Assignment A1

Student name / BTEC Registration Number

THE UNIVERSITY OF DANANG
Truong Thai Bao/Oliver HH43429
UNIVERSITY OF ECONOMICS
CENTER FOR INTERNATIONAL EDUCATION
 I. EXPLAIN THE IMPORTANCE OF
FINANCIAL PLANNING IN A BUSINESS.

1. FINANCIAL PLANNING:
Financial planning is the process of setting, planning, achieving and
reviewing your life goals through the proper management of your
finances. A holistic financial plan not only involves investing money
and building your wealth; but also your credit and tax obligations,
everyday spending, planning for a family, setting up your home, saving
for your childrens education fund, and saving for retirement as well
as protecting yourself and your family with suitable insurance policies
and arranging your estate. All these facets of your financial plan are
interconnected.
Financial planning is an important life skill to help you plan for your
future and take better control of your financial goals by helping you to
set realistic plans, evaluate alternatives and take effective measures.

2. THE IMPORTANCE OF FINANCIAL PLANNING

IN A BUSINESS:
Sound financial planning is essential for success of any business
enterprise. Its need is felt because of the following reasons:
1. It Facilitates Collection of Optimum Funds:
The financial planning estimates the precise requirement of funds
which means to avoid wastage and over-capitalization situation.
2. It Helps in Fixing the Most Appropriate Capital Structure:
Funds can be arranged from various sources and are used for long
term, medium term and short term. Financial planning is necessary for
tapping appropriate sources at appropriate time as long term funds are

2
generally contributed by shareholders and debenture holders, medium
term by financial institutions and short term by commercial banks.
3. Helps in Investing Finance in Right Projects:
Financial plan suggests how the funds are to be allocated for various
purposes by comparing various investment proposals.
4. Helps in Operational Activities:
The success or failure of production and distribution function of
business depends upon the financial decisions as right decision ensures
smooth flow of finance and smooth operation of production and
distribution.
5. Base for Financial Control:
Financial planning acts as basis for checking the financial activities by
comparing the actual revenue with estimated revenue and actual cost
with estimated cost.
6. Helps in Proper Utilisation of Finance:
Finance is the life blood of business. So financial planning is an
integral part of the corporate planning of business. All business plans
depend upon the soundness of financial planning.
7. Helps in Avoiding Business Shocks and Surprises:
By anticipating the financial requirements financial planning helps to
avoid shock or surprises which otherwise firms have to face in
uncertain situations.
8. Link between Investment and Financing Decisions:
Financial planning helps in deciding debt/equity ratio and by
deciding where to invest this fund. It creates a link between both the
decisions.
9. Helps in Coordination:
It helps in coordinating various business functions such as
production, sales function etc.

3
10. It Links Present with Future:
Financial planning relates present financial requirement with future
requirement by anticipating the sales and growth plans of the
company.

4
 II. EXPLAIN THE IMPACT OF FINANCE ON
THE FINANCIAL STATEMENTS:
Financial statements form a basis for understanding the financial
performance, position and liquidity of a firm. As per the IAS Financial
statement refers to:
Balance sheet
Income statement
Statement of changes in equity
Cash flow statement
Accounting policies and notes
An annual report includes following in general,
Financial statements
Auditors report
05 year summary of key financial data
Stock prices(High or low)
Management discussion and analysis

Financial statements give good direction to achieve the objectives of a

user. Fr example a lender to a firm in deciding whether or not to lend
may refer to the cash flow statement. Financial health of a firm could
be better understood by means of cash flow statement. Therefore this
information collection can be viewed as a map, which provides a good
direction.
Often financial statements contain a large amount of information.
Further the accounting policies, reporting environment, accounting
practices are complex and constancy changing. The man can hide or
omit key information, create the picture they require. Though the
accounting standard limits variability, still financial reporting in
different firms and industries has considerable deviations.
The balance sheet is the snap shot of the firm. It is a convenient
means of organizing and summarizing what a firm owns and what firm

5
owes and the difference between the two at a given time (Equity). The
structure of assets for a firm reflects line of business that the firm is in
and also marginal decisions about how much cash and inventory to
have and about credit policy, fixed assets acquisition and so on.
Income statement measures a performance over some period of time,
usually a quarter, or year. If you think balance sheet as a snap shot, then
you can think of the income statement as a video recording covering
the period between a before and an after picture.
Information about the cash flows of an enterprise is useful in
providing users of financial statements with a basis to assess the ability
of the enterprise to generate cash and cash equivalents and the needs
of the enterprise to utilize those cash flows. The economic decisions
that are taken by users require an evaluation of the ability of an
enterprise to generate cash and cash equivalents and the timing and
certainty of their generation.
A cash flow statement, when used in conjunction with the rest of the
financial statements, provides information that enables users to
evaluate the changes in net assets of an enterprise, its financial
structure (including its liquidity and solvency) and its ability to affect
the amounts and timing of cash flows in order to adapt to changing
circumstances and opportunities. Cash flow information is useful in
assessing the ability of the enterprise to generate cash and cash
equivalents and enables users to develop models to assess and compare
the present value of the future cash flows of different enterprises. It also
enhances the comparability of the reporting of operating performance
by different enterprises because it eliminates the effects of using
different accounting treatments for the same transactions and events.

As discussed in above lenders can evaluates the secure of their

lending using g the information reflects on the cash flow statement.
On the basis of that, if a company's cash flow statement reflects the

6
well management of their cash and cash equitant that company is in
position to raise fund easily from external sources.
Various tools can be used in financial analysis. The derivative
financial statements, (Cash flow statement, fond flow statement)
Common size financial statement (Common size balance sheet and
common size income statement), trend statement and Financial ratio
analysis are the most commonly used tolls in financial analysis. These
can be used as techniques of analyzing financial information for a more
meaningful understanding of the financial position and performance
of a firm.
Formats of financial statements
There are three basic forms of business organizations. Sole
proprietorship, Partnership and limited liability companies. Sole
proprietorship is a business form for which there is one owner, in a
partnership two or more individuals act as owners and a limited
liability company is a separate legal entity from its owners. When
shares of a public limited company are listed, the company is known as
quoted company, whose financial statements publication is
compulsory. Therefore the annual reports of quoted companies are a
major source of financial information. However most of the time, the
financial information of sole proprietorships, partnerships and private
limited liability companies are not readily publically available as there
are no volunteers in financial statements publication.
Tryor Plc presented their financial statements in accordance with the
IAS'S since it get affects from legal requirements such as listing rules
governed in the stock exchange. The main reason is the Tryor Plcs
shared are listed on the stack exchange.

Ratio Analysis

7
 Financial performance of the company can explain using a variety of
measures. In particular, in this report, principally discuss the Trevor's
results by using ratio analysis. Ratio analysis can be regarded as a
technique used in the financial statement analysis. It gives an insight in
to the performance of an enterprise.
Ratios could primarily be divided in to following areas:
Profitability
Asset Efficiency
Liquidity
Working Capital Management
Gearing/ Leverage
Investors Ratio

Profitability
This ratio reveals the efficiency of a business in terms of profitability
and Assets utilization.
Gross profit ratio of the company is recorded as 28.95%. This ratio is
said to be favorable but in order to make accurate comment this has to
be compared with the last year figures or industry averages. Net profit
ratio of Trevor's is 6.37%. Net profit ratio is also said to be favorable to
the company since company earning profits from their operations.
Trevor Plc was able to achieve significant turnover for the period. In
addition to that management of the company was able to manage their
cost of operations efficiently. However accurate comment on both
rations will depend on the results of the last years and industry
averages.

Asset Efficiency

8
 It assesses the efficiency of the company in terms of assets utilization.
It is concerned on the areas of utilization of fixed assets and working
capital. The detail analysis these ratios will reveal whether there are any
idle assets or underutilized assets.
Assets turnover is recorded at 0.73. This ratio indicates the 1 of assets
generates 2.38 sales to the company. Therefore available information
for the company is not sufficient since it has to be compared with
industry averages or past year's results.
Liquidity
This ratio assesses the liquidity position of the company.
Liquidity is the amount of cash a company can put its hand to settle
its debt and possibility to meet other unforeseen demands for cash
payments too. A company can obtain liquid assets other the sales such
as issue of shares for cash new loan or the sale of long term assets. But a
company cannot rely on these at all times, and in general obtaining
liquid funds depends on making sales and profits.
Company's Current ratio is 2.16. Further Quick assets ratio is recorded
as 1.50. (Refer Appendix 01). In theoretical view these two ratios are
expected to be within a given range of 2:1 and 1:1 respectively. Trevor's
current ratio and quick assets ratio are lie within that given range. As a
result of that company's liquidity position is held at good position.
Therefore management of the company has to adopt on current
strategies to continue this position in future also. However these ratios
also compared with last year results or industry averages to raise an
accurate comment on liquidity position of the company.
Working Capital Management
This assesses the efficiency of the working capital management of the
company. Finished goods turnover ratio is recorded as 12 times. Further
this led to finished goods residence period to 30 days. In addition to
that Creditor's turnover ratio of the Trevor's PLC is recorded as 8 times.
Further company creditors' period from suppliers is 45 days.

9
 Factors such as stock policies, policies on credit period allowed to
debtors and those obtained from suppliers helps to determine the
working capital management of the company. Comment on those
rations cannot be raised due to unavailability of information. However
Company would concentrate on increasing the rapidity of cash cycle,
because each cycle can enhance the profitability of the company.

Solvency
Gearing ratios are concerned with a company's long term stability.
How much the company owes in relation its size, whether it's getting in
to heavier debt or improving situation, and weather its debt burden
seems heavy or light.
Debt to equity ratio recorded as 3.94. It means 01 of equity carries
3.94 of debt. By just seeing the ratio it's fair to say that Trevors uses
significant amount of debt and can be identified as a geared company.
Debt generally carries a fixed rate of interest; hence there is a given
amount to be paid out from profits to holders of debt before arriving at
residue available for distribution to the holders of the equity. The
highly gearing situation creates greater risk to the equity holders. This
means that there will be a grater volatility of amounts available for
ordinary shareholders and presumably therefore greater volatility in
dividends paid to share holders. Dividend payment in year 2009 is
50,000.
Investor's ratio
These ratios are considered to be external ratios and are used in
evaluating the stability and investment potential of a company.
Basic Earnings per share of the Trevor Plc was 2.03 in 2009,
reflecting the profitability in 2009. Trevor's Plc can be considered as a
well performing company in the industry since company maintains
favorable investor's ratios attracting potential investors. However this

10
comment will not be accurate due to unavailability of comparison
information about the past results of the company or the industry
averages.
Cost of sources of finance and impact on financial statements
(FS)
Capital structure decision is very significant since the question arises
where her there is an optimal mix of capital and debt which a c
company should try to achieve. If company is looking for obtaining
debt Capital Company should earn enough profits to cover its interest
charges before anything is available for equity. On the other hand if
borrowed funds are invested in projects which provides return in excess
of cost of debt capital, then the shareholders will enjoy the increased
return on their equity. General cost of debt of each source as discussed
in above is greater than the cost of equity financing. However tax
savings can be enjoyed by the company in the cash of interest payments
on debt financing. In the case of issuing shares to the public company
has to incur considerable amount of expenses which are not tax
deductible. As far as companies are concerned debt capital is
potentially attractive sources of finance because interest charges reduce
the profits chargeable only to corporate tax.
Shares can be issued to the public for the company whose shares are
traded on the stock exchanges. In such case financial statements has to
be complied with the IASs, listing rules and other regulations
governing under the various institutions. Further format of financial
statements for those companies are predetermined. But any company
can obtain debt financing. In such case if the company is a quoted
company, it has to be disclosed the financing sources and their cost and
interest payments made during the period.

11
Conclusion
There are many items such as sales, collection of money, owners
capital equity, issue of shares, payment of dividend, purchase of
treasury, expenses, cost, borrowings, payment of principal, etc have an
impact on the financial statements. When the company transacts,
each item will affect financial statement. The first finance transaction
should be mentioned is sales. When sales are made, it increases
revenue in Income statement and, associate cost of goods sold, it affect
on the net profit. On the balance sheet, sales make the merchandised
goods decrease and increase cash collected or an account receivable.
Therefore, making good sales would result in good impact on the
sales, owners equity and the performance of a company. Secondly, the
company tries to collect money or debt from customers or partners,
etc. It is collection of money. When the company collects money, it
decrease account receivables and increase cash. It is because the
company collect money from their debtors and therefore, these item is
converted into cash in the period paying bill, maybe from 30 to 60
days. It makes current assess on the balance sheet and capital in the
income statement increases. Therefore, collection of money will raise
the capital of the company to ensure the financial position of the
company. Owners capital investment is the net capital after misusing
every debts. On the balance sheet, owners capital equal to total assets
minus total debts. Therefore, support that total debts doesnt change,
when owners capital investment increases, it will increase total assets
and increases chartered capital and total equity on balance sheet. The
next finance action is issuing of shares. When the company issues new
shares, it will increase interest (more detailed, interest payable)
because they need to spend money to issue new shares to public and
also, the company will pay more dividend to shareholders after a year
so it will affect dividend on profit and loss statement. On the other
hand, issuing new shares will generate capital on balance sheet
because when investors buy its shares, they will increase the capital of

12
the company. After a year, the company must pay dividend annually to
their shareholders. The action will make retained profit for the year
decreases on thein come statement.

13
III. REFERENCES
http://smallbusiness.chron.com/impact-financial-statements-
23794.html
https://www.quora.com/What-is-the-impact-of-finance-on-the-
financial-statements
https://www.boundless.com/finance/textbooks/boundless-finance-
textbook/financial-statements-taxes-and-cash-flow-2/introducing-
financial-statements-31/defining-the-financial-statement-176-401/
http://smallbusiness.chron.com/importance-financial-plan-small-
business-4713.html
https://www.blueshorefinancial.com/ToolsAdvice/Articles/Financial
Planning/TenReasonsWhyFinancialPlanningIsImportant/
http://www.managementstudyguide.com/financial-planning.htm

14