3.

1 The budget of Holyrood Products Ltd:

In business management, budget is a useful method for controlling and planning the finance for
company. From the budget, manager can set out new plan and strategy for achieving the finance
success and avoid failure. It also provide a relevant information within organization then planner
can review the overall performance and compare with actual result. The budget is useful for
controlling the business plan of company. Therefore, the budget is important of the development
in business.
The statement of budgeted profit for the year to 30 June Year 4:

DVD Recorder Calculators Watches
Variable cost
Direct material 158,000 15,000 10,000
Direct labor 96,000 10,000 25,000
Works and administration overhead 32,000 2,500 15,000
Selling overhead 15,000 4,500 4,500
Fixed cost
Works and administration overhead 18,000 8,000 13,500
Selling overhead 8,000 2,250 6,750
Total cost 327,000 42,250 72,500

Direct material = 128,000 + 30,000 = 158,000
The variable selling overhead = 75% x 20,000 = 15,000
The fixed selling overhead = 20,000 15,000 = 5,000
But the fixed selling overhead of DVD recorder increase 60% so the final figure are:
5,000 + 60% x 5,000 = 8,000
Total cost of three products = 327,000 + 42,250 + 72,500 = 441,750
The proportion for cost of each product out of total cost

The total profit = 441,750 x 25% = 110,437
The profit for each
product
DVD Record Calculators Watches
81,745.8 10,557.8 18,122.8

The calculation of sale prices for each products as follow:

According to the calculation, watches and DVD record will bring higher profit than calculators
and watches. However, the variable cost of DVD record and fixed cost of watches is still high so
company should reduce in order to ensure the profitability of company in the future. Therefore,
the good budget is necessary successful operation of most organization. According to the
calculation above, budget will provide the guideline for manager of Holyrood Products Ltd to
make decision about finance then they can achieve their goals and objectives. Thus, financial
manager should planning and controlling the cost effectively through the financial statement and
budget. With the budgetary planning and control system, company can ensure the achievement
of objectives and create the attractive prices.
3.3 The viability of project in Holyrood Products Ltd:
The investment appraisal is a technique used to determine the company long-term investment
projects such as new machinery, new product, and research & development project are worth
purchasing. Basically, it has three principal methods are the accounting rate of return, the
payback period and discount payback. There is all the information of new project of Holyrood
Product Ltd:

Cost 50,000
Estimated scrap value 10,000
Estimated life 5 years
Cash inflows year
1 10,000
2 15,000
3 20,000
4 25,000
5 25,000

3.3.1 The accounting rate of return (ARR): The method will show and calculate the
accounting profit that project could be earned. From this method, manager will identify which
project is the best choice for company. If the ARR is equal to or greater than 0 then the project is
acceptable. On the other hand, the ARR is less than 0 that men it is negative so company should
reject. There are the calculation of ARR according to the case given:

Total cash flow = 10,000 + 15,000 + 20,000 + 25,000 + 25,000 = 95,000
Total depreciation = 50,000 10,000 = 40,000
Total profits after depreciation = 95,000 40,000 = 55,000

Based on the figure of ARR, Holyrood Ltd can choose the good project for company in order to
help bring more profit for its assembly line. It mean that this project can earn 36.67 pound out of
company invested yearly.
3.3.2 The payback period: It calculate the length of time required before the total cash inflow is
equal to the original cash based on cash flow. From the data of case, the payback period for this
project of Holyrood Products Ltd is not until early in Year 4. Therefore, company can choose the
good investment because it is lower the standard payback of company (5 years).
3.3.3 The discounted cash flow (DCF): It divided into two sub-unit are the net present value
and internal rate of return. The NPV is the main tool of DCF analysis as useful for financial
manager.
The net present value (NPV): This method estimate the present value of cost in the project then
it will discount and compare with the initial investment. Company should try to reject the project
with negative NPV because the present value of stream of benefit will recover the cost of project.
The principal of NPV are if NPV > 0 project should be accepted and if NPV < 0 then project
rejected by company. According to course book, this is the formula to calculate NPV:

Year Cash flow
Present value
factor
Present value Cumulative PV
0 (50,000) 1.000 (50,000)
(50,000)
1 10,000 0.909 9,090
(40,910)
2 15,000 0.826 12,390
(28,520)
3 20,000 0.751 15,020
(13,500)
4 25,000 0.683 17,075
3,575
5 25,000 0.621 15,525
19,100
19,100


The NPV is positive so this project should be accept by Holyrood Product Ltd because company
will earn profit more than 10% (191,000). Since the project will earn these return at a cost of
only 50,000 it must earn a return in excess of 10 %.
Discounted payback period: 3 years +

= 3.8 years
As can be seen, this project will takes about nearly 4 years so Holyrood Products Ltd can
payback for the investment. Therefore, company can invest to bring more benefit from this
machine in the short term. According to three methods, Holyrood Products Ltd can determine the
good investment to get more profit and measure the performance of company.
4.1 The main financial statement of Holyrood Products Ltd:
The financial statement is very important report for any kind of business. It has three main
statements include balance sheet, income statement and cash flow statement. The organization
can use them for many different purposes of business operation. However, the main purpose of
financial statement is to provide all information about the financial position, performance and
changes of company for stakeholders. It is really useful for manager or stakeholders making
decision influence on the development of business operation. The financial statement should be
presented clearly with detail information to help users such as manager, employees or
government understand the current financial health of company. There are the main purpose for
decision makers in the business.
Owners or manager: Their main mission is manage and control all business activities of
company. Thus, the financial statement is a good information to provide information and support
decision maker. It includes all data about profit, expenses, capital, and revenue and so on. In
order to run business effectively, the good information will affect strongly to the maintaining and
development of company operations in the future. Besides that, it will give the review for
manager the development of company through knowing clearly how much they earn in order to
compare with cost. From that, they can know their profit and control the financial in their
business and making the decision based on the financial statement.
Employees are the important stakeholder of business that effect directly all business activities.
From the financial statement, the employees can know about the financial health of company.
When company has strong finance then they can offer the good salaries for employees. It will
meet the employees satisfaction then they will continue contributing work for the company. In
contrast, if it is not enough or lower, they can choose other firm that better condition. Therefore,
the financial statement as well as salary is very important in making decision working of the
employees.
Investors: This stakeholders are also interested in the financial statement of the company
because it affects to their investment. It show the financial situation such as current debt, asset of
company, working capital throughout a year. Therefore, the investor can evaluate the viability of
investing in a business to ensure the success of project. If they invest to any company without
getting profit, they can draw investment. In other hand, they also need to know the capital of the
business because it also includes the investors capital.
Suppliers: They require the report from financial statement to prove that the company has
enough finance. Through the financial statement, the company can build the good relationship
with supplier. Besides the profits, the suppliers also want to know the expenses that the company
spends on buying materials in period of time.
Government: They needs to know how much the company earn profit in one year. From that,
they can have an overall view of the business and assess the earning money progress of
company. The government needs the financial information to check and ensure the propriety and
accuracy of taxes and other duties. The tax is accorded to the profits that the company earns as
well as the salary of the employees. Therefore, the company always show their financial
statement to the government to consider whether the employees are received the suitable salaries
or not and the company pay right taxes or not. General, company must follow the law of
government.
Shareholders are also play an important role in making capital of business. The financial
statement must show the good financial information to help them making decision in investing
the company or not. Because when the company gets profit, the shareholders are also divided the
part of earning from profits. Besides that, shareholder also want to assess how effectively
management is performing its function and know how profitably managements is running the
operation of business or how much profit they can afford to recover from the business for their
own use. Through showing the information about income statement and balance sheet, the
company will create the belief on investing of shareholder.
4.1.1 Balance Sheet: This statement will represent information about finance position of
company at a time of period. It consist of assets, liabilities and capital of organization that is very
useful in helping company to predict the fund that would be used in the future. Besides that, it
give the guide for Holyroods manager to understand the financial strength and capabilities of
business then manager cam find out the areas of its business that need to be improved at the
period of time. Besides that, manager can analyze and predicts the fund of project in the future.
Other wives, this statement contained the status of asset and capital and convincing
demonstration when company want to submit the bank or potential investors. By comparing
with last years, company will set up possible strategy to increase the sales and improve
performance of business operation. From the balance sheet, financial manager can easily
compare the different of data between two years. For current liabilities, are with 122,919 in
2012 and 135,361 in 2013. On the other hand, the non-current liabilities are with 292,915 in
2012 and 299,942 in 2013.
4.1.2 Income Statement (Profit and Loss Account): It is a record of company revenue,
expenses and loss during the period of business. Accountant has responsible to calculate and
determine the incomer then they represent in the P&L account. Thus, manager and stakeholder
can see how much company gain or loss money during the period of time. By considering the
data from income statement, the investors will decide to invest into the company or not. It is
necessary for most company, investor to determine the past performance of enterprise and assess
the capability of future cash flow. Holyrood Products Ltd can make the strategy plan to generate
revenue and control cost effectively. According income statement, for the year ended 31 July
2013 Holyrood spend the cost of sales are with 621,894 in 2013 and 503,699 in 2012. That
mean company increased the production to meet the demand of market. The cost increased will
led to expenses will also rise. Therefore, the gross profit is not increase too much with 109,019
in 2013 compared with 97,596 in 2012.
4.2 The appropriate format of financial statement for different types of business:
The financial statement has different format to suitable for each types of business. Each financial
statement has the different format that will provide a lot of useful information for wide range of
users. The different appropriate format suit for each type of business.
Sole trader: It is a business types that owned and run by one individual. The owner has
unlimited liability because all the assets of the business are owned by them. The sole trader can
be organized informally and simple to manage and control. Therefore, the format of financial
statement would be simple and clear information because it just owner use it to make decision.
Balance Sheet Income Statement
It show all the asset and liabilities of
company. Because the business has only one
Basically, it consist of profit and loss of
account for business for owner. It will show
owner so the balance sheet is simple and no
need to divide too many parts.
the changes of equity, share capital, profit and
capital reserve account in the year.

The sample for sole trader:

Cost Depreciation
Net Book
Value

Fixed assets 24,000 13,000 11,000
Current assets 14,000 14,000
Creditors: amounts falling due in less than one
year

(6,500)

(7,000)

7,000
18,000
Creditors: amounts falling due in more than one
year
(3,000)
15,000
Capital 5,000
Profit and loss account 15,000
Partnership: This types of business set up by more than two people. The partner will contribute
their money, property to run business. Therefore, they will share with each other the profit that
business can earn.
Balance Sheet Income Statement
It will represent the balance of the amount of
capital in different partner. It must show the
share of capital contributions and share of
profit for each partners of organization.
It will show how much the income, net profit
distribute to each partner. In addition, the
corporation tax is not payable for this kind of
business.

The sample for partnership:

Cost Depreciation
Net Book
Value

Fixed assets 24,000 13,000 11,000
Current assets 14,000 14,000
Creditors: amounts falling due in less than one year

(6,500)

(7,000)

7,000
18,000
Creditors: amounts falling due in more than one
year
(3,000)
15,000
Capital account 5,000
Partner 1 2,000
Partner 2 3,000
Partner 3 1,000
Profit and loss account 11,000

Limited company: The liability of shareholders of company is limited. The limited company
divided into public and private company. People can buy the share in the public limited
company.
Balance Sheet Income Statement
For this types of business, the balance sheet
comprise a lot of factors such as share capital,
retained earnings. The equity would be listed
It include the change of equity, share capital
and profit during the year of company. In
addition, limited company must pay the
as common stock and retained earnings. The
main different is just about the capital and
reserves.
dividend for shareholders.

The sample of income statement for limited company:

Cost Depreciation
Net Book
Value

Fixed assets 24,000 13,000 11,000
Current assets 14,000 14,000
Creditors: amounts falling due in less than one
year

(6,500)

(7,000)

7,000
18,000
Creditors: amounts falling due in more than one
year
(3,000)
15,000
Capital and reserves 5,000
Share capital 10,000
Profit and loss account 15,000
For limited company:

Turnover 3,992
Operating profit 1,312
Interest (997)
Profit on ordinary activities before taxation 315
Taxation on ordinary activities (114)
Profit on ordinary activities after taxation 201
Dividend (143)
Retained profit for the year 58
Earnings per share 0.015
4.3 The financial statement of Holyrood Products Ltd analyzed using
appropriate ratios:
Ratios analysis is the approach to evaluate the financial statement that based on data of financial
statement. The analysis provide all important warning indicator that help manager solve their
business problems quickly. This paper will apply internal comparison with previous period.
According the financial statement of Holyrood Products Ltd, there are four kinds of ratio include
liquidity, gearing, profitability and financial.
4.3.1 Profitability ratios:
Profit before interest and tax (PBIT): This ratio measure the companys profit that include all
expenses without interest and tax income.
2012 2013
Net interest payable 16,517 18,844
Profit before tax 53,568 56,139
PBIT 70,085 74,983

2012 2013
Gross profit 97,596 109,019
Sales 601,295 730,913
Gross profit Margin (%) 16,23 14,91

The gross profit ratios show the relationship between gross profit and total sales revenue. For
Holyrood Product Ltd in 2012 is higher than gross profit in 2013. The main reason may be
Holyrood Products Ltd decrease the price of products to increase the number of sales because the
gap in gross profit between 2013 and 2012 is 11,423. Therefore, company must create the new
plan to increase the gross profit margin and attract new investors.
Return on capital employed (ROCE): The ratio is used to prove the value of business gains
from the assets and liabilities in period of time. It is also a useful ratio for comparing profitability
based on amount capital of company.

Capital employed = total asset current liabilities
According to the above formula, there is the calculation of ROCE of Holyrood between 2012 and
2013.
2012 2013
PBIT 70,085 74,983
Capital employed 660,447 680,989
PBIT 10.6% 11.01%

4.3.2 Liquidity ratios: It analyze the ability of a company to pay off both current liabilities and
long-term liabilities. It include the current ratios and acid test ratio that will be discussed as
following.
Current ratios: It is a financial ratio that measure resources of company can pay its debt over
the next 12 months. There is the formula:




2012 2013
Current assets 38,325 42,527
Current liabilities 122,919 135,361
Current ratio 0.311 0.314

Based on above table, the current ratios of Holyrood increase from 31.1% to 31.4% however it
still lower compared with the acceptable ratios is 1.5. It suggest that company couldnt pay off its
obligation then they do not have good financial health. Therefore, it may lead the bankrupt.
For financial, the acid test or quick ratios measure the ability of company to use the quick asset
to extinguish the current liabilities immediately. In addition, it show how well company can
quickly convert its asset into cash in order to pay off its current liabilities. There is the formula as
following:
4.3.3 Gearing ratios: It compares some form of owners equity or capital to borrow the funds.




2012 2013
Total liabilities 292,915 299,942
Total assets less
current liabilities
660,447 680,989
Debt ratios (%) 44.35 44.05

According to the table, the debt ratios in 2013 and 2012 is not high. The low gearing ratio
represent a low proportion of debt to equity. Holyrood Products Ltd must keep their eyes in this
ratios.
Interest cover ratios:
2012 2013
Profit before tax 53,568 56,139
Net interest payable 16,517 18,844
Interest cover ratios 3,24 2,98
The interest cover ratios in 2012 is higher than in 2013 because the company earned much profit
and interest payable. Therefore, company should keep maintain the effective work to achieve
their finance target in the year.
From the income statement, we can see that the financial performance of Holyrood Products Ltd
in 2013 are better when compared in 2012. The profit, total asset and total capital increase while
the debt has the same. Although the revenue, total sales, costs of products sold increase in 2013
they not much different with previous years. In order to expand the business scales and meet the
market demand, company must increase the cost of sales to ensure the effective of performance
of business. In summary, the business activities in 2013 is better than 2012.