Assignment front Sheet

Qualification

Unit number and title

Business

02. Managing Financial Resources and Decisions

Student name

Assessor name

Muhammad Waleed Ahmad

Mehreen Haroon
Khan
Date issued
Completion date

Submitted on

15th October 2015

15th December 2015

Assignment Title

15th December 2015

Sources Of Finance & Decision Making

Learning
Outcom
e

Learning
Outcome

Assessment
Criteria

LO1

Understand
the sources
of finance
available to
a business

1.1

Understand
the
implications
of finance
as a
resource
within a
business

2.1

Be able to
make
financial
decisions
based on
financial
Information

3.1

Be able to
evaluate the
financial
performanc

4.1

LO2

LO3

LO4

1.2
1.3

2.2
2.3
2.4

3.2

3.3

In this assessment you will

have the opportunity to
present evidence that
shows you are able to:
identify the sources of finance
available to a business

Tas
k
No.

assess the implications of

different sources
evaluate appropriate sources
of finance for a business
project
analyze the costs of different
sources of finance
explain the importance of
financial planning
assess the information needs
of different decision makers
Explain the impact of finance
on the financial statements

analyze budgets and make

appropriate decisions
explain the calculation of unit
costs and making pricing
decisions
using
relevant
information
Assess the viability of a
project
using
investment
appraisal techniques
Discuss the main financial
statements

1
1
2
4
8

6
8

1
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Evidenc
e
(Page
no.)

e of
business

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.

Learner declaration
I certify that the work submitted for this assignment is my own and research sources are
fully acknowledged.
Student signature:

Date:

2
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

TASK 1- SCENARIO 1
In task 1 identify and evaluate the different sources of finance, which
are available to the group of professionals, discussing the legal and
financial implications of the finance resource.
Cash that is needed for starting up a business activity is called business finance.
Finance is needed from beginning to the end of the business. From establishing a
business to running it and then expanding its activities. From buying assets to
running day-day operations like paying daily wages or buying raw materials etc.
There are numerous sources that a startup business would need and it is important for
a business owner to be aware of these financial sources so you can outline which
source is suitable for your business. The internal and external sources that a business
can look upon are:
Retained profit
Sales of assets
Bank loans
Bank overdrafts
Leasing
Hire purchase
Working capital management
Public deposits
Partnership
Trade credit
Government grants
Retained profit: is when a company is trading profitability, some of its profits will be
taken in tax by the government and some of it is almost paid out of the owners or
shareholders. One of the major advantages of retained profit is that is does not have
to be paid back since it is a long-term finance. Secondly, there is no set obligation of
interest or installment payments. Thirdly, as there is no added equity to be issued,
there is no strength of control and ownership in the business. Biggest disadvantage of
retained profit will be that the profits of a small business may be too near to the
ground to be of any use. For e.g. gym and health center is a newly formed business so
they cannot apply this source of finance as they have no previous trading history and
no retained profits are available currently.

3
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Sales of assets is another one of the sources of finances, this means when
conventional companies sell their assets that are no longer fully working to raise cash.
Its advantage is that is can save a large number of space as old assets are no longer
present. Also, it makes superior use of the business capital. Its major drawback is that
it is time consuming because the business might not find an appropriate buyer
particularly if the assets are old. Secondly, new businesses will not have any old assets
to sell.
Bank Overdraft means that the amount raised can vary from day to day, depending
on the particular needs of the business, the bank allows spending more money from
their account than is actually in it. Its advantages are that it is the most easily arranged
and flexible of all sources of finance. It is also cheap, as the company only has to pay
interest on the amount overdrawn at any one time. The disadvantages are that the bank
can ask for the overdraft to be repaid at whatever time they want to and with the short
notice. Secondly, the interest has to be paid as well. It also cannot be used to finance
long-term assets.
As for this organization its not very feasible because an overdraft can cause financial
cost, which right now this partnership cannot afford, bank overdrafts can be
financially convenient with its high interest rate, which is normally charged every day.

(Stimpson and Farquharson, 2010)

Hire purchase is a form of credit for purchasing an asset over a period of time in
form of monthly payments. The biggest benefit of hire purchasing to a business is that
it avoids making large initial cash payment to purchase the item/asset. The drawback
would be that since the interest rates are very high. It may be better to take out a bank
loan. Secondly, a cash deposit needs to be paid at the start. But as for the given
scenario, hire purchase can be used to buy gym equipment and the price can be paid
in the form of installments; no burden on the partners. (Stimpson and Farquharson,

2010)
Leasing involves no down payment from the buyer to the seller but asset is acquired
for a particular period of time against the monthly rent payable to use the asset and a
part of cost. The first gain would be that the company would not have to spend a lot of
money on buying the asset. Secondly, the firm will be able to easily update their
equipment. Thirdly, the leasing company will be taking care of maintenance and
replicating the damaged asset. Its biggest weakness would be that in the longer term,
leasing would be more expensive than actually purchasing the equipment.
Bank loan is one of the most important sources of finance; it is where a business
borrows money from a bank for a limited period. It is usually used to buy fixed assets,
for e.g. machinery and buildings etc. Advantages are that the business can plan ahead
without any difficulty, as the interest rate is fixed. Also, larger businesses can get
lesser interest rates, as they are more consistent. Disadvantages are that the smaller
companies will have to pay higher interest rates and the interest needs to be paid at
any cost. Collateral is needed, means that if the business fails to repay the loan, the
4
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

bank will be firm that it sells its property. In the case of a sole trader, the owner might
lose their possession. So for this partnership this will be another huge financial cost if
theyre planning a big loan for purchasing the gym equipment, the bank will take
longer in checking if they will be able to repay the bank loan since interest rate is the
first thing in the loan agreement.
Working capital management is an attempt to have only the required amount of
working capital in a business, so that it would not face problem of having too much or
too low working capital. The advantages would be, when a company reduces its
working capital-capital is released, which acts as a source of finance for other uses. It
also enables a concern to face business crisis in emergencies such as depression. Its
disadvantage would be that the return of investment would fall short with the shortage
of working capital.
Public deposits in sources of finance means when a company raises its short and
long-term finances by inviting the public to deposit their savings with their company.
Its beneficial because acquisition of investment through public payments is very easy.
Also, it does not weaken the control of shareholders. Since the rate of interest waged
on a public deposit is secure, the company can easily play trading on equity. Its
disadvantages maybe that they are not very certain and realistic forms of financing.
Public deposits are accessible for a very small amount of time only. Since the deposits
are not secured, the management may waste the deposits.
Trade credit is a short term, external source of finance, it used when a business buys
raw materials or takes any services or other goods from another business but delays
the payments of bills. Its suppliers or creditors are giving the services without taking
immediate payments; so then the supplier becomes a trade creditor means someone to
whom the business owes money. It is very flexible; the amount of credit replicates the
value of business done with a supplier. It is also less costly; trade creditors dont
charge interest on the amount outstanding, unless the payment is delayed beyond the
given time. Its downside is that trade credit is available only to those companies that
have a good track record of paying the money on given time. Also, for a new
business, it is very difficult to finance working capital through trade credit.
Additional partners in source of finance are when you add partners to the company
to raise its capital. It is suitable for partnership business as the new partners can
contribute extra capital. Its good thing is that is doesnt have to be paid back as well
as no interest in payable. Its downside is that the profits will be split more ways. Also
the diluting control of partnership will be involved.
Government grants, as a source of finance is when government organizations offer
grants to businesses, both new and established. Usually certain conditions apply, such
as where the business is located. Its advantage is that it doesnt have to be paid back.
These grants can be significant and give your organization immediate reliability and
public exposure. Government grants are usually on a reimbursement system, so if you
are a cash-strapped organization, you might face hardships and it automatically falls
5
Student Name:
Assess
SOURCES OF FINANCE
Waleed Ahmad
or Name:
AND DECISION
Mehreen Bakht
MAKING

in the drawbacks. Government grants also come with requirements to spend the funds
allowing to a complex set of regulations and laws by the government.
Mortgage is a long-term source of finance, it is loan secured on property and repaid
in installments over a period of time. The business will own the property once the
final payment has been made. Its biggest advantage is that it is very long term. Gives
the business a long time to repay the money. Disadvantages are that this is an
expensive method compared to buying with cash. Also if the company does not keep
up with the payments, the property could be repossessed. Interest needs to be paid as
well.
Debt factoring is a short-term finance and is when a business sells its outstanding
customer accounts (those who have not paid their debts to the business) to a debt
factoring company. A business can raise finance by collecting the debts from the
debtors. Also, the companies that only deal in cash do not have any debtors. Its upside
is that no additional cost in getting this finance, it is part of the businesses normal
operations. Major drawback is that there is a risk that debts owed can go bad and
cannot be repaid.

6
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

TASK 2 SCENARIO 1

Explain the importance of financial planning for business

organizations.
Financial planning is getting arranged for a business on the undertaking of picking
how the organization will perform its key objectives. Conventionally, an organization
makes a monetary course of action quickly after the vision and targets have been
achieved. The money related strategy defines each of the exercises, assets, mechanical
assembly, and materials that are depended upon to complete an organization's visions
and targets in a timeframe.
Financial planning generally opts the strides or the systems utilized by an individual
or business, which makes a go for satisfying the cash, related destinations or to pull in
with specific circumstances, which requires wisdom. A budgetary strategy for any
business or connection can offer bearing to the managers to comprehend whether they
can perform the given targets or not. The vital thing is that it should be done in a way
so that it offers the manager some help with settling on choices that provides financial
success of the association. Financial coordinating relates to the entire money is related
to book keeping of an affiliation. Each of the point of interest, exercises, materials,
and gear's that are incorporated to perform an association's goals and moreover the
time frame is elucidated in financial planning. It recognizes the framework for
achievement by ensuring that the destinations that have been set are either achievable
or not when seen from a financial perspective. By adding to a financial strategy, the
profit related targets are set viably by the CEO for the connection and prize the staff
for meeting the destinations inside of the given spending game plan.
It is important for the developers of the housing estate to withdraw a good financial
plan in order to cover the costs of the building, the cost of the bar, swimming pool,
spa, sauna, healthcare center, gym instructor, physiotherapist, dietician, heating and
the cost of lighting. In order to achieve the completion of the project, they are
required to meet the needs of a good financial plan and managers. They should aim to
provide bonuses to their staff once they have achieved there given tasks.

7
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

8
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

TASK 3 - SCENARIO 1

What factors should be taken into consideration when deciding the

member fee to be charged from the resident members?

When fixing the values of your products, the specific organization must look at the
price related to developing the particular products or services. This kind of pricing
includes both varying along with established costs. For this reason, nevertheless
fixing the values, the specific organization must manage to recover both varying along
with established costs. However, while fixing the values within the stock, the specific
affiliate marketer must consider the specific goals within the organization. Just as one
case in point, if the objective of a firm is to have a growth on the return on
investment, then it might charge a higher price, in case the goal would be to receive a
significant market share, then it might demand lesser price. Demand must be regarded
ahead of figuring out the particular price.
Whenever setting any products cost, marketers need to consider the different aspects
which can be the outcomes regarding companys selections and steps. Most of these
aspects usually are in the control of the management of the company and if required
could be alerted. And as for the new health clubs and other membership-oriented
firms use several pricing strategies to have a better customer services.
Pricing Strategies:

Price skimming

Price penetration

Competitive pricing

Cost plus pricing

Discriminatory pricing

Psychological pricing
Price skimming: setting a high price for a new product when a firm has a
unique or highly differentiated product with low price elasticity of demand.
(Stimpson and Farquharson, 2010)
Price skimming is the technique that is used to sell any product at an excessive price.
This can be applied as soon as any brand-new solution can be unveiled out there as
soon as joining price skimming an organization can be decreasing higher unit sales,
which it can win from reducing prices. As soon as the competitor enter the market, the
organization that's been employed directly into price skimming has to decrease the
price ranges, this technique is used by the companies to recover the cost of
development.
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Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Price skimming is the technique involving selling any product at excessive price? This
can be applied as soon as any brand-new solution can be unveiled out there as soon as
joining price skimming an organization can be decreasing higher unit sales, which it
can win from reducing prices. As soon as the competitor enter the market, the
organization that's been employed directly into price skimming has to decrease the
price ranges, this technique is used by the companies to recover the cost of
development. To keep this going for a longer period of time suppliers have to generate
a solid brand image for which the buyers are willing to pay better rates. There are a lot
of benefits of price skimming, one of it is that it facilitates the organization in
recovering research and development cost of a particular product involving brand new
item which attracts the customers more.
Gym and health center can use this strategy in such in a way that they could make
their residents think that the equipments theyre offering will be modern as well as
this is the reason they are getting an increased value for better quality goods as well as
development of these product.

Price Penetration: setting a relatively low price often supported by strong

promotion in order to achieve a high volume of sales
(Stimpson and Farquharson, 2010)

When a new product or service is launched, to attract the buyers, firms are likely to
undertake penetration-pricing strategy because they're planning to use mass marketing
and achieve a bigger market share. Since the prices will be low, customers will buy
more products and be aware of the low prices as compared to the competitors. And if
the product gains its targeted market share then the prices can slowly be increased.
The intention of the organization using penetration pricing can drive competitors out
of the marketplace, so the company can sooner or later charge a boost in the prices
with minor fear of price competition from the competitors left in the market. It can
also achieve enough market share that the seller can lower down its manufacturing
costs due to very large production or purchasing volumes. This strategy gives its best
during the phase of the products growth since the product has already occupied a
positive image in the market. The advantages of price penetration are that there will
be an entry barrier for competitors if the company continues with its price penetration,
possible new entrants to the market will be deterred by the low prices. It is also
possible to accomplish the dominant marketplace with this particular method, though
the penetration pricing may have to continue for a long time in order to drive away a
sufficient number of competitors to do so. The gym and health center organization can
use this in such a way that theyre new in the market and attract the residents
positively by setting the prices of the gym a little cheaper but it can be vice versa as
the residents might think the management is not providing them with the quality
equipment and services.

Competitive pricing: a firm base its price upon the price set by its
customers
(Stimpson and Farquharson, 2010)

10
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Competitive pricing is when a seller uses its competitors prices as its benchmark and
instead of considering customers demand or setting their own cost for a product. This
is applicable on the organizations selling similar products, since services can vary
from business to business even though the characteristics of merchandise keep on
being equivalent. This type of pricing strategy is generally used once a price for a
product has reached on a balanced level, this normally happens when a product is in
the market for a longer time, this often happens when there are many alternatives for
the product. One particular advantage of competitive-based pricing is that it
eliminates selling price rivalry which could cause destruction for the company.
Another advantage is if you have a reasonably strong comprehension in your
products high quality, target audience and cost of production using this method will
most likely by no means cause personal bankruptcy. Disadvantage of competitive
pricing is that by replicating your current markets prices will lead to missing a lot of
opportunities and also misplaced revenue, in case you think youre achieving a lot.
The purpose of your business is always to make best use of income and also revenue.
It would not be a great idea for gym and health organization to adopt this pricing
strategy since its newly formed business, the professionals should set their own prices
for the gyms services.

Psychological pricing: psychological pricing utilizes your buyer's psychological

reaction to increase sales. By means of pricing products strategically, a firm may well
enhance sales without drastically minimizing its prices. For instance, a higher price is
actually more likely to encourage sales. Considering a number of factors inside
developing the psychological pricing strategy to get the ideal final results.
One of the advantages of the particular psychological prices approach assists you to
construct an impact of this brand devoid of generating substantial changes for the
item. Simply revising the price structure can make the item all of a sudden appear to
be the best bargain on the market or even increase the high-class item for the top
choices. The disadvantage of it is that it may be hard for the cashier to calculate
whenever fractional costs are employed, as well as to make change for such
purchases. That is a smaller amount of a trouble whenever credit card and also other
sorts of digital repayments are employed.

(Small Business - Chron.com, 2015)

11
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Discriminatory pricing: pricing strategy that charges its customers diverse costs
for the same item or services. In immaculate price discrimination, the seller will
charge every client the greatest value that he or she is willing to pay. In more regular
types of price discrimination, the vender spots clients in gatherings in light of specific
properties and charges every gathering an alternate cost. Basic aims of this pricing
strategy are gaining higher profits, extra revenue, and improved cash flow and use up
spare capacity. The advantages of this strategy are that the firms will be able to
increase revenue. This will enable firms to stay in business for example by offering
different prices in peak and off peak periods. Firm will be able to attract more
consumers offering lower prices during off peak period enabling the firm to stay in
business. Its disadvantage is that a few consumers may question value separation
particularly those purchasers that need to pay higher costs. (Economicshelp.org,

2008)

Cost plus pricing: There is a big difference between costs and price. Costs are the
expenses of a firm. Price is the amount customers are charged for items. A business
can make a profit only if the price charged eventually covers the costs of making an
item. One way to try to ensure a profit is to use cost plus pricing. For example, adding
a 50% mark up to a sandwich that costs 2 to make means setting the price at 3. The
drawback of cost plus pricing is that it may not be competitive. (Bbc.co.uk, 2016)
Cost plus pricing is setting the costs of products and administrations. Under this
methodology, you include the immediate material cost, labor cost, and overhead
expenses for an item, and add to it a markup rate (to make an overall revenue) to
determine the cost of the item. It furthermore pays an arranged benefit
notwithstanding the expenses brought about. Its advantage is that it can be easily used
to determine a product price. It is assured of f having its costs reimbursed and making
a profit so any contractor will accept this method for a contractual agreement with the
customer, thus there is no risk of loss in this contract. Its disadvantage is that if a
company sets a product price on the basis of cost plus pricing and its competitors are
charging different prices than them, it leaves a huge impact on the companys market
share and profit. It might end up giving away profits by charging less or it might
achieve minor revenues by charging more.

Discriminatory pricing: Business firms operating in competitive markets are not

restricted to charging only one price for their product. These firms may find that by
charging different customers different prices for a common product may actually
increase the profits of the firm. This charging of different prices for a particular good
is known as Price Discrimination and is very common in various markets around the
globe. (Digitaleconomist.org, 2016)
Discriminatory pricing generally eludes as various costs being charged for giving the
same administrations relying upon territorial monetary circumstances. To procure and
hold every single conceivable continue from every penny that a shopper spends in a
definitive objective of any organization and it is prepared by utilizing unfair
12
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

evaluating. The real point of preference is that it additionally creates income, which
makes them empower to stay in the business that generally would have been made
misfortune. Offering lower costs amid off crest period empowering the firm to stay in
business pulls in more purchasers. The purchasers that need to pay higher costs might
question value segregation this evaluating plan is generally connected on exercise
centers or spa clubs and in the given situation experts can make utilization of this
procedure by giving an offer, for example, half markdown for families yet not for a
solitary individual or 20% rebate for initial ten individuals in such way biased
estimating can be misused.

13
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

TASK 4 SCENARIO 1
Describe the information needs of the owner and lender involved in
this investment decision.
An owner is an individual or entity that claims a business element trying to benefit
from the successful operations of the organization. Initially, a business owner must a
strategist or a principal organizer. To comprehend the new business, and the resources
and techniques it makes sense to begin with a strategy for success and showcasing
arrangements. Youll need to do research, planning and writing to develop a plan, and
hope to return to and transform it as required.
Most organizations need start-up funding to get set up and develop their items and
administrations. Contingent upon the business, a few proprietors can bootstrap and
begin with a littler spending plan. Different endeavors require a little business
advance to reserve costs for retail space, office hardware and procuring
representatives. You'll likewise need to set up and keep up business financial balances,
installment handling, records payable and records receivable, and charges. Whether
you are simply beginning or hoping to develop, banks and loaning organizations can
be thorough in their loaning survey rehearses. The absolute necessities that the bank
would be searching for in this situation would be that they have adequate resources,
money related stores and individual insurance to continue business variances and still
pay off their advance. As a current entrepreneur, he should demonstrate that he has
strong income, adequate to reimburse the credit. New organizations need confirm that
they have a reputation of gainfulness and accomplishment in a comparative business
try. A loan specialist will audit the individual financial record, particularly if the
organization does not have a reputation of creating income.
Most entrepreneurs require a bank credit at some time, and applying for one includes
a great deal more than rounding out research material. In addition to other things, they
have to consider the condition of their own and business accounts, how they're going
to reimburse the credit, and the amount of cash they really require. Before drawing
nearer the bank, the businessperson needs to ensure that they have a decent handle on
the amount of money they really require. The most ideal approach to decide this is to
make a month-to-month income projection. Likewise, what should be ensured is that
they incorporate their obligation reimbursement arrangement in those projections.

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Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

At the point when paying special mind to an advance, the agent needs to see whether
he is allowed to pay the credit off right on time with no punishment. A few states
permit loan specialists to charge prepayment punishments, in which case he ought to
attempt to arrange a tradeoff. It's something a great many people don't prefer to
consider, but in the occasion of their passing, an unpaid business advance can
influence their families. A great many people think, on the off chance that they bite
the dust, the bank is in a tough situation, yet that is not genuine, legitimate moves can
be made against them. (Small Business - Chron.com, 2015)

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Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

TASK 5 SCENARIO 2
Draw up a cash budget given the information above.

Cash Budget:

June

July

August

September

October

November

(35,000)

(10,450)

40,750

34,000

7900

(5900)

Cash inflow
Sales revenue

230,000

320,000

250,000

140,000

120,000

110,000

Total inflow

195,000

30,950

290,750

174,000

127,900

104100

Cash Outflow
Purchases
Admin {2}
Selling
Taxation
Finance
Shop fitting
Credit card
{1}

135,000
40,000
22,000
5000
3450

180,000
41,000
24,000
5000
14,000
4800

142,000
38,000
28,000
22,000
5000
18,000
3750

94,000
33,000
26,000
5000
6000
2100

75,000
31,000
21,000
5000
1800

66,000
30,000
19,000
5000
1650

Total Outflow 205450

268800

256750

166100

133800

121650

Closing
Balance

40750

34000

7900

(5900)

(17550)

Opening
balance

(10450)

16
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

The cash budget contains an itemization of the projected sources and uses of cash in a
future period. This budget is used to ascertain whether company operations and other
activities will provide a sufficient amount of cash to meet projected cash
requirements. If not, management must find additional funding sources.
The inputs to the cash budget come from several other budgets. The results of the cash
budget are used in the financing budget, which itemizes investments, debt, and both
interest income and interest expense.
The cash budget is comprised of two main areas, which are Sources of Cash and Uses
of Cash. The Sources of Cash section contains the beginning cash balance, as well as
cash receipts from cash sales, accounts receivable collections, and the sale of assets.
The Uses of Cash section contains all planned cash expenditures, which comes from
the direct materials budget, direct labor budget, manufacturing overhead budget, and
selling and administrative expense budget. It may also contain line items for fixed
asset purchases and dividends to shareholders. (Accountingtools.com, 2016)

17
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

TASK 6 SCENARIO 3
You have been asked to assess the viability of the project using
investment appraisal techniques (ARR, NPV, IRR and PAYBACK)
and advice Flapjack plc. whether they should produce the
skateboards or sell the manufacturing rights to the sports company.
Sales Revenue Collection
2011
SALES UNIT
TOTAL SALES 2000
REVENUE
2012
TOTAL SALES

MAJOR
1000
@50/unit
50,000

OTHER
1000
@50/unit
50,000

4000

2000
@60/unit
1000X60 =
60,000

2000
@60/unit
120,000

10% discount

1000X54=
54,000

10,000

5000
@70/unit
1000x70=
70,000
4000x 63=
252,000

5000
@70/unit
350,000

3000
@70/unit
1000x70=
70,000
2000x63=
126,000

3000
@70/unit
210,000

2000
@70/unit
1000x70=
70,000
1000x63=
63000

2000
@70/unit
140,000

REVENUE

2013
TOTAL SALES
REVENUE

10% discount
2014
TOTAL SALES

6000

REVENUE
2015
TOTAL SALES
REVENUE

4000

INFLOW

100,000

234,000

672,000

406,000

273,000

18
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Variable=>Outflow
Year
2011
2012
2013
2014
2015

Units
2000
4000
10,000
6000
4000

Variable cost/unit
40
40
40
40
40

Total V.C ()
80,000
160,000
400,000
240,000
160,000

Depreciation
Initial year = 0

(150,000)

Scrap Year = 5

25000-----Inflow

Depreciation

Cost

Line of asset

scrap

150,000- 25000
5
=25000

Fixed cost = cash outflow

2011
2012
2013
2014
2015

75,000-25000
75,000-25000
75,000-25000
75,000-25000
75,000-25000

50,000
50,000
50,000
50,000
50,000

4. Year 0= (15,000)
Year 5= 15000Inflow

19
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Cash Flow
YEAR
2010
2011
2012
2013
2014
2015

INFLOW
100,000
234,000
672,000
406,000
273,000
25000
15000

OUTFLOW
150,000+15000
80,000+50,000
160,000+50,000
400,000+150,000
240,000+50,000
160,000+50,000

CASHFLOW
(165000)
(30,000)
24000
222,000
116,000
103,000

Calculate NPV
NPV = Cash flow x discount factor
Year
0
1
2
3
4
5
NPV

Cash Flow ()
(165,000)
(30,000)
24000
222,000
116,000
103,000
at
8%
= 215,019

Discount factor 8%
1
0.926
0.857
0.794
0.735
0.681

Present value ()
165,000
27,780
20,568
176,268
85,260
70,143

165,000-(27,780+20,568+176,268+85,260+70,143)

Payback Period
Year
0
1
2
3
4
5

Cash Flow ()
(165,000)
(30,000)
24000
222,000
116,000
103,000

Cumulative cash flow ()

(165,000)
(195,000)
(219,000)
(441,000)
(557,000)
(660,000)

IRR
L + NPVL
NPVL NPVH

(H-L)
20

Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Year
0
1
2
3
4
5
NPV

Cash Flow ()

at

Discount factor 2% Present value ()

(165,000)
1
165,000
(30,000)
0.980
29,400
24000
0.961
23,064
222,000
0.942
209,124
116,000
0.923
107,068
103,000
0.905
93,215
15%:
165,000-(29,400+23,064+209,154+107,068+93,215)
= 296,759

NPV 2%
NPV 8%

296,759
215,019

L + NPVL
(H-L) 2 +
NPVL NPVH

215,019{15-2}
296759-215019

ARR
Average
Profit
Average capital

= 23.78

100%

270,000Average Profit =
5
Total cash flow Total depreciation =54000
Life of project

Average capital Employed=

Initial investment + scrap value

250,000

165000+25000+15000
2
2
= 102500

Average
Profit
Average capital

100%

21
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

54000
x
100%
=
52.68%
102500
Net Present Value (NPV): it is the net benefit or loss in present value terms from an
investment opportunity. It represents the surplus funds, which are available to the
investor because of taking the project. Any project with a positive NPV is accepted
and any project with a negative NPV is rejected. When given an opportunity to choose
a project, we should consider taking the one with the higher NPV.
The following is the formula for calculating NPV:

Where
Ct = net cash inflow during the period t
Co = total initial investment costs
r = discount rate, and
t = number of time periods
Internal Rate Of Return (IRR): it is the rate of return in which the NPV = 0.
It is the rate of return that the certain project is expected to achieve. If the IRR is
greater than the cost of capital, the project should be accepted, we should always
prompt for projects with higher IRR.

Where:
Ct = net cash inflow during the period t
Co= total initial investment costs
r = discount rate, and
t = number of time periods
Average Rate Of Return (ARR): ARR represents the average profit from the project
as a percentage of the average investment. Projects that have an ARR above the
defined minimum are viable.
Payback Period: it tells that how long in terms of years and months does it take to
recover the investment. We should compare the payback period to the companys
maximum return time allowed, if it is higher then the project is viable.
Payback Period = Cost of Project / Annual Cash Inflows

22
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

TASK 7 SCENARIO 4
Calculate for Osprey ltd, for both years the following ratios (to one place of
decimals):
I.
II.
III.
IV.
V.
VI.
VII.
VIII.

Operating Profit Margin

Net Profit Margin
Asset Turnover Ratio
Return On Capital Employed
Current Ratio
Quick Assets Ratio
Receivable Collection Period
Gearing Ratio (debt to capital employed)

23
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

RATIOS
OPERATING
MARGIN

2011

2012

PROFIT 914
9482

= 9.6%
Operating Profit x
100%
Net sales
NET PROFIT MARGIN
892
9482
Net profit before tax
100%
Net sales
ASSET TURNOVER

Long-term Liabilities
100%
Capital employed[1]

=0.81
100% 961
13943

100%

7700
5174

= 1.5 : 1
2386 7700
5174

100%

100%

3420

= 0.82 : 1
x

365 4280
11365

365 = 98 Days
1220
11033

100%

= 6.9%

Current
assets
Current Liabilities
=3.3 : 1
QUICK ASSET RATIO
4926
1508

Debtors
x
Credit Sales
GEARING RATIO

11365
13943

100% = 8 %

Current assets Stock =1.6 : 1

Current Liabilities
RECIEVABLES
2540
COLLECTION PERIOD
9482

= 8.4%

9482
11033

4926
1508

100

100% 961
13943

x = 9.4%

CURRENT RATIO

= 9.2%

=0.85
Sales Capital employed [1]
RETURN ON CAPITAL
892
EMPLOYED
11033
Profit before tax x
Capital employed[1]

100% 1042
11365

365

= 137 days
x

100%

3675
13943

100%

x
= 11 %

= 26.3 %

24
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

The asset turnover ratio is a productivity proportion that measures an organization's

capacity to create sales from its advantages by contrasting net deals and normal
aggregate resources. At the end of the day, this proportion indicates how effectively an
organization can utilize its advantages to produce more sales.
Current ratio measures the ability of an organization to pay its bills in the near-term.
This implies an organization has a restricted measure of time with a specific end goal
to raise the assets to pay for these liabilities.
The quick assets ratio is a measure of how well an organization can meet its fleeting
money related liabilities. Otherwise called the acid test proportion. A speedy
proportion of 0.5 would propose that an organization could settle half of its present
liabilities promptly. Quick asset ratio varies from current ratio in that those present
resources that are not promptly convertible into money are prohibited from the
computation, for example, stock and conceded duty credits since transformation of
such resources into money may take impressive time. It shows the current assets that
can be readily converted into cash.
The gearing ratio measures the extent of an organization's obtained assets to its
value. This ratio demonstrates the money related danger to which a business is
subjected, subsequent to extreme obligation could prompt budgetary challenges. A
high gearing ratio speaks to a high extent of obligation to value, and a low gearing
ratio speaks to a low extent of obligation to value.
Analysis: Working overall revenue implies that the amount of cash you are making
from any organization. In the given situation OSPREY PLC Company was making
9.6% benefit in 2011 which was gainful for the organization where as in 2012 just
9.2% benefit was being made which can antagonistically influence the organization.
In 2011 the net deals were recorded less when contrasted with 2012 albeit working
benefit was less in 2011 compare to 2012 that put an awful effect on the last result.
Endeavors ought to be made to build deals and moreover, expanding working overall
revenue.

25
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

26
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

TASK 8 - SCENARIO 4
You have to discuss the main financial statements and explain
the impact of financial statements
Financial statements are a collective data of reports of the firms financial
position and cash flow. They help in determining if a business can generate
enough cash, the sources and the uses of the cash. They also help in
determining if the firm has the ability to pay back its debt. Financial
statements are composed reports that measure the financial quality, execution
and liquidity of an organization. Financial Statements mirror the money
related impacts of business exchanges. There are four main types of financial
statements: Balance sheet, income statement, cash flow statement and the
statement of changes in equity.
Balance sheet represents the financial statement of a substance. It has three
main elements, the assets, and the things a firm owns for i.e. machinery, store,
cash etc. The second element of a balance sheet is liability. It is something,
which the business owes for i.e. money to the banks and creditors. The third
element is the equity it is what the business owes to its proprietors. This
speaks to the measure of capital that remaining parts in the business after its
advantages are utilized to pay off its exceptional liabilities.
Income statement is also known as the profit and loss statement, it reports the
profits and losses of a firm over a designated period of time. It is comprised of
two elements; income and expense. Income is what the business has earned
over the time for i.e. sales revenue etc. Expense is the total cost which is spent
by the business over time in i.e. salaries, rents etc.
Cash flow statement is the report, which shows the movement of the cash of
the firm and the bank balances over a specified period of time. It has three
main elements, operating activities, investing activities and the financial
activities. Operating activity determines the cash flow from the primary
activities of a business. Investing activities determines the cash flow of the
purchase and sale assets for i.e. the purchase of a new land. Whereas the
financial activities determines the income produced or spent on raising and
reimbursing offer capital and obligation together with the installments of
interest and profits.
Statement of changes in equity determines the movement in the owners
equity over a specified period of time. It can be derived from the following
elements; the net profit and loss and reported in the income statement, the
capital issued or repaid, dividend payments, profit or loss directly in the equity
27
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

for i.e. revaluation surpluses and the last element is the effects or changes
made by the accounting policy or the correction of accounting errors.

TASK 9 SCENARIO 4
Compare appropriate formats of financial statements for different
types of business organizations.
There are many types of businesses; sole trader, partnership, private limited company,
public limited company etc.
Partnership is a business formed by two or more people to carry on a business
together, with shared capital investment and, usually, shared responsibility.

(Stimpson and Farquharson, 2010)

Limited company is a privately owned business whose proprietors are lawfully in
charge of its obligations just to the degree of the measure of capital they contributed.
There are many differences between the financial statements of a partnership and
limited companies. In partnership there is more than one capital record. The quantity
of capital record relies on upon the quantity of accomplices in the Partnership
concern. Whereas in a limited company, Shareholders funds that involve numerous
classes like offer capital, held profit, other income and capital stores. In partnership
the profit and loss is divided between the partners capital account according the
agreed ratio. Unlike partnership, which has taxation on every individual, limited
company is imposed tax as a separate legal entity. The income statement of the
partnership shows how the profit and loss is divided among the partners, where as in a
limited company the statement of changes in equity shows the capital, profit, revenue
and other capital interests annually. The balance sheet of a partnership shows the
balance of the capital amount of each partner agreed under owners equity. Besides
the income statement and the balance sheet, a Statement of Partners Equity is also
made to show the changes in equity of each partner annually.

28
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Statement Of Changes In Owners Equity:

(Abrugar, 2012)

Income Statement Of Partnership:

29
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

30
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

(Learnaccounting's Weblog, 2007)

Sole trader: A sole trader business structure is a person trading as the individual
legally responsible for all aspects of the business. This includes any debts and losses,
which can't be shared with others. Is simple to set up and operate. Gives you full
control of your assets and business decisions. Requires fewer reporting requirements
and is generally a low-cost structure. Has unlimited liability, all your personal assets
are at risk if things go wrong. Your assets can be seized to recover a debt.

(Business.gov.au, 2016)
Statement Of Changes In Owners Equity:

(Farmriskresources.com, 2016)
31
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht

Income statement of sole trader:

(Dl.groovygecko.net, 2016)

32
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
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Assess
or Name:
Mehreen Bakht

BIBLIOGRAPHY
I.
II.

III.

IV.

V.

VI.
VII.

VIII.

IX.

Student Name:
Waleed Ahmad

Stimpson, P. and Farquharson, A. (2010). Cambridge

international as and A level business studies coursebook.
Cambridge: Cambridge University Press.
Small Business - Chron.com, (2015). What Is Psychological
Pricing?.
[online]
Available
at:
http://smallbusiness.chron.com/psychological-pricing11862.html [Accessed 13 Dec. 2015].
Economicshelp.org, (2008). Benefits of Price Discrimination
|
Economics
Help.
[online]
Available
at:
http://www.economicshelp.org/blog/306/concepts/benefitsof-price-discrimination/ [Accessed 13 Dec. 2015].
Small Business - Chron.com, (2015). Tasks &
Responsibilities of a Small Business Owner. [online]
Available
at:
http://smallbusiness.chron.com/tasksresponsibilities-small-business-owner-23718.html [Accessed
13 Dec. 2015].
Bbc.co.uk, (2016). BBC - GCSE Bitesize: Pricing strategies.
[online]
Available
at:
http://www.bbc.co.uk/schools/gcsebitesize/business/marketi
ng/productpricerev1.shtml [Accessed 25 Jan. 2016].
Digitaleconomist.org, (2016). Price Discrimination. [online]
Available at: http://digitaleconomist.org/pd_4010.html
[Accessed 25 Jan. 2016].
Accountingtools.com,
(2016).
Cash
Budget
AccountingTools.
[online]
Available
at:
http://www.accountingtools.com/cash-budget [Accessed 25
Jan. 2016].
Abrugar, V. (2012). How to Make a Statement of Changes in
Owner's Equity | Business Tips Philippines. [online]
Businesstips.ph. Available at: http://businesstips.ph/how-tomake-a-statement-of-changes-in-owners-equity/ [Accessed
25 Jan. 2016].
Learnaccounting's Weblog, (2007). Partnership - Example
of Income Statement and Balance Sheet, Part 1 of 3. [online]
Available
at:
https://learnaccounting.wordpress.com/2007/12/21/threemost-common-types-of-small-businesses--sole33
Assess
SOURCES OF FINANCE
or Name:
AND DECISION
Mehreen Bakht
MAKING

X.

XI.

XII.

proprietorship-partnership-and-private-limitedcompany/partnership-example-of-income-statement-andbalance-sheet-part-1-of-3/ [Accessed 25 Jan. 2016].

Business.gov.au, (2016). Sole trader | business.gov.au.
[online] Available at: http://www.business.gov.au/businesstopics/business-structures-and-types/businessstructures/sole-trader/Pages/default.aspx [Accessed 25 Jan.
2016].
Farmriskresources.com, (2016). [online] Available at:
http://www.farmriskresources.com/images/defaultsource/default-album/statement-of-owner-39-s-equity-for-camp-d-farms.png?sfvrsn=0 [Accessed 25 Jan. 2016].
Dl.groovygecko.net, (2016). [online] Available at:
http://dl.groovygecko.net/anon.groovy/clients/kaplan/AlexI
LS/ACCAWIKI/ACCA_F3_HTML/Images/ACCAF3_CH2
_img003.gif [Accessed 25 Jan. 2016].

34
Student Name:
Waleed Ahmad

SOURCES OF FINANCE
AND DECISION
MAKING

Assess
or Name:
Mehreen Bakht