mfrd - lalitesh

8/10/2019 MFRD - LALITESH

1/35

MFRD Page 1

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

Assessor name : Dr.NEERAJA

Task L O Assessment criteria Pass Merit Distinction

1.1 11.1 identify the sources of finance available to a business

P

1.2 11.2 assess the implications of the different sources

P M2

1.3 11.3 evaluate appropriate sources of finance for a business

projectP D1

2.1 2 2.1 analyse the costs of different sources of finance P M1

2.2 2 2.2 explain the importance of financial planning P

2.3 22.3 assess the information needs of different decision

makersP M2

2.4 22.4 explain the impact of finance on the financial

statementsP

3.1 3 3.1 analyse budgets and make appropriate decisions P D1

3.2 33.2 explain the calculation of unit costs and make pricing

decisions using relevant informationP M2

3.3 3 3.3 assess the viability of a project using investmentappraisal techniques

P D2

4.1 4 4.1 discuss the main financial statements P

4.2 44.2 compare appropriate formats of financial statements

for different types of businessP M2

4.3 44.3 interpret financial statements using appropriate

ratios and comparisons, both internal and external.P M2

Date set: Hand-in date Submitted Date:

Review dates 1: 2: 3: 4:

Learner declaration I, herebyconfirm 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


2/35

MFRD Page 2

and copying and agree to be bound by them

Learner signature Date

TasksTask

No (Include the grading statement from the published specifications)

Evidence required for

learning outcome

ASSIGNMENT I PONNI SUGARS & CHEMICALS LIMITED

1 1.1 identify the sources of finance available to

a business

Ascertain different sources of finance

available in the given case.

2 1.2 assess the implications of the different

sources

Enumerate the implications for each source of

finance

3 1.3 evaluate appropriate sources of finance

for a business project

Evaluate different sources of finance for the

project of Ponni Sugars and Chemicals Ltd

4 2.1 analyse the costs of different sources of

finance

For different sources of finance evaluate by

comparison

5 2.2 explain the importance of financial

planning

What is financial planning how does it help the

organisation

6 2.3 assess the information needs of different

decision makers

Evaluate the information needs of different

decision makers in a organisation

7 2.4 explain the impact of finance on the

financial statements

Assess the impact of finance on financial

statements

ASSIGNMENT II TESCO RETAIL OUTLET & Vishal Mega Mart

8 3.1 analyse budgets and make appropriatedecisions

Analyze budgets and recommend actions

9 3.2 explain the calculation of unit costs and

make pricing decisions using relevant

information

Assess costing and recommend pricing

decisions

10 3.3 assess the viability of a project using

investment appraisal techniques

Ascertain project viability by using investment

appraisal methods

11 4.1 discuss the main financial statements Explain financial statements and their purpose.

12 4.2 compare appropriate formats of financial

statements for different types of business

Compare financial statements of different

businesses

13 4.3 interpret financial statements using

appropriate ratios and comparisons, both

internal and external.

Compare financial statements both internal and

external using financial ratios.


3/35

MFRD Page 3

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 equalscurrent 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 long-

term 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)


4/35


5/35

MFRD Page 5

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, theseenterprises 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.



6/35

MFRD Page 6

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.


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.


7/35

MFRD Page 7

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 x6/100)

(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)

(60,50,000)

Earnings after Interest, Tax and Dividends 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


8/35

MFRD Page 8

= 4, 90, 00,000 = High Geared

40, 60, 00,000

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




Particulars Rs



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


58,49,16,000

Less: Dividends on Preference Shares

(2,08,00,000x10/100)

(20,80,000)


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

605000


9/35

MFRD Page 9

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




Particulars Rs



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


59,18,22,000

Less: Dividends on Preference Shares (22,05, 00, 000x10/100)

(2,20,50,000)


EPS = 56, 97, 72,000 = Rs. 2739.2


10/35

MFRD Page 10

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 Geared40, 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 moreearnings 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)

NPCost of debt=

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 = Principalcost of flotation

= 12, 50,00025, 00,000

= 12, 25,000Tax = 40% = 0.40

Kda= I (1-t)NP

=1, 00, 00,000(1- 0.40)

12, 25, 00,000

Cost of Preference shares:

Kp= Cost of preference shares, D = Annual preference dividend, NP- Net Proceeds

12, 50, 00,000 x 2= 25, 00,000100

12, 50, 00,000 x 2= 25, 00,000100


11/35

MFRD Page 11

Cost of flotation (2%) = 12, 10,000

NP= 6, 05, 00,00012, 10,000 = 5, 92, 90,000

D= 60, 50,000

Kda= I .

NP=60, 50,000

59290000

= 0.102 or 10.2 %

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 valueRs 2 cost of issue= 98

= 20.4%

Cost of retained earnings:

D= Expected annual dividend per share, NP = Net proceedsD = 20% annual dividend and Rs 100 per share value

NP = Rs 100 per share valueRs 2 cost of issue= 98

= 0.204 X 0.60

=0.1224

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

Cost of equity is very high.

6, 05, 00,000 x 2= 12, 10,000100

Kes= DNP

Kes= D (1 t)NPKes= 20 = 0.204

98

= 20 x 100 = 20100 K es= 20X (1- 0.40)

98


12/35

MFRD Page 12

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 moreof 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.


13/35

MFRD Page 13

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 areduced pension rising in the state which in return is a problem for a normal person. There can bemany 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.


14/35

MFRD Page 14

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 arewritten 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 StatementIncome 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:

Income: What the business has earned over a period.

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


15/35

MFRD Page 15

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:

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 Rs Assets Rs

Equity share capital 208, 00,000 Land and site

development

102, 00,000

Preference share capital 605, 00,000 Buildings 543, 00,000

Debentures 1250, 00,000 Plant and Machinery 29, 59, 00,000

Loan from IDBI-

Financial Institution

2205, 00,000 Miscellaneous Fixed

Assets

176, 00,000

Retained earnings 282, 00,000 Fees and Consultants 55, 00,000

Preliminary and Pre-

operative Expenses

445, 00,000

Provision for 210, 00,000


16/35

MFRD Page 16

contingences

Margin money for

working capital

60, 00,000

45, 50, 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=20120705235242AAjUybN2. publishyourarticles.net/knowledge-hub/company-accounts/what-is-preference-share-

capital.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-and-planning.html#ixzz2BFLnT4wd

8. businesscasestudies.co.uk/business-theory/finance/financial-analysis-and-

planning.html#ixzz2BFKmN9U5

Task 2.3

9. investorwords.com/3775/preference_shares.html#ixzz2BFU7bmpq

10.en.wikipedia.org/wiki/Debenture


17/35

MFRD Page 17

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


18/35

MFRD Page 18

-Selling expenses and overheads are one month lag. Apr payment in May and May in June.

Cash Budget:

Particulars June July August

Opening Balance 10,000 (30,500) (32,375)

Receipts- Collection from

customers

1,10,000 1,30,000 1,50,000

Total receipts (A) 1,20,000 99,500 1,17,625

Payments:

-Sales Commission 5,000 6,000 7,000

-Payment to credit

(Purchase)

80,000 90,000 1,00,000

-Plant 48,000 15,000 15,000

-Wages 9,500 11,375 14,500

-Selling expenses 3,500 3,500 3,500

-Overheads 4,500 6,000 6,000

Total Payments (B) 1,50,500 1,31,875 1,46,500

Closing Balance (A-

B)

(30,500) (32,375) (28,875)

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


19/35

MFRD Page 19

Selling overheads)

Selling price 10

Contribution/unit (Selling price MarginalCost)

1

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 25000 32,500

Selling overheads 25000 32,500Marginal Cost (PC +Overheads)

4,50,000 5,85,000

Fixed Cost 37500 37500

Total Cost (MC + FC) 487500 622500

Sales 600000 750000

Profit (SalesCost) 112500 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 Cash flow PV factor PV

I 50,000 0.909 45450

II 1,00,000 0.826 82600


20/35

MFRD Page 20

III 1,00,000 0.751 75100

IV 30,000 0.683 20490

V 20,000 0.621 12420

V (scrap) 10,000 0.621 6210

Present Value of all

cash inflows

242270

Less: Initial

Investment

200000

Profit 42270

Project- Mumbai (Virar)

Initial Investment- 300000

Estimated Life- 5 yrs

Scrap- Rs. 20000

Year Cash Flow PV factor PV

I 2,00,000 0.909 181800

II 1,00,000 0.826 82600

III 50,000 0.751 37550

IV 30,000 0.683 20490

V 20,000 0.621 12420

V (scrap) 20,000 0.621 12420

Present Value of allcash inflows

347280

Less: InitialInvestment

3,00,000

Profit 47280

Rate of Returns = Total profits 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:


21/35

MFRD Page 21

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 statementis 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. Fora 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 acompany'sassets,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).
http://en.wikipedia.org/wiki/Statement_of_Financial_Positionhttp://en.wikipedia.org/wiki/Statement_of_Financial_Positionhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Legal_liabilityhttp://en.wikipedia.org/wiki/Statement_of_Comprehensive_Incomehttp://en.wikipedia.org/wiki/Statement_of_Comprehensive_Incomehttp://en.wikipedia.org/wiki/Statement_of_Changes_in_Equityhttp://en.wikipedia.org/wiki/Statement_of_Changes_in_Equityhttp://en.wikipedia.org/wiki/Statement_of_cash_flowshttp://en.wikipedia.org/wiki/Statement_of_cash_flowshttp://en.wikipedia.org/wiki/Statement_of_cash_flowshttp://en.wikipedia.org/wiki/Statement_of_Changes_in_Equityhttp://en.wikipedia.org/wiki/Statement_of_Comprehensive_Incomehttp://en.wikipedia.org/wiki/Legal_liabilityhttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Statement_of_Financial_Position


22/35

MFRD Page 22

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'tnormally 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 Particulars Rs

To Opening Stock Xxx By sales XxxTo purchases Xxx By Other direct Income Xxx

To Other Direct Expenses Xxx By closing Stock Xxx

To Gross Profit Xxx

Xxx xxx

To salaries Xxx By Gross Profit

To Trade expenses Xxx By Commission received Xxx

To Rent and taxes and interest Xxx By discount received Xxx


23/35

MFRD Page 23

To Commission allowed Xxx By Interest on drawings Xxx

To Other indirect expenses Xxx By other indirect incomes Xxx

To Net profit Xxx xxx

Balance Sheet

Capital + liabilities Rs Assets Rs

Capital: Opening capital xxx Fixed Assets Xxx

Less: Drawings xxx

Add: interest on capital xxx

Less: interest on drawings xxx Investment Xxx

Add: Net profit xxx Xxxx

Long Term Loans Xxx Current assets/Advances and loans

Short Term loans Xxx A. Current assets

Sundry debtors Xxx

Current liabilities Cash in hand/bank XxxSundry creditors Xxx Closing stock Xxx

Outstanding items Xxx B/R Xxx

B/P Xxx B.Loans and advances

Commission in advance Xxx Prepaid items Xxx

Fictitious Assets

xxx

Xxx Xxx

Format for manufacturing business:

Manufacturing, Trading and P & L account

Particulars Rs Particulars Rs

To Raw material consumed By cost of goods manufactured xxx

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 XxxTo cost of goods manufactured Xxx By sales Xxx

To Opening stock of Finished

goods

Xxx By Closing stock Xxx

To purchases of FG Xxx

To gross profit Xxx

Xxx Xxx

To Office expenses By Gross Profit Xxx


24/35

MFRD Page 24

To Other indirect expenses By other indirect incomes

To net profit Xxx

Xxx Xxx

Balance Sheet

Capital + liabilities Rs Assets Rs

Capital: Opening capital xxx Fixed Assets Xxx

Less: Drawings xxx

Add: interest on capital xxx

Less: interest on drawings xxx Investment Xxx

Add: Net profit xxx Xxxx

Long Term Loans Xxx Current assets/Advances and loans

Short Term loans Xxx A. Current assetsSundry debtors Xxx

Current liabilities Cash in hand/bank Xxx

Sundry creditors Xxx Closing stock Xxx

Outstanding items Xxx B/R Xxx

B/P Xxx B.Loans and advances

Commission in advance Xxx Prepaid items Xxx

Fictitious Assets

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 thecompany 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 summarizesthe 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 "incomeand 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


25/35

MFRD Page 25

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 themanufacturing 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 willalways be some unfinished goods or work-in-progress. The cost of work-in-progress at the endof 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 Opening Closing

Raw material Include as cost in

calculation of material

consumed

Deduct from opening stock +

purchases and include in balance

sheet.

Work in progress Include as cost in

manufacturing account

Deduct from manufacturing account

and include in balance sheet

Finished goods Include as cost in tradingaccount

Deduct from trading account andinclude in balance sheet

Manufacturing A/c Trading A/c

1. Manufacturing a/c is part of trading a/c 1. Trading a/c is one of the most important

accounts of final account.

2.Manufacturing a/c is prepared by

productive industries only

2.Trading a/c is prepared by both

productive and non productive industries

3. Inventories a/c are taken into

consideration in manufacturing a/c

3. Direct the cost of product is taken in

trading a/c

FORMAT OF BALANCE SHEET AND PROFIT & LOSS ACCOUNTSub-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 ThirdSchedule 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 1

Reserves & Surplus 2

Deposits 3


26/35

MFRD Page 26

Borrowings 4

Other liabilities and provisions 5

Total

Assets

Cash and Balances with ReserveBank of India

6

Balances with banks and money atcall and short notice

7

Investments 8

Advances 9

Fixed Assets 10

Other Assets 11

Total

Contingent LiabilitiesBills 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:

= 50%

2. Net Profit Ratio:

= 41.5%

Net Profit after tax x 100

Net Sales

Gross Profit 100

Net Sales

= 5, 00,000 x 100

10,00,000

= 4, 15,000 x 100

10, 00,000


27/35

MFRD Page 27

3. Earnings per share:

= Rs 415

4. Time Interest Earned Ratio:

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

= 4, 25,000 (profit before interest)

= 42.5

5. Return on share holders equity:

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

= 2, 00,000

= 207.5

Liquidity Ratios:

1. Working Capital turnover:

Working Capital= current assetscurrent liabilities

(Tesco)= 4, 00,0001, 50,000 = 2, 50,000

= 4:1

2. Current Ratio:

Profit after tax

Total Equity shares

= 4, 15,000

1,000

Profit before Interest and Tax

Interest expenses

= 4, 25,000

10,000

Net profit after tax x 100

Average amt of share holders equity

= 4, 15,000 x 100

2, 00,000

Net sales

Working capital

= 10, 00,000

2, 50,000

Current Assets

Current Liabilities

= 4, 00,000

1, 50,000


28/35

MFRD Page 28

= 2.6:1

3. Quick Ratio:

Quick Assets = All current assets except stock and prepaid

=1, 50,000

= 1:1

4. Average receivable turnover: (debtors turnover ratio)

= 1000

= 10:1

5. The days sale in account receivable ratio: (Debtors conversion period)

= 36.5 days

6. Inventory Turnover ratio:

Cost of sales = Sales- Gross profit

=10, 00,0005, 00,000

= 5, 00,000

Quick Assets

Current Liabilities

=1, 50,000

1, 50,000

= Net sales x 100

Debtors

= 10, 00,000 x 100

1, 00,000

=No of days of yr

Debtors turnover ratio

= 365

10

Cost of sales

Avg Stock

Average Stock= Opening stock + Closing stock

2

= 1, 50,000 + 2, 50,000

2


29/35

MFRD Page 29

= 2, 00,000

= 2.5

7. Inventory Conversion Period:

= 146

Solvency Ratios:1. Debt of equity ratio:

Total liabilities = current liabilities + long term loans

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

= 3, 50,000

= 1.75:1

The following are Vishal Mega Mart Ratios:Profitability ratios:

1. Gross Profit Ratio:

= 65.45%

2. Net Profit Ratio:

= 55.9%

3. Earnings per share:

= 5, 00,000

2, 00,000

No of days in yr

Inventory conversion

= 365

2.5

Total Liabilities

Equity share funds

=3, 50,000

2, 00,000

Gross Profit 100

Net Sales

= 7, 20,000 x 100

11, 00,000

Net Profit after tax x 100

Net Sales

= 6, 15,000 x 100

11, 00,000

Profit after tax

Total Equity shares

= 6, 15,000

2000


30/35

MFRD Page 30

= Rs. 307.5

4. Time Interest Earned Ratio:

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

= 6, 50,000 (profit before interest)

= 18.57

5. Return on share holders equity:

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

= 3, 00,000

= 205

Liquidity ratios:

1. Working Capital turnover:

Working Capital= current assetscurrent liabilities

(Vishal Mega Mart) = 5, 00,0002, 50,000

= 2, 50,000

= 4.4: 1

2. Current Ratio:

= 2:1

3. Quick Ratio:

Profit before Interest and Tax

Interest expenses

= 6,

50,000

Net profit after tax x 100

Average amt of share holders equity

= 6, 15,000 x 100

3, 00,000

Net sales

Working capital

= 11, 00,000

2, 50,000

Current Assets

Current Liabilities

=5, 00,000

2, 50,000

Quick Assets

Current Liabilities


31/35

MFRD Page 31

Quick Assets = All current assets except stock and prepaid

=2, 50,000

= 1:1

4. Average receivable turnover: (debtors turnover ratio)

= 1100

= 11:1

5. The days sale in account receivable ratio: (Debtors conversion period)

= 33.1

6. Inventory Turnover ratio:

Cost of sales = Sales- Gross profit

=11, 00,0007, 20,000

= 3, 80,000

= 3, 10,000

= 1.2

= 2, 50,000

2, 50,000

= Net sales x 100

Debtors

= 11, 00,000 x 100

1, 00,000

=No of days of yr

Debtors turnover ratio

= 365

11

=Cost of sales

Avg Stock

Average Stock= Opening stock + Closing stock

2

=2, 50,000+3, 70,000

2

=3, 80,000

3, 10,000

No of days in yr

Inventory conversion


32/35

MFRD Page 32

7. Inventory Conversion Period:

= 304.1

Solvency Ratios:

1. Debt of equity ratio:

Total liabilities = current liabilities + long term loans

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

= 5, 50,000

= 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 1:1ratio 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.

= 365

2.5

Total Liabilities

Equity share funds

=5,

50,000

3, 00,000


33/35

MFRD Page 33

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 casewe 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) Tesco has more inventory conversation ratio

b) Vishal Mega Mart has more current ratio and account receivable ratio.

c) Comparatively Vishal Mega Mart has more gross profit and net profit ratio than Tesco.

d) Earnings per share of Tesco are greater than Vishal Mega Mart.

e) 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


34/35

MFRD Page 34

FEEDBACK TO LEARNER

Outcome/Grading Criteria Comments on evidence produced Feedback

LO1 Understand the sources of

finance available to a business

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 financialinformation

3.1 analyse budgets and make

appropriate decisions


35/35

3.2 explain the calculation of unit

costs and make pricing decisions

using relevant information

3.3 assess the viability of aproject 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

mfrd - lalitesh

Documents