Task 1.1; identify the Sources of Finance available to the business.

Task 1.2; assess the implications of the different sources

Every business needs budgets to run a business. The source of finance available to a business
may be four ways, business owners, borrowing from the bank, other ways of borrowing and
Government aid.

Sources of finance

Sources of finance mean the keys or the ways to get money that is used for operating business,
making a project to achieve their objectives.

There are many sources of finance. I want to describe some sources of finance. They are

1. Business owner It means the business has some money of its own. For
example, if a business owner wants to build a building to launch a new hotel, he
will give money from my savings for rent, costs.

2. Borrowing from the bank It means that the business borrow money for
operating new business or new project. For example, a business owner can
borrow money from the bank for started up a new hotel.

3. Government aid In deprived areas, government helps to build new business

within government grants for developing that area. Therefore, some business can
get money from government grants.

4. Receive money from venture capitalists or Business Angles Some business get
money from private individuals known as Business Angles (these have often
been seen in the entertainment industry) or from venture capitalists (organization
set up specifically to find profitable uses for spare funds).

5. Making sales Businesses are set up with the object of making profits or money
for their owner. All businesses will generate money by making sales.

6. Other ways of borrowing It includes factoring, invoice discounting, leasing, hire

purchase, franchising.

There are several different types in classifying business. They are sole traders, partnerships,
and companies. A sole trader business is owned by one person. But, a partnerships business
has one or more person and companies also one or more. In a sole trader business, the owner
provides the money to start up the business (the capital) and all the profits that it makes belong
to him. Owner provides capital and the business is totally independent. When a business
started, business owners are the first shareholders. There is no limited liability in sole trader and
partnerships businesses. But the liability of companies is limited. Sole trader is easy to set up
and this business does not need to publish accounts. But, it can be hard to get credit from
suppliers and banks.

1. There are different types of banks which operate within the banking system. They
are Clearing banks These are the banks which operate the so-called clearing
system for setting payments (Eg. Payment by heque by bank customers)

2. Retail banks This is traditional high street banks, Nat West, etc. The wholesale
bank is the bank which specializes in lending in large quantities to majors
customers. The clearing banks are involved in both retail and wholesale banking
but are commonly regarded as the main retail banks.

3. Merchant banks This is the bank which offer services, often of a specialized
natural to corporate customers companies

Banks do not lend their money to anybody. They apply certain well-tested principle of lending
that are Character of borrower, Ability to borrow and repay, Margin of profit for the banker,
Purpose of the loan, Amount of the loan, Repayment terms and Insurance against non-
payment(security), known as CAMPARI. Borrowers have to show to the Bank such as buildings,
lands and other as evidence. The Banks are also check the personal data of borrowers. A
business that borrowed money from bank has to explain the purpose of the loan and ability to
borrow and repay. If this business perfects everything, it can get this Banks loans.

Other ways of borrowing involve Factoring, Invoice discounting, Leasing, Hire purchase and
franchising at UK. A business can also borrow from his relatives and friendly friends. Most of
people use this way. Invoice Discounting is a related to factoring and many factors will provide
an invoice discounting service. A Business should only want to have some invoice discounted
when it has a temporary cash shortage. The Business gets cash from its sales invoices earlier
than it otherwise would but the Key different is that the credit control remains with the business
owner. Hire purchase is like as leasing. It is a form of borrowing whereby an individual or
business purchases goods on credits and pays for them by investment. Franchising is one
sources of finance. If the business is a kind of franchise, the money is got from franchisee.

Government aid or grants is the sources of finances. It means that a public subsidy offered to a
recipient for business or personal purposes. The subsidy is not expected to be paid back, and
may be used for research, business development, education or other endeavors that are
anticipated to support a common cause. The aid offering typically includes condition that must
be met, such as reporting performance or result. It is limited loans. Everyone cannot get this.
Only development area can get this loan such as development of borders of country. The
interest of this loan is cheaper than the other. In a few years, government draw new plan for it
aid. They try to give most of the business such as promotion of human rights, popular
participation in peace process and improved health for women and children.

Task 1.3; evaluate appropriate sources of finance for a business project

Every business needs capital or money when they want to expand their business or
make a new project. In that time, business should choose appropriate sources of finance for
their business projects. My business also has to choose appropriate sources of finance. My
business is garment industry that produces T-shirt. Now, my garment also wants to manufacture
jean trouser. Therefore, I need capital or money from only one source of finance to invest for my
new project. I think to choose three sources of finances that are borrowing from banks, receiving
money from Business Angles and making sales. However, I compare these three sources of
finance according to their benefit and cost.

Borrowing from banks is like as loan but it can pay money or capital in much immediately
for my new project. However, I have to pay interest to banks for loans. The bank will test to my
garment and my new business project by the principle of CAMPARI. If my new project, jean
trouser will not be succeed in a market, there is no profit, money to pay banks as interest
because of no sale. This bank will expropriate my business for loans and interest.

Business Angles can provide large sum of equity finance, able to bring wealth and
expertise to our company, easier to secure future funding from other sources, the business is
not obligated to repay the money. Whatever, they are lengthy and complex process, in the deal
negotiation stage, we will have to pay for legal and accounting fees and investors become part
owner of our business founder loss of autonomy or control.
 All businesses are generating money by making sale. It is few amount of capital. If I
used that ways, my new project will slow to set up. Making sale has no costs of money for my
business but time consuming to set up new project.

I think making sale is the most appropriate sources of finance for my new project
because another two sources of finance that are borrowing from banks and Business Angles
have more costs of money for my business.

Task 2.1; analyze the costs of different sources of finances

When the business makes the new project or setting up a new business in the market,
the owner of the business takes capital from several sources of finances. There are different
sources of finance that are

1. Share capital or owners savings

2. Borrowed funds

3. Government grants

4. Retained earnings

Every sources of finance has each strength and weakness or benefits and costs that effect upon
the business.

Costs of share capital or owners savings

The costs of share capitals are dividends in cash and scrip dividends. Scrip dividend is
that a company pays scrip dividends in the form of new shares instead of paying out dividends
in the form of cash. Both for investors and for companies, dividends also have some relatively
complicated tax suggestions. These are well outside the scope of this book. Within certain legal
restrictions, the amount of dividend paid is set up to the companys management. However,
shareholders usually believe the amount that they received in dividends to increase over time
and to be reasonably dependable from year to year. For some investors dividends are as
important a source of income as a salary that is for an employee: for them if a company decides
to, halve its dividend suddenly. The employee would leave as soon as possible, and likewise
investor would return the company. So the company is by no means free to pay whatever
dividend it likes. If funds are not needed immediately there are may be a cost associated with
investing them until they are wanted for use in the procedures of the business.

Costs of borrowed funds

The highest cost is interest. The rate of interest could either be fixed or variable. A
variable rate is usually the bank base rate plus an extra amount so that the bank makes a
profit. Because of knowing for positive how much do their future-costs are going to be, on the
whole businesses prefer fixed rate loans Tax relief on interest reduces the cost of debt capital
but this will be set against taxable profit. There will often be an initial arrangement fee to cover
the lenders administrative costs on setting up the loan. Factors charge commission for
progressing funds as well as interest for the period during which a debt remains unpaid.
Business should not forget that the loan itself has to be repaid. From the relationship between
the borrower and the lender, financial and non-financial costs arise. The lender will require the
borrower to provide it with regular information about the performance of the business, and this
will have a cost as well as creating the uncomfortable feeling of being watched. The business
generally is less in control of its assets. If it goes through a bad might demand immediate
repayment, effectively closing the business down. Sole trader and partners are often required to
put up their personal property as security for a business loan. This puts a good deal of
psychological pressure on the borrower and may have harmful effects on their personal life and
relationship. The business has more limited opportunities to do what it likes with its assets, if a
loan is secured on the asset of the business. eg sell them.

The costs of government grants

There ought to be opportunities costs related with eligibility for a grant. Being based in a
certain region, for example, may take away a business of certain sales opportunities. There will
also be certain administrative costs to cover applying for the grant and (probably) filling in forms
on a regular basis to assure the grant-giving authority that the business is still eligible to receive
it.

The costs of retained earning

A businesss sales are only generated by incurring costs such as wages, rent, materials,
electricity and so on. Businesses have to pay tax on their earning. Dividends are a cost of
retained earnings as well as a cost of share capital. If dividends are not paid, shareholders
friendliness will be lost. Like capital not needed immediately, retained earnings may be invested
in the short term and this will have certain costs. The perception of opportunities costs is again
relevant here. For example, if $50,000 of retained earnings is to be used for project A, this will
reduce the amount of capital available for other, alternative, projects.

Task 2.2 explain the importance of financial planning

Financial planning is the progression of enclosing financial policies in relation to

procurement, investment and administration of funds of an enterprise. It is also the progression
of appraising the capital required and determining in its competition.

Financial planning is very important for success of any business enterprise because determining
capital requirements will depend upon factors like cost of current and range planning. Capital
requirements have to be observed with both features: short-term and long-term requirements.
Financial planning is also important for defining capital structure. The capital structure is the
configuration of capital that is the relative kind and proportion of capital required in the business.
This includes decisions of debt equity ratio-both short-term and long-term.

Financial planning is providing in ensuring a reasonable balance between output and input of
funds so that stability is sustained. Financial planning confirms that the suppliers of funds are
effortlessly investing in companies that exercise financial planning. Financial planning is also
providing in in making growth and development programs that helps in long-run survival of the
company. Financial planning reduces reservations with concerns to changing market trends
which can be challenged easily through enough funds. It also helps in reducing the reservations
that can be an interruption to growth of the company. This helps in ensuring stability and
profitability in concern.

Financial planning also influence on the success or failure of production and distribution
functions of business as factual decision that ensures smooth flow of finance and smooth
operation of production and distribution. Financial planning is also helps to avoid shock and
surprise that else firm have to face in unreliable situation. It guesses the specific requirement of
funds which means to avoid wastage and over-capitalizations situation.

Financial planning is a basic for testing the financial activities by comparing the actual revenue
with appraised revenue costs with estimated costs. Therefore, financial planning is an essential
part of the corporate planning of business. All business plans is influenced on financial planning
because finance is the life blood of business.
Task 2.3; assess the information needs of different decision makers

For every organization, the effective management of any resources including finance
requires good information. Information is anything which is communicated to know. To run the
business, it has to have information. The most important kind of information used to run the
business is information about money, financial information. Information about finance is derived
from an organizations accounting system. An accounting system records the reasons why
money was received and the money was paid out, analyzing costs and the money who owes
what to whom. . Financial information details direct and indirect costs, fixed costs and variable
costs, functional costs, cost-benefit analysis: decision making and relevant costs and functional
costs. This financial information is needed in different decision making. Without financial
information in a business, this business will be closely down.

The most important sort of information for managing a business or making decision is
information about costs. Information about Functional costs include three main financial costs
that are production or manufacturing costs, administration costs, marketing or selling and
distribution costs. In details, the information of financial costs involves the costs of production,
selling, distribution, research and development, financing and administration costs. Production
costs are the costs which are acquired by the arrangement of operations beginning with the
supply of raw materials and the ending with accomplishment of the products. Selling costs are
the costs of creating of demand for products and acquiring firm order from customers, it also
known as selling costs. Administrating costs are the costs of managing organization that is
controlling and planning in its operation. Distribution costs are the costs of transportation to
customers. Financing costs are the costs that incurred to finance the business such as loan
interest. Research and development costs are not only the costs of searching a new or
improved product but also the costs incurred between the decision to produce a new product
and the commencement of full, formal manufacture of product.

The cost is categorized by two types. They are direct cost and indirect cost. Direct cost
is a cost that can be traced in full to product, service, or department whose cost is being
determined. Direct cost includes direct labor costs, direct material costs and other direct
expenses. Direct labor costs are the specific costs of workforce used to make a product or
provide a service. Direct material costs are the costs of materials that are used to manufacture
products. Indirect cost or overhead is a cost that is incurred In the course of making a product,
providing a service or running a department, but which cannot be traced directly and in full to
the product service or department.

In decision making, the distinction between fixed and variable costs becomes very important
and it lies in weather the amount of costs earned will rise as the volume of activity increases, or
whether the costs will remain the same, nevertheless of the volume of activity. Variable cost is
that part of cost which varies which varies with the volume of production. For example, direct
material costs, sales commission and telephone charges. Fixed cost is that part of cost which
does not vary with the level of activity or volume of production. For example, the rental cost of
business premises. Financial information is important in decision making because it allows
the resources of the business to be managed; it must be collected, by law; HM Revenue and
Customs requires the information.

Task 2.4; explain the impact of finance on the financial statement

Every organization should keep the financial statement to ensure that the information of
finance is correct. Without financial statement in an organization, this organization will lose the
information and they cannot adjust the money that they have used. The financial statement
regularly consists of income statement, balance sheet and cash flow statement.

Income statement is that reports all expenses and all incomes in order to calculate the profit of
company in the period of time. This statement provides information for internal and external
stakeholder whether company creates profit or lost in one specific period of time. According to
income statement, manager can evaluate all kind of expenses and incomes to bounce decision
in order to make profit for company. Balance sheet is a statement that accounts fixed and
current asset, non-current and current liabilities, debt and capital of on organization. The
balance sheet is the only one statement that applies to a single point in time of a business'
calendar year. It summarizes an organization or individual's assets, equity and liabilities at a
specific point in time. Small businesses tend to have simple balance sheets. Larger businesses
tend to have more complex balance sheets, and these are offered in the organization's annual
report. Large businesses also possibly will prepare balance sheets for divisions of their
businesses. Managers and investors are given information about the ability to repay the
liabilities or debt, how many capital and asset company have through balance sheet. Cash flow
statement gives more detail where a business gets capital, investment from and how and where
the firm uses these capitals for. It is essential for large company to arrange a cash flow
statement.

The financial statement can have large impact on the business and on the investors of the
company if they are released.

When making investment decision, most of investors look at the financial statement. If the
information of financial statement in a present is better or worse than they expected, it can lead
to the stock price increase or decrease. According to the information from the financial
statement, investors often use financial ratios that received from this statement to make
assumption. Therefore, the financial statement can impact on the investors of a business.
Moreover, it also impact on attracting new investors. For new share of stock, financial statement
is very important to attract to potential investors. If the potential investors want to put money into
the company, they will examine the financial statement to decide. If there will be low earnings
number in financial statement, there will be reduced in the number of investors willing to put
money into the company.

Financial statement can also impact on financing decision. When the business is trying to
borrow the business loan from the bank or other, they will examine the financial statement of
that business. If the financial statement of that company is negative in the earning number,
lenders dont want to pay loans for that company because lenders usually want to pay only
businesses that have high earning number in financial statement.

Therefore, every business should make the financial statement systematically.

Task 3.1 analyze budgets and make appropriate decision

Every firm has to use budgets to make their plan. A budget in business is a financial plan
in accurately the same way. To understand how their activities must fit in with activities of other
operations, budgets encourage forward thinking and help managers to see. To compare the
actual performance for managers, budgets also act as a yardstick.

Budget

Budgets are basically the plan expressed in monetary terms. The plan covers income,
expenditure and capital investment.
 Budgets provide a system for ensuring communication, co-ordination and control within
an organization therefore budgets are the important sources of information for mangers. A
budgetary planning and control system have many objectives which are ensuring the
achievement of the organizations objectives, compelling planning and decision making,
communicating ideas and plans, coordinating activities, providing a framework for responsibility,
establishing a system of monitoring and control and motivating employees to improve the
performance.

Budgetary control is the practice of launching budgets which identify areas or

responsibility for individual mangers and of regularly associating actual results against expected
results the difference being variances.

There are various types of budgets. They are

1. The sale budget

2. Resource budgets

3. Production and direct labor budgets

4. Materials purchase budgets

5. Budgets for overheads

Manager have responsible for preparing budgets that should ideally be the managers whose
sections are responsible for operation the budget, selling goods and approving expenditures. In
budgets preparation, there are eight steps. They are identification of the principle budget factor,
preparation of a sale budget, preparation of a sale budget, preparation of a production budget,
preparation of budgets of resources for production, preparation of overhead cost budgets, co-
ordination and review of budgets and preparation of a master budget.

Flexible budget is in recognizing the existence of fixed, variable and semi-fixed costs,
changes so as to relate to actual volumes in the period.

My company manufactures and sells a single product. Budget results and actual results
are as follows.

Budget Flexible budget Actual budget Variance

Production 10500 12000 12000

Sale revenue 126000 144000 142800

Direct materials 52500 60000 57000 3000(F)

Direct labor 31500 36000 33600 2400(F)

Production 26000 29000 28000 1000(F)

overheads

distribution costs 10200 10800 10300 500(F)

and selling costs

Administration 4200 4200 4600 400(A)

costs

Total costs 124400 140000 133500

Profit 1600 40000 9300 5300(F)

In production, the actual cost of production is 12000 and the flexible budget is the same
as the actual budget. For direct materials, the flexible budget is a little more than actual budget
and its variance is 3000. Therefore, the situation of this variance is favorable. For the cost of
direct labor, production overheads, distributing and selling is less in actual than flexible budget,
therefore their variances is favorable. The variance of the administration costs is adverse
because the flexible budget is more than the actual budget. The profit of company is in good
condition and it should run in the future.

Task 3.2; explain the calculation of unit costs and make pricing decisions using relevant
information

Full cost plus pricing

In full cost plus pricing, calculating the full cost of the product and adding a percentage
mark-up for the profit determines the sale price. In full cost plus pricing, the full cost possibly will
be a fully engrossed production cost only or it possibly will consist of some engrossed
administration, selling and distribution overhead. The full cost may also consist of some
opportunity costs such as opportunities cost of production resource that is in short supply, so
that full cost need not be the cost as it might be recognized in the account.

Marginal cost plus pricing

Instead of pricing products or service by totaling a profit margin on to full cost, a

business might add a profit margin on to marginal cost of sales or production. This is called
mark-up pricings or marginal cost plus pricing.

Calculation of Unit Cost

Full cost plus pricing $ Marginal cost plus pricing $

Direct Material xx Direct Material xx

Direct Labor xx Direct Labor xx

Direct Expense xx Direct Expense xx

Overhead absorbed xx Variable Overhead xx

(Fixed and Variable) ---------- ---------

Production Cost for xxx Production Cost for xxx

Unit produced Unit Produced

For example;

Full cost plus pricing Marginal cost plus pricing

Direct Material 10 Direct Material 10

Direct Labor 9 Direct Labor 9

Direct Expense 3 Direct Expense 3

Fixed overhead 3

($30000 10000)

_____ _____

Unit cost 25 Unit cost 22

Profit 20% 5 Profit 30% 6.6

______ ________

Selling price 30 Selling price 28.6

When the selling price of the product is calculated by the method of cost plus pricing and
the method of marginal cost plus pricing, the selling price calculated by the method of cost plus
pricing is 30 and more than the selling price calculated by the method of marginal cost plus
pricing. The cost plus pricing method is more cost for my company. If the cost plus pricing
method is applied, the selling price of my product will be high and the cost also high. The
revenue of the product will be decrease and the profits also do. If the marginal cost plus pricing
is used for my product, the cost will be effective. The revenue and the profit of the product will
be increase. Therefore, the method of marginal cost plus pricing should be used and it is
appropriate for my product.

Task 3.3; assess the viability of a project using investment appraisal techniques

There are three principle methods of project appraisal that assess whether a capital
project is value to an enterprise. They are the accounting rate of return, the payback period and
discounted cash flow (DCF). Discounted cash flow is subdivided into two approaches that are
the net present value (NPV) and the internal rate of return (IRR).
 In the accounting rate of return, this method calculates the profit which will be earned by
a project and states this as a percentage of the capital invested in the project. If the rate of
return is higher, a project is highly ranked. This calculating method is founded on accounting
results rather than cash flows.

ARR= 100%

In the payback period, the length of time for a project will take to recoup the initial
investment or how long a project will take to pay for itself is calculated based on cash flow.

The net present value (NPV) method calculates all related cash flows associated with a
project over the whole of its life and regulates those happening in future years to their present
value by discounting at a rate called the cost of capital.

The internal rate of return (IRR) method comprises paralleling the rate of return expected
from the project calculated on discounted cash flow foundation with the rate used as the cost of
capital.

Payback period

Project M Project N

Year Cash Flows Commutative Cash Flows Year Cash Flows Commutative Cash Flows

0 (350) (350) 0 (600) (600)

1 50 (300) 1 180 (420)

2 65 (235) 2 255 (165)

3 280 45 3 220 55

4 200 245 4 240 295

280 --------> 1 year 220 ---------> 1 year

235 --------> 0.84 years 165 ---------> 0.75 = 0.8 year

Payback period= 2.8 years Payback period= 2.8 years

Net Present Value (NPV)

Project M Project N

Year Cash Flows Factor Present Value Year Cash Flows Factor Present Value

0 (350) 1 (350) 0 (600) 1 (600)

1 50 0.870 43.50 1 180 0.870 156.6

2 65 0.756 49.14 2 255 0.756 192.78

3 280 0.658 184.24 3 220 0.658 144.76

4 200 0.572 114.40 4 240 0.572 137.28

41.28 31.42

Internal Rate of Return (IRR)

Project M Project N
Year Cash Flows Factor Present Value Year Cash Flows Factor Present Value

0 (350) 1 (350) 0 (600) 1 (600)

1 50 0.833 41.65 1 180 0.833 149.94

2 65 0.694 45.11 2 255 0.694 176.97

3 280 0.579 162.12 3 220 0.579 127.38

4 200 0.482 96.40 4 240 0.482 115.68

(4.72) (30.03)

IRR= A + x (B-A) IRR= A + x (B-A)
+ +

41.28 31.42
= 15% + 41.28+4.72 x (20%-15%) = 15% + 31.42+30.03 x (20%-15%)

= 0.15 + 0.897 x 5% = 0.15 + 0.511 x 0.05

= 0.195 = 0.175

= 19.5% = 17.5%

The period of payback is the same for the project M and project N. But we shouldnt look
only on the payback period because payback period shows only the time that we can get back
our investment money. So, we also need to look NPV and IRR for both of project M and project
N. NPV and IRR shows the amount of profit and others good for the business. When we look at
NPV and IRR, the amount and the percentage of project M is greater than project N in both. In
that case, we should choose the project M for the business.

LO4: Discuss the financial performance of a business

Task 1.1: The main financial statements

Financial statements are collections of financial data of organization that are the costs of
generating or operating business. The main financial statements are income statement, balance
sheet and cash flow statement. E.g. company, partnership and sole trader
 Income statement is a record of income generated and expenditure incurred or the trading
over a given period. It calculates the net profit and net loss of business during the period
therefore it is also called statement of financial performance or statement of comprehensive
income. Its calculation is based on the profit formula:

Profit = Total revenue Total costs

Total revenue is the total of money received from selling goods and services. To receive
costs of sale, closing inventory is deducted from the total solved opening inventory that involves
purchases, discount received, drawing goods and carriage inward etc.. Costs of sale are money
spent providing the goods and services sold. In the income statement, there are also include
gross profit which is profit or loss made before indirect costs are deducted of, operating profit
which is the profit or loss from trading, operating expense which is indirect costs that business
has had to pay, net finance expense which is costs or revenue from financial dealing, profit
before tax is which is profit or loss before paying tax, tax which is money the business must pay
to government and net profit which is profit after paying all tax.

Balance sheet is a statement or a snapshot of the assets, liabilities and capital of a business
in a given moment of time. It is also referred as statement of financial position because it shows
the financial position of a business that is the value of the resources within the business, and
how they were financed. The resources which have been obtained must have been financed in
some way must be balanced in a balance sheet. Balance sheet is based on this accounting
equation;

Total asset = Capital + Total liabilities

Solving balance sheet in this equation, there are involving current asset and non-current
asset and current liabilities and non-current liabilities, net asset, total asset, total liabilities and
total equity. Non-current assets are fixed assets that are long-term uses for business. E.g. land,
office furniture and machinery etc. Current assets are assets that do not intent to use for longer
than 12 months. E.g. stock, receivables etc. current liabilities are debts that must be repaid to
debtors within 12 months. E.g. payables and accrued wages etc. Non-current liabilities are for
long term borrowing or debts for over 1 year. E.g. bank loan and renting land etc. Total asset is
derived from the total of current and non-current assets and total liabilities are from the total of
current and non-current liabilities. Total asset is the total value of things the business owned.
Net asset is the difference between total liabilities and total assets. Total liabilities is the total
value of owes of business. Total equity is the funds contributed into the business by the owners.

Cash flow statement is a factual document that explains differences between profit and cash.
Moreover it also shows a businesss operating, investing and financing activities that business
gets its capitals from and what uses it puts the capital to. Most businesses are required to
produce a summary form.

Task 4.2: Compare appropriate formats of financial statements for different types of
business

Financial statements are different according to types of business. There are different types of
business. They are sole trader, partnerships and company. Sole trader is a business owned and
operated by one person. Partnerships is a business that owned by two more persons who agree
to share running and risk taking of business, agree to take profit equally. Company is a business
operated by two more persons who are in separate legal unit.

Income statements of partnerships, sole trader and company are the same but financial
statements are not. In partnerships, profit and loss appropriation account and partners current
account required besides financial statements. Profit and loss appropriation account is for to
know the expenditure of partners including profits. In profit and loss appropriation account, there
is profit for the year, interest on partners capitals, partners salaries, interest on drawing,
residual profit and share of profit in that format. In that appropriation account, the total of interest
on partners capital and partners salaries are deducted from profit for the year and then adding
interest on drawing into it to get residual profit. After that, profits for partners are taken equally
called share of profit. Partner current account is for personal data of partners to know who used
money or goods from business.

In partner current account, there is opening and closing balance, drawings, share of profit,
interest on partners capital and partners salaries. In that current account, drawing is deducted
from the total of interest on partners capital, opening balance, partners salaries and share of
profit to get closing balance. After all, partners capital and partners current are put into
statement of financial position for partnerships. There is non-current assets, current assets, total
assets, partners capital, partners current, non-current liabilities, current liabilities and total
equity and liabilities in statement of financial position for partnerships.

In company, there is also need profit and loss appropriation account for statements of
financial position. In that appropriation account for company, there is profit for the years,
opening retained earnings, taxation, dividend, transfer to reserve and closing retained earnings.
The total of taxation, dividend and transfer to reserve are deducted from the total of profit for the
year and opening retained earnings to get closing retained earnings. In statement of financial
position for company, there are non-current assets, current assets, total assets, equity and
liabilities, capital and reserves, equity, non-current liabilities, current liabilities and total equity
and liabilities. In capital and reserves, there are ordinary share capital, %preferred share capital,
share premium, revaluation reserves, capital reserves, general reserves and retained profit.

For sole trader, there is no need to draw another account or formats besides statement of
financial position. In statement of financial position for sole trader, there are non-current
account, current account, total assets, capital and liabilities, non-current liabilities, current
liabilities and total equity and liabilities.

Task 4.3; Financial statements using appropriate ratios and comparisons, both internal and
external

Financial statements are based on the profit and loss account, the balance sheet and cash
flow statement and it is aiming to know the company performance over the period of time. In the
accounting period, financial statement is the report which is showing that how much money did
the used Financial statement is usually interpretation by accounting ratio. Accounting ratio is a
kind of ratio which compares two kind of financial statement such as relationship of current
assets to current liability.

Accounting ratio can be grouped into four categories, they are

1. Profitability and return

2. Borrowings

3. Liquidity and working capital

4. Shareholders investment
Profitability ratio

It is a kind of ratio which is used to measure the profit-generating ability of a company

relative to sales, assets and equity.

Borrowing ratio
Borrowing ratio, solvency ratio, is a ratio which is used to measure the skill of a company to
meet its long term debts.

Liquidity ratio

A kind of ratio which is used to calculate the companys available cash and marketable
securities against outstanding debts is called a liquidity ratio.

Shareholder investment ratio

Ratio of total company equity held by shareholders to the total value of assets held by the
company is called a shareholder investment ratio.

Here is the interpreting of financial statements using appropriate ratios and comparisons for
internal of LOTTE SHOPPING, 2013 and 2014.

Profitability ratios

Returned on capital employed (ROCE) = (PBIT Capital employed) 100% = %

For 2013, ROCE = (1566895 16925242) 100% = 9.3%

For 2014, ROCE = (1326696 17543877) 100% = 7.6%

Profit margin = (PBIT Sales) 100% = %

For 2013, Profit margin = (1566895 28211703) 100% = 5.6%

For 2014, Profit margin = (1326696 28099567) 100% = 4.7%

Asset turnover = (Sales Capital employed)

For 2013, Asset turnover = (28211703 16925242) = 2 times

For 2014, Asset turnover = (28099567 17543877) = 2 times

Profitability 2013 2014

ROCE 9.3% 7.6%

Profit margin 5.6% 4.7%

Asset turnover 2 times 2 times

In the period between 2013 and 2014, ROCE were decreased to 4.7% from 5.5%. The profit of
2013 was increased than 2014. The capital was more invested in 2014 than 2013. Revenues
were also fallen. Although asset turnover of these two years were the same, profit margins of
2014 is less than 2013. Therefore, this LOTTE shopping organization is bad condition in the
profitability and return. This company will be worried to running in the next years.

Borrowings

Gearing ratio/Equity ratio = (Prior charge capital Total capital) 100% = %

For 2013, Gearing ratio = (9715441 16925242) 100% = 57.4%

For 2014, Gearing ratio = (9994535 17543877) 100% = 56.9%

Interest cover = (Profit before interest and tax Interest charges) = times

For 2013, Interest cover = (1566895 248483) = 6 times

For 2014, Interest cover = (1326696 248700) = 5 times

Borrowing 2013 2014

Gearing ratio 57.4% 56.9%

Interest cover 6 times 5 times

In the between 2013 and 2014, gearing ratio were decreased from 56.9% to 57.4% and gearing
ratio is more than 50%, this condition is bad or unhappy. Therefore, this organization should
concentrate to invest more and to expand their business. This organization should buy their
share. The organization should take long term liabilities to operate. The times of interest cover
were reduced. Surely, the condition of LOTTE shopping is in bad situation.
Liquidity and Working Capital

Current ratio = (Current assets current liabilities)

For 2013, Current ratio = (14291092 12331883) = 1.16

For 2014, Current ratio = (14975643 12533914) = 1.19

Quick ratio = (Current assets less stocks Current liabilities)

For 2013, Quick ratio = (14291092 - 3114492) 12331883 = 0.906

For, 2014, Quick ratio = (14975643 3161054) 12553914 = 0.941

Debtor days ratio = (Trade debtors Sales) 365 days

For 2013, Debtor days ratio = (937436 28211703) 365 days = 12 days

For 2014, Debtor days ratio = (912952 28099567) 365 days = 16 days

Stock turnover period = (Stock Cost of sales) 365 days

For 2013, Stock turnover period = (3114492 19547012) 365 days = 58 days

For 2014, Stock turnover period = (3161054 19336671) 365 days = 60 days

Creditors turnover = (Trade creditors Purchases) 365 days

For2013, Creditors turnover = (5269926 19457012) 365 days = 99 days

For 2014, Creditors turnover = (5623106 19336671) 365 days = 106 days

Liquidity and working capital 2013 2014

Current ratio 1.16 1.19

Quick ratio 0.906 0.941

Debtor days ratio 12 days 16 days

Stock turnover period 58 days 60 days

Creditors turnover 99 days 106 days

 Because of current ratio and quick ratio are nearer 1, this organization is in good condition. In
the 2013, the organization can get receivables in 12 days but it can get in 16 days in 2014. In
2013, stock can be operating in 58 days but there can operating to stock in 60 days. Creditors
turnover was 106 days in 2014 than 2013. From the business, although it is a good situation,
creditors will not supply to LOTTE shopping organization again because there is for a long time
for creditors.

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