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(a) Income and Cash flow Statement
Income Statement
Revenue
Investment
125,000
Expenses
Loan
100,000
Corporation tax
Insurance, other costs
95,000
Wages
15,000
Manufacturing costs
300,000
Net income
385,000
Table 1: Income Statement for the first year of trading
(Source: MS-Excel)
Figure 1: Cash flow statement for the first year of trading
(Source: MS-Excel)
(b) The ability of the company Spray
I) Conversion operating profit in cash: the company ability to convert the operating profit in cash is appropriate. It is being converted by the formula that is + shareholder's equity. The amount of the cash that is being reflected in the balance sheet under the heading of the assets is similar to the net cash that will be generated from the calculation of the statement of the cash flow (Bellavitis et al., 2017). The profit is cash aspect refers to the profit that is being recorded in the business that uses the system of cash that is based on the system of accounting. Under the method, the revenues are being based on the receipts of cash and the expenses that are being based on the payments related to cash. The profit on the cash aspect is referred to the net change in the cash from the payments and the receipts that have been ascertained during the specific period (Cumming, and Johan, 2017). The ability to convert the cash refers to the situation of the economy that helps in the controlling that will help in the representation of the relation between the net profit and the flow of the cash. It is basically determined for a specific period of time, basically a quarter or a year. [Referred to Appendix 1]
ii) Matching the sources of the financing the long term external: the finance sources are debt, equity, term loans, venture funding etc., they are all being classified based on the period of time, control, ownership, and also the source of the generation. The capital sources are considered to be the best area for exploration, especially for the business organizers (Meoli et al., 2019). Selecting the right source of the finance developer is the challenge for the manager. On the basis of the period of the time, the sources are being classified on the sources of finance like the short, medium and long term. The various sources that are available under the financing of the long term are as follows:
Shares of equity
Retained earnings
Shares of preference
Bonds or debentures
Funding for venture
Securitization of asset
Specific term loans
(c) Purpose and limitation of the balance sheet
The main purpose of the balance sheet is to reflect the summary of all the assets present in the business and all the liabilities present. The balance sheet of the business generally helps in the provision of the funding of the debt that is being available by the organization (Vuong, 2020). The main purpose is to reveal the status of the finance of the business at a specific point of the time. The statement reflects what an entity owns and then what the company owes, and also the amount that is being invested in the regular course of the business (Salman and Jamil, 2017). The information is important as the balance sheets for the consecutive years are being grouped all together so that the analysis in the various items of the line can be viewed. Investors take the role of examining the amount of the cash prevailing on the balance sheet to analyze whether there is sufficient balance available to pay the dividend.
One limitation of the balance sheet:
It doesn't give the accurate position of the business: the statements of finance are being expressed in terms of money, as they are being appeared for the accurate and the final position of the business (Kenney and Zysman, 2019). The amount of the fixed asset that appears in the balance sheet tends to represent the value of the fixed assets that will be sold or the amount that will be required for the replacement of the assets. The balance sheet is being prepared on the continuous concern presumption.
Answer 2
(a) Net present value and internal rate of return
Figure 2: Net present value
(Source: MS-Excel)
Figure 3: Internal rate of return
(Source: MS-Excel)
(b) Report
(I) Companies like Tree house ltd. Can include the net present value and the internal rate of return, there are many benefits to the net present value. The net present value can help in the assumption of reinvestment in a significant manner. The net present value includes the acceptance of the conventional cash flow mattered. The benefits of net present value also include the proper measurement of the probability (Wekesa et al., 2017). The factors of the risk are measured by the net present value. Besides these, the consideration of several ‘Cash flows’ can be acknowledged with the present net value.
The limitation of the net present value includes- opportunity cost's estimation, avoiding the sunk cost, hard determining of the required return rate, 'optimistic projection, not boosting ROE and EPS, several project sizes.
The benefits of the Internal Rate of Return include money's time value, and this can be very impactful for the calculation in the business. The internal rate ratio also includes the nature of simplicity. The benefits also include the required or hurdle rate of return is not essential to be engaged. There can be a chance of a rough estimation of the needed return rate.
The disadvantages of the internal rate of return include the ignorance of the economic scale, implicit assumption, ignorance of the dependent project or contingent project, the ignorance of ‘mutually exclusive projects’ ((Pham et al. 2020)). Besides this, the IRR is not possible here if there is an insufficiency of cash inflows.
(ii) After analyzing the benefits and limitations of the net present value' and the factor of the internal rate of return', it can be decided that both calculation methods are impactful for business calculation. There is a significant offer of net present value that includes several benefits for the qualitative factors in the business. The imitations of the net present value have to be improved with substitution methods. Besides this, the limitations can be ignored in this manner.
The qualitative factors, internal rate of return, also the beneficial effect on the business calculation, and the factors of the internal rate of return are the most considerable area to be engaged effectively if there is ignorance of the limitations of the internal rate of return.
Answer 3
(a) Ratio calculation
Particulars
Formula
Ross Ltd
Working
Wye ltd
Working
Profitability Ratios:
Return on Capital Employed
EBIT/Net Assets
0.2
30000/150000
0.125
2000/16000
Gross Profit Margin
Gross profit/sales*100
70%
91000/130000
64%
57600/90000
Operating Profit
Operating profit/sales*100
21%
27000/130000
22%
19600/90000
Working capital Ratio:
Stock Turnover Days
COGS/Average inventory*365
8
(39000/5000)
3
32400/12000
Trade Receivable Days
Trade Debtors/Sales*365
34
(12000/130000)
0
90000/90000
Trade Creditor Days
Trade Payables/ COGS*365
66
7000/39000*365
113
10000/57600*365
Liquidity Ratios:
Current Ratio
current assets/ current liabilities
3.86
27000/7000
2.10
21000/10000
Quick Ratio
(Current Assets – Inventories) / Current Liabilities
3.14
(27000-5000)/7000
0.90
(21000-12000)/10000
Table 2: Calculation of the ratio
(Source: MS-Excel)
(b) Evaluation
By the evaluation of the annual results and all the ratios that have been calculated in the above part has helped us in the evaluation of the position of the company. The ratio that has been calculated is the ratio of liquidity, profitability, working capital management that helps in the analysis of the position of the company (Bonini and Capizzi, 2019). The company Ross ltd The gross profit margin has been calculated to be 70% as compared to the company Wye ltd, which has 64%. In the analysis of the net profit margin, the percentage for the company Wye ltd. was 22% and that when compared to the company Ross ltd. 21%. So the profitability ratio helps in the determination of the profit that the company is being generated. It helps in the overview of whether the company can be able to survive in the long run. As if the company doesn't earn enough profit, then the company will not be able to run in a long span of time, so hence the determination of the profitability capacity of the company is an integral part. In the analysis of the liquidity ratio, the quick and the current ratio has been undertaken to examine the position of the business in terms of liquidity (Bernthal, 2018). The current ratio for the company Ross ltd. was estimated to be 3.86; however, the current ratio for the company Wye ltd. was 2.10. And when the calculation of the quick ratio was determined, the rate of the company Ross ltd be 3.14 on the other hand, for the company Wye ltd was 0.90. The liquidity helps in the determination of the capacity of the business in terms of the liquid assets being present. It also determines how quickly the fixed assets can be converted into cash for the evaluation of liquidity. In the evaluation of the ratio for the management of the working capital, there were three ratios evaluated, namely, "Stock Turnover Days, Trade Receivable Days, and Trade Creditor Days" (Cumming, and Vismara, 2017). For the company Ross ltd., the ratio was determined being valued at 8, 34, and 66, respectively and on the next side for the company Wye ltd. It was evaluated to be 3, 0, and 113, respectively. The return on capital employed was also analyzed and undertaken for the analysis of the performance. So both the companies are performing well in the aspect for the ratio that we have analyzed. And the table has been attached below:
Particulars
Ross Ltd
Wye ltd
Return on Capital Employed
0.2
0.125
Gross Profit Margin
70%
64%
Operating Profit
21%
22%
Stock Turnover Days
8
3
Trade Receivable Days
34
0
Trade Creditor Days
66
113
Current Ratio
3.86
2.10
Quick Ratio
3.14
0.90
Table 3: Ratio Analysis
(Source: MS-Excel)
(c) Advantages and Disadvantages of Ratio analysis
Ratio analysis is referred to as the aspect of quantitative analysis of the information that is being enclosed by the financial statement of the enterprise (Deloof et al., 2019). It is being used for accessing various perspectives of the enterprise working and the performance of the financial statement like solvency, turnover, liquidity and profitability. It is the method of comparing and analyzing data by the computation of the statement percentages value except by the comparison of the line items from the financial statement. The advantages and disadvantages of the analysis of ratio are as follows:
Advantages:
It helps the company in the determination of the solvency of the long term and the liquidity and helps in the comparison of two or more firms.
It also helps in the provision of the important information to the users for the information of the accounting in respect of the basic performance of the business working under the prevailing condition.
Disadvantages:
Various organizations seem to be working in the enterprises that possess various positions prevailed in the environment like the structure of the market, the regulations and the rules etc. there are various factors that are integral for the comparison of the various firms and the enterprises that are being a varied industry that might seem to be ambiguous.
The data for financial accounting is being influenced by the hypothesis and the views. The criteria of the accounts help in the provision of the various methods that helps in the reduction of the comparability (Owen and Mason, 2017). Hence the analysis of the ratio is very helpful in various circumstances. The statements for the financial aspects are complicated in nature. [Referred to Appendix 2]
References
Journals
Bellavitis, C., Filatotchev, I., Kamuriwo, D.S. and Vanacker, T., 2017. Entrepreneurial finance: new frontiers of research and practice: Editorial for the special issue Embracing entrepreneurial funding innovations.
Cumming, D. and Johan, S., 2017. The problems with and promise of entrepreneurial finance. Strategic Entrepreneurship Journal, 11(3), pp.357-370.
Cumming, D., Meoli, M. and Vismara, S., 2019. Does equity crowdfunding democratize entrepreneurial finance?. Small business economics, pp.1-20.
Vuong, Q.H., 2020. Entrepreneurial Finance at the Dawn of Industry 4.0.
Kenney, M. and Zysman, J., 2019. Unicorns, Cheshire cats, and the new dilemmas of entrepreneurial finance. Venture Capital, 21(1), pp.35-50.
Pham, T.H., Ho, M.T., Vuong, T.T., Nguyen, M.C. and Vuong, Q.H., 2020. Entrepreneurial finance: Insights from English language training market in Vietnam. Journal of Risk and Financial Management, 13(5), p.96.
Bonini, S. and Capizzi, V., 2019. The role of venture capital in the emerging entrepreneurial finance ecosystem: future threats and opportunities. Venture Capital, 21(2-3), pp.137-175.
Bernthal, J.B., 2018. The evolution of entrepreneurial finance: a new typology. BYU L. Rev., p.773.
Cumming, D.J. and Vismara, S., 2017. De-segmenting research in entrepreneurial finance. Venture Capital, 19(1-2), pp.17-27.
Cumming, D., Deloof, M., Manigart, S. and Wright, M., 2019. New directions in entrepreneurial finance. Journal of Banking & Finance, 100, pp.252-260.
Owen, R. and Mason, C., 2017. The role of government co-investment funds in the supply of entrepreneurial Finance Assignment: An assessment of the early operation of the UK Angel Co-investment Fund. Environment and Planning C: Politics and Space, 35(3), pp.434-456.
Salman, A. and Jamil, S., 2017. Entrepreneurial Finance and its Impact on e-Business. Problems and perspectives in management, (15, Iss. 3), pp.24-41.
Wekesa Bunyasi, G.N., Bwisa, H. and Namusonge, G., 2017. Effect of entrepreneurial finance on the growth of small and medium enterprises in Kenya.
