Index

Task 1
Growth profitability and Financial ratio............................................. 2
Business structure of the organization.................................................................. 3
Compare finances of the business......................................................................... 4
Advice a potential investor on investing in the business...................................... 5
Suitable source of finance..................................................................................... 5
Managing working capital.................................................................................... 6

Task 2
Cash Flow
Statement..................................................................................................................7

Task 3
Financial Calculatio....................................................................... 7
Recommendation..................................................................................................10
References............................................................................................................. 11

Task 1
(A) Using set of published accounts from a real business organization, carry
out ratio analysis for two years.

Growth Profitability and Financial Ratios for Mother Care

2013
2012
Revenue GBP Mil
812.7
793.6
Gross margin percentage
6.3
6.3
Operating Income GBP Mil
43.7
42.6
Operating Margin percentage
3.4
4.1
EPS GBP
1.8
24.7
Pay-out Ratio %
78.4
58.7
Revenue
100
100
Cost of goods sold
93.69
93.69
Gross Margin
6.31
6.31
Net Margin %
0.06
0.09
Asset Turnover ratio (Average)
1.28
1.27
Return on Assets %
2.17
2.04
Financial leverage (Average)
7.05
14.06
Return on Equity %
5.84
6.29
Return on Invested Capital %
9.56
19.67
Interest Coverage
6.3
8.05
Cash & Short-Term Investments
6.17
7.18
Inventory
99.1
116
Total Current Assets
175.6
193.8
Total Assets
338.4
409.3
Accounts Payable
12.04
11.62
Total Current Liabilities
(151.6) (139.4)
Total Liabilities
(265.7) (216.5)
Total Stockholders' Equity
72.8
192.8
Total Liabilities & Equity
100
100
Current Ratio
1.19
1.39
Quick Ratio
0.50
0.59
Debt/Equity
3.64
1.12
Payables Period
53
62
Receivables Turnover
11.85
11.57
Fixed Assets Turnover
4.40
4.30
Asset Turnover
3.45
2.28

(B) Comment on the business structure of the organization and the

reporting requirement for the structure. Compare this with other
possible business structure and explain the relative advantages of the
structure of the chosen organization.
Mother care is large organization which is serving customers from almost four decades.
Information is passed through a process, top management or leadership set a goals for the
betterment of organization and then they allocate tasks to relevant department heads or
leaders. Leader or manger of the relevant department passed the information to his team
or groups and motivate them how goals can be achieved. In mother care information
passed from one person to another until its get to the down level management. It is the
responsibility of the management to pass the information to lower management and keep
them up to date if there is any change in the organizational structure. If there is any
changes in the task lower management should not wait to response from top management,
they should have to know what they have to do in such kind of particular situation.

(C) Compare the figures for two years and comment on the finances of
the business.
According to annual report of the mother care, organization sales in the UK is decreasing
from last few years while international sales are increasing there is increase in the net
income of the organization. Which is however very healthy for the organization. Group
revenue of the mother care is increasing as compare to last two years. There is 2.4%
increase in group revenues which is healthy for the organization.
Total capital expenditure for the year 2011/12 are 24.09 million. 3.4 million Was allocated
for the intangible software. Revenues from the international market is increasing
gradually while in UK revenue is decreasing.

(D) Advice a potential investor on investing in the business compared to

placing money in a deposit account. (Current deposit account
interest rates should be sourced from local banks or Internet for
comparison). The investor has 50 000 (or equivalent in other
currency) to invest. (1.2)
In modern world, banking sector is at his peak level it is very easier for the every investor
to open a basic account with a small amount of money. There is not any particular deposit
limit for such types of account. Interest rate is vary on the amount it could be increased or
decreased depending on the amount how much you used. Interest rate applies if you
overdraw for particular amount. Usually small amount is charged as a fees if your account
balance dip to minimum. If you are not satisfied from the account you can closed your
account at any time, there is no penalties for the early withdraw but in future if you are

interested to open a new account then you have to offer high level of security. Otherwise
it will be difficult for you to open an account because bank need security.
Risk is always involved in the investment, risk depend on the nature of business. Some
business have high risk for example trading with other nations or countries. There is no
unusual for the passbook accounts holders to pay lower interest or dividend rate than the
inflation rate. In spit many deposit accounts pay relatively low returns, but there are
number of attraction for the new investors. The most important and first thing is high
liquidity.

(E) Suppose the business requires additional finance of 500 000. Advise
on a suitable source of finance giving possible alternatives,
implications of each and reasons for your recommendation.

There are two kinds of sources of fund

Internal sources
External sources

There are some types of internal sources of funds which are as follows

Friends and family

Credit card
Personal saving loans

External sources of funds

Loan from bank

Long term debentures

Internal sources:
For internal sources of funds, investors try to arrange the finances his own. Investors try to
arrange from his friends and family. The advantage of internal sources investors have to pay
no interest rate or having very minor interest rate. If investor use his credit card he have to
pay low interest rate and he can return amount any time he wants, he make small payments to
refunds finance or set fixed amount which is deducted each moth form his account. It easier
for the invertor to get finances through internal sources, interest rate is low and mange easily.

External sources:
Bank loans:

Bank are like supermarkets they provide short term loan as well as long term loan. Interest
rate is variable it is depend on the size of loan, with similar amount costing a bit more. Cash
flow could be generated by the investors to make the interest payment.
Long term debentures:
Long term debentures could be used to arrange finance for the investment. Long term
debentures are issued to stakeholders or general public to get the finances. If investor have
any difficulty to gather finance he should give incentive or some extra amount to sell the
debenture. Debenture issued at par value but redeemable at 10% premium could motivate to
stakeholders to buy the debentures.

(F) Advise on how working capital can be effectively managed within

the business using figures from the accounts and your calculated
ratios to illustrate your answer. (3.3)

Working capital could be negative or positive, it is depend on the financial situation of the
organization. Working capital is a sort of cash available for day to day operation of the
organization. Major sources of working capital are net income, long term loans, sales of
capital assets and the funds provided by the stakeholders. Management can take advantages
of adopting unexpected opportunities through working capital. Working capital could play
vital role for bank loans and favourable credit trade terms. Working assets equal to working
capital of organization in the average trade cycle of organization.
Working capital is used to measure the efficiency of the company and short term financial
policy. If there is difference in the current assets and current liabilities means current assets
are more than current liabilities, then organization might be in trouble to pay back its loans or
credits in such case organization could be declared bankrupt.
The organization earn a huge profit in the year 2010 fiscal year, they have managed business
very strictly and as a result they generate a working capital inflow 3.4 million. With the
passage of time organization working capital is increasing every year.

Task 2
Green Limited is a wholesaler. The budgeted income statements for 6 months
are as follows:

Cash Flow Statement

000
Cash flow from investing
activities
Cash receive from customers
Cash paid (expense less
electricity)
Cost of goods sold
Expenses less electricity
Electricity charges
Cash generated from operations
Dividend Received
Interest Received
Tax paid
Net cash flow from Operating
Activities
Cash Flow from investing
activities
Additions to
equipment(payment of van)
Replacement of Equipment
Proceeds from sales of
equipment
Net cash flow from investing
activities

July
106

August
114

Sep
118

Oct
124

Nov
104

Dec
96

-106
-30

-64
-30

-66
-30
-20

-70
-30

-59
-30

-54
-30
-34

-30

20

24

15

-22

24

15

-22

-25

-30

20

-23

Cash Flow from Financing

Activities
Proceeds from capital
contributed
proceeds from loan
payment of loan
Net cash flow from financing
activities

-30

20

-23

24

15

-157

Net increase/Decrease in Cash

Cash at the start of the period
cash at the end of the period

90
60

60
80

80
57

57
81

81
96

96
-61

TASK 3

-135

A) Assess the given projects using accounting rate of return, payback

period, Net present values and internal rate of return. (3.2)

(1)

Accounting rate of return = Initial investment- residual value)/ useful life

ARR for project 1= (200-7)/3

= 3.5%

ARR for project 2 = 5.33%

(2) Payback period for project 1 and 2

Payback period for project 1 = 3 years and 8 months
Payback period for project 2 = 3 years 5 months

(3) NPV for project 1 and 2

NPV for project 1 = -128.31
NPV for project 2 = 51.24
(4) IRR for both projects
IRR for project 1 = 3.64
IRR for project 2 = 9.24
[Note: Financial calculator is used for calculation]

(B) Make recommendations based on calculations and explain reasons

for recommended choice. (3.3)

According to calculation it is better for the organization to choose project 2. There are some
reason to choose the project 2 because if we look at the NPV project 1 NPV is negative while
project 2 NPV is much better. Project 2 IRR is better so it is strong reason for organization to
select project 2. Payback period for project 2 is slightly lesser as compare with project 1.

References:

 http://www.accountingformanagement.com/variable_and_absorption_cost
ing.htm- Accessed on 7 July 2014
McLaney, E & Atrill, P (2002) Accounting-An Introduction, 2nd
edition, London: Prentice Hall, p.433-441.Upchurch, A (1998)
Management Accounting-Principles and Practice, London: Financial
Times management, p.329-339.
http://www.letslearnfinance.com/advantages-and-disadvantages-ofmarginal-costing.html
http://www.letslearnfinance.com/advantages-and-disadvantages-ofmarginal-costing.html - Accessed on 1 July 2014