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Key Topics
- Requirement
- Solution
- Assess the implication of different resources
- Evaluate the impact of finance on financial statement
- Analyse budget & make appropriate decision
- Assessment of viability of project using investment appraisal technique
- Comparison of financial statement for different types of business
- Interpretation of financial statement
- Differentiation:
- References
Requirement
Financial Management
Solution
Assess the implication of different resources
There are different sources of funds which are used in the company for investment such as equity financing, debt financing, hybrid financing and others. The sources have different implications according to the type of fund. The resources are chosen on the basis of the type of business, nature, the capacity of taking the risk, manager's perception and others. The implication of various sources is explained below:
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1.Equity:
The equity financing is mainly suited for large organisation and projects with long-term duration. The equity capital is invested in the company for the long term which is understood by the shareholders because equity investment is a long term plan. So the equity investment is suitable for long-term investment in the organisation. There is no fixed repayment of liability such as repayment of interest, capital repayment and others so it can be avail as a fixed asset for the company which can be used for long-term projects. However the control of management is diluted by equity investment over the various significant aspects due to which it impacts on the power of management for decision making (Zheng et al., 2013). The equity can be the best possible source of finance when the total control of the affairs of management and decision making is given away by the organisation. -
2.Debt:
The debt financing can be used by the company to fulfil the long and short term needs of the company. The debt financing can be afforded by the company who is having satisfied liquidity and cash flow (De et al., 2012). The long run debt financing is chosen on the basis of the rate of interest of debt as to whether the rate of interest if costlier or cheaper.
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Evaluate the impact of finance on financial statement
The finance impacts on the financial statement of the company in various ways. The common aspects are explained below:
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1.Impact on stock prices:
The stock prices show the financial position of the companies which are listed on stock exchanges and their primary source of finance for equity which is used by the listed companies. The financial position of the company reflects in the eyes of the potential investors and potential consumers by the stock price. The financial statement is closely looked by the investors in order to take investment decision than in that case the financial statement must meet the expectation of shareholders. The results of the quarter and annual are examined with the great anticipation because the various parties who have to take into account the financial position of the company at the particular period of time. The stock prices are decided by the sentiments of the market. The supply and demand of stock depend on the financial statement of the company. -
2.Financial decision making:
The availability of credit is impacted by the financial statement of the company. The lenders and financial institutions investigate the financial statement of the company at the time of lending money (Brigham et al., 2013). Therefore the decision of lending money by the financial institution largely depends on the financial statement of the company. -
3.Attracting new investors:
The financial statement of the company is investigated by the new investors in order to analyse the financial position of the company. If the financial position of the company is strong, then the investors take the chance to invest in the shares of the company. The decision of investment by the investors is taken on the basis of the financial statement of the company.
Analyse budget & make appropriate decision
The company has cash surplus which can be utilised in various ways in order to make higher revenue. The two ways are explained below:
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1.Investment in share
The investment of surplus funds in the financial market helps to grow the money over the particular time period. The investment of shares helps to grow money by increasing the price of shares. The price of shares is decided by the demand and supply of shares. It is the most vital area of the economy which helps to gain to the potential investors on the basis of the financial position of the company. -
2.Investment in expansion of product line
The investments of surplus cash in the expansion of product line by introducing a new product which helps to grow the money for long term. The investment helps to generate the profit for the long term which also helps to serve additional product to the consumers.
Assessment of viability of project using investment appraisal technique
The investment appraisal techniques help t examining the long-term viability of the investment proposal. The high rate of return on investment is needed by every company in order to expand the company with higher returns. The process of investment appraisal helps to assess the benefits from the specific project which helps to take strategic investment decision (Mamo et al., 2014). It is difficult to take the decision regarding the investment proposal for the project manager because of various reasons such as fluctuations in the life of project, risk and others. The various processes are included in the project such as budgeting, profitability analysis, forecasting and others due to which numbers related to the project are not accurate.
The return on capital employed helps to determine the expected return over the particular period of time
The payback period helps to take determine the initial time to recover the initial investment of the specific project.
The net present value helps to determine the profitability of investment on the basis of which strategic decision of accepting or rejecting the project is made.
The accounting rate of return helps to determine the return generated from the initial investment in the project.
Comparison of financial statement for different types of business
The financial statement of the company is recorded on the basis of statutory and legal requirements of the business. The pattern of summarising financial statement and recording of the financial transaction is varying from business to business. For example, the small business do not require compulsory audit due to which various statutory requirements are not fulfilled by them whereas big organisation have to report the statutory body due to which they follow the statutory requirements of the business. The incorporation business needs to follow the legal requirements such as International Financial Transactions and Generally Accepted Accounting Principles. There are mainly two types of balance sheets, namely, report form and account form. The cost accounting and managerial accounting are generally used by the company in order to enhance the financial statement of the company (Healy et al., 2012). Then the analysis of financial statement is done through ratio analysis. There are two types of an income statement, namely single step income statement and income statement by nature classification. The single statement is mainly used by the small companies in which similar expenses are combined together whereas the statement classification by nature is done in the big organisations where expenses are classified on the basis of their nature.
Interpretation of financial statement
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1.Current ratio
It is defined as the financial ratio which is used to determine the liquidity of the company. It is calculated the current assets upon current liability. The ideal ratio is 2:1. The current ratio is 1.51:1 which shows that the company is able to pay its operational expenses. -
2.Acid test ratio
It shows the short-term liquidity of the company. It reflects that the ability of the company to meet the short-term obligations with the liquid assets of the company. The quick ratio is 0.844 it shows that $0.84 of liquid assets is available to cover $1 for each current liability of the company. -
3.Return on capital employed
The ratio is used to determine the return on capital employed. It reflects the profitability and efficiency of the invested capital by the company. The return on capital employed is 73.8% it shows that the company is getting satisfying returns on investment. -
4.Gross profit margin
It is used to examine the financial health of the company. It is the first layer which is used to determine the efficiency of producing products among the competitors within the same industry. The gross profit margin is 81.25% which shows that the company is performing well. -
5.Net profit margin
It is used to determine the net income from the total sales of the company within the particular time period. It is used to measure the net dollar earned by the company in translated net profits. The net profit margin is 28.75% which shows that the company has low net profit margin.
Differentiation:
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1.Current and acid test ratio
The prime difference among the financial ratios is that the current assets consider all current assets whereas the acid test ratio only considers quick assets such as cash, accounts receivables, short-term market securities, and others (Delen et al., 2013). The current ratio includes stock in current assets whereas the acid test ratio does not consider the stock. -
2.Gross profit and net profit
The gross profit margin shows the profitability of the company, and it increases with the increase in the sales of the company. It is not a precise indicator whereas the net profit margin reflects net profit per dollar of sales which is a precise indicator.
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Healy, P. M., & Palepu, K. G. (2012). Business Analysis Valuation: Using Financial Statements. Cengage Learning.
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Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
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Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.
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Mamo, A. (2014). The use and usefulness of investment appraisal techniques in non-financial services Maltese listed companies.
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Zheng, H., Robinson, B. E., Liang, Y. C., Polasky, S., Ma, D. C., Wang, F. C., ... & Daily, G. C. (2013). Benefits, costs, and livelihood implications of a regional payment for ecosystem service program. Proceedings of the National Academy of Sciences, 110(41), 16681-16686.
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De Mooij, R. A. (2012). Tax biases to debt finance: Assessing the problem, finding solutions. Fiscal Studies, 33(4), 489-512.
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