contribution (per unit)

 

2.95

Break even point (in units)

TFC/ Contribution per unit

36136

Break even point (in GBP)

Units BEP * Selling price per unit

469763

Margin of safety

Particulars

Actual

Level of Break even point

 

C. Extracting margin on 48000 tables

Particulars

Figures

Amount (in £)

Selling and production

48000 tables

624000

Break even point

36136 units

469763

Margin

 

154237

D. Clarkenpark Ltd's strategy

Particulars (per unit)

Figures (in £)

Selling price (9 % increase on 13)

14.17

TVC (Total variable cost)

10.05

Contribution

4.12

Particulars

Figures (in £)

Total cost

151600

Contribution (per unit)

4.12

Break even point (in units)

36797

Break even point (in GBP)

521400

It could be clearly viewed that Clarkenpark Ltd has created plan for spending 45000 with context of marketing activities where is selling price will increase by 9%. The new sales in units and price would raise by 17% as priorly the commodity price was 13 and after increment by 9% it was about 14.17. However, contribution is extracted as 4.12 and after adding marketing and selling expense to total cost as 106600 has given 151600. In the similar aspect. Break even point had been arrived as in unit it was 36797 and in GBP it is 521400 (Morano and Tajani, 2017).

It has been clearly articulated that organisation will accomplish margin but at 17% level was not considered as good strategy. In simple words, it signifies increment in price along with expenses but there will be no change in profit at huge extent. Henceforth, this is not considered as effective strategy with reference to Clarkenpark Ltd.

E. Identifying and explaining assumptions on basis of break even model

Break even analysis is very important as it identifies various practical applications of cost function. It is identified as function of specific three factors such as sales, profit and cost as its objective is to classify dynamic relationship among volume of sales and total cost of business entity. It helps in understanding operating condition which exists when business entity breaks even, in simple words when sales is equal to all incurred expenses for attaining sales level. This model is based on numerous assumptions which are stated below:

  • There is appropriate classification of total cost in variable and fixed cost as it avoids semi variable cost.
  • The product's price is considered as constant or stable.
  • There is presence of linearity among cost and revenue functions.
  • Generally, volume of production and sales are equal.
  • The variable cost will be attaining increment with constant rate.
  • The technology is constant with absence of improvement in labour efficiency.
  • There is no change in factor price.
  • The fixed cost is constant with consideration of particular volume.
  • The alterations in input price is ruled out.
  • With context of multi product firm there is stability in product mix.

Analysing about model which could be utilised with specific range of business

Break even analysis is used for identifying about volume of sales for business when it is making profit on basis of variable and fixed cost along with selling price. It is used in conjunction with forecast of sales along with appropriate development of pricing strategy as part of business or marketing plan. In nutshell, its uses for business had been identified for business perspective are stated below:

  • It is used for identifying the number of units with business requirements for dell in order for ignoring loss. It is used with reference to budgeting process as it exactly identifies units for selling with context to break-even.
  • It also motivates employees majorly sales staff as it clearly reflects profit at different points of sales (Cortes, Amano and Yamasaki, 2017).

The most important aspect for application of break even analysis for improving growth as it allows various users for input actual units sold with context of revenue, fixed and variable costs sold on per units. The sales volume is fixed for recovering specified return on capital employed as it provides recommendations for shifting sales mix. It provides creating inter-firm profitability comparison. Further, it reveals about profit earning capacity and strength of specific concern with absence of effort and difficulty.

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PART C

A. Calculating payback period, accounting rate of return, net present value along with their recommendations

Payback period

Average Rate of Return

Year

Cash inflow

1

10600000

2

10600000

3

10600000

4

10600000

5

10600000

Average profit: 10600000

Average Investment: (40000000 + 5000000) / 2

=22500000

The average rate of return: Average Earnings after tax / Average investment * 100

=47.11%

Net Present value

Depreciation expense

Particulars

Figures

New machine cost

40000000

Value of scarp

5000000

Residual life (in years)

5

Depreciation

7000000

Computing Net present value

Year

Cash inflow

(-) Cash outflow

(-) depreciation

Cash inflow (Gross)

(+) depreciation

1

17000000

6400000

7000000

3600000

7000000

2

17000000

6400000

7000000

3600000

7000000

3

17000000

6400000

7000000

3600000

7000000

4

17000000

6400000

7000000

3600000

7000000

5

17000000

6400000

7000000

3600000

7000000

Cash inflow

PV factor @ 7%

Cash inflows (Discounted)

10600000

0.9346

9906542.06

10600000

0.8734

9258450.52

10600000

0.8163

8652757.5

10600000

0.7629

8086689.25

Total discounted cash inflows

 

43462092.8

Less: initial investment outlay]

 

40000000

Net present value

(Total discounted cash inflow – initial investment)

3462092.82

Recommendation: The decision about purchasing machine has been taken by considering investment appraisal techniques such as payback period, Average rate of return and net present value.

Payback period: It is replicated as covering its initial cost as in this project of 5 years, its initial investment of 40000000 will be recovered in 3 years and 8 months with 7% cost of capital. In simple words, it could be elaborated that this project is beneficial and give profit after this duration as there is measurement of length of required time (Jonker, Junginger and Faaij, 2014).

Average rate of return: It is an accounting concept which has consideration of time factor as returns are produced via net profit of proposed capital investment. It is reflected in percentage form as in above project, its average investment of 22500000 along with average net income as 10600000 along with appropriate return as 47.11%.

Net Present value: There is analysis of profitability of this project with context of determining net present value. There is extraction of depreciation of residual life of 5 years as its scrap value is 5000000 so its depreciation as 7000000. In this aspect, its cash inflow as 17000000 by excluding cash outflow of 6400000 and depreciation which will give gross cash flow. Again there will be addition of depreciation will be accomplished as cash inflow with its cost of capital as 7% will lead to discounted cash inflows. After performing this procedure, the sum of discounted cash inflow will be considered as sum then it will exclude initial investment then its final outcome as net present value. The above machine's net present value is extracted as 3462092.82 which is profitable to Dane Jones Ltd.

Hence, this analysis of investment appraisal techniques, it has been evaluated that this machine could be brought to business as each outcome is favourable and beneficial to Dane Jones Ltd.

B. Producing report with explanation and analysis of key merits and demerits for differing investment appraisal techniques

Investment appraisal techniques is referred as planning process which is used for identifying long term investments of company like new machines and products, replacing machinery, research development projects and worth with cash funding via optimal capital structure of business entity. The decision about investment is associated with tactical and strategic business decisions with requirement of attaining objectives for long term perspective. There are various techniques for investment appraisal techniques which are beneficial to business but it has demerits as well which are stated below:

Payback Period: It is referred as time length with requirement of recovering investment cost. It is provided with specific investment of project which is significant as proper determinant for undertaking project or position where long payback period are not directly desirable for position of investment. In simple words, it is time when initial cash outflow is recovered with cash inflow which is produced through investment (Vesty and et.al., 2018). It is considered as simplest technique of investment appraisal. Its merits and demerits are explained below:

Merits

  • It is very easy to calculate and understandable as well.
  • There is need of less time, cost and labour as compared to different capital budgeting methods.
  • It avoids and reduce loss via obsolescence with preference to short payback period as compared to long.
  • It is highly suitable for business entity with short amount of cash in hand along with weak liquidity position of cash is very weak.
  • It provides huge importance for speedy investment recovery with context of capital assets (Hyk, 2018).

Demerits

  • This method does not consider time value of money.
  • It might mislead decisions of capital budgeting as it fails for measuring capital expenditure's productivity due to absence for reattempting measure for investment returns.
  • It avoids liquidity and short term solvency with specific business concern.
  • The economic life and capital wastage has been avoided through restricting particular consideration of gross earnings of project.
  • The cost of capital has been overlooked which is specific factor for sound capital budgeting decision as it does not consider cash inflow arising after payback period.

Accounting Rate of return: It is financial ratio which is used for capital budgeting as it measures amount of profit and expected on particular investment. It divides average profit through initial investment for extracting return or ration which is expected. Generally, it is used for appropriate comparison among organisation's profitability and basic outlook for performance of investment (Bader, Al-Nawaiseh and Nawaiseh, 2018).

Merits

  • It is also very easy for calculating and understanding as it undertakes total profits and saving with entire duration of project's economic life.
  • It undertakes net earnings' concept which is earning after depreciation and tax as it is important factor with appraisal of particular investment proposal.
  • It helps in facilitating comparison of innovative product project along with decreasing cost or it should be competitive in nature.
  • It specifies clear picture about project's profitability.
  • It would be considering proper accounting concept of margin with context of extracting rate of return.
  • It is very important for tracing current performance of business entity.

Demerits

  • It avoids time value of money as it first weakness is to choose alternative applications of funds where time factor is avoided.
  • It does not determine proper rate of return with reference to ARR as it is management discretion.
  • It does not undertake external factors which is impacting project's profitability.
  • In the similar aspect, cash inflows are not considered which are highly important as compared to accounting profits.

Net Present value: It is referred as variation among present value of cash outflow and inflow of specific duration. Generally, it is used for capital budgeting along with investment planning for analysing profitability of forecasted project or investment as well. It is form of intrinsic valuation which is applicable in extensive format among accounting and financing for identifying business value, capital project, cost reduction program, investment security and any other aspect which has high involvement of cash flow (Panadiy, 2018).

Merits

  • It considers time factor and saving or earnings over whole project's life. The savings and earnings are transformed in present value of money.
  • It is used for comparative assessment for various projects.
  • It helps in increasing organisation's profit as it could be applied to uneven or even pattern of cash inflows.
  • The risk and profitability of project is given at huge priority.

Demerits

  • It does not reflect rate of return which is expected for earn.
  • It might fail to provide satisfactory outcome with huge requirement of various level of amount investment along with specific project's economic life.
  • It has huge requirement of rate of cost of capital as if there is absence of cost of capital then this method could not be used.
  • It leads to contradictory and confusing answers for ranking complicated projects.

C. Producing report with explanation of key benefits and limitations of using budget as tool for strategic planning

Budget is replicated appropriate estimation of expenses and revenue of specified duration as it is directly re-evaluated and compiled on periodic aspect. It is referred as planning tool which provides help to leaders for purpose of planning of future and learnings from previous experience. The planning process of budget has huge involvement of observing availability of funds and to segregate resources in efficient aspect. Effective budget planning has engagement about information related to goals and to develop financial plan for supporting overall objectives. It is comprehensive financial plan for attaining operational and financial objectives of business entity. For creating this budget, the business is appropriately developing its goals for acquisition and application of its specific resources (de Queiroz Falcão and et.al., 2018). It becomes as valuable benchmark for identifying about steps which are taken by management and ensure about attained objectives or not. There are various benefits and limitations derived from budgeting are stated below:

Benefits: It helps in formalising coordination of various activities among numerous department while aligning specific activities as strategic plan of business entity. It also helps in assignment of responsibilities with context of decision making and to enhance responsibility of management. In the similar aspect, all decision makers are performing for attaining similar objective as it also raises performance evaluations. It gives common base of discussion for meeting objectives and to give specific point of concern about actual outcome variations from original budget. It also helps in encouraging area in particular business to be highly efficient as it rolls great efficiency company wide.

Limitations: The most important aspect of budgeting as it demotivate staff with reflection of unique targets which are very easy for attaining as they are highly responsible for competing on incapability for identifying targets for themselves. It could be used mechanically and rigid as it shows numerous issues as there is observance of planning which is not mandatory for additional work and obtains less priority. It reduces innovation and initiative at low level without getting money for numerous innovative ideas as it does not have flexibility. In the similar aspect, there is fulfilment of objective along with various meaningful metrics which are worsened. There is formation of perception with context of unfairness as there is lack of cooperation in departments and function where its results forms operational plan in conflict (Advantages and disadvantages of Budget, 2018). Are you worried about online homework help? We provide the best writing service at an affordable budget.

CONCLUSION

From the above study it had been concluded that finance and accounting are very important aspect for business as with its absence, regular operational activities could not be performed in efficient aspect. It has been articulated that financial statements plays essential role for analysing its financial performance and position. It has shown importance of break even and margin of safety with its assumptions and in similar aspect, there is analysis of investment appraisal techniques where machine could be bought as its has positive outcome with reference to payback period, accounting rate of return and net present value.

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