Free sample   Financial management assignment analyzing accounting and finance concerns of businesses

## Financial Management Assignment Analyzing Accounting & Finance Concerns Of Businesses

Question

In this financial management assignment, you are required to answer the following questions:

Financial Management Assignment Question 1 –

Lincoln labs Inc. is considering the purchase of a \$700,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Lincoln labs is expected to be able to sell all that it can manufacture for the next five years. The government exempted taxes on profits from new investments to encourage capital investments. This legislation is not expected to be altered in the foreseeable future. The equipment is expected to have five years of useful life with no salvage value. The company employs straight-line depreciation. The net cash inflows are expected to be \$180,000 each year for five years. Lincoln labs uses a rate of 9% in evaluating its capital investment projects.

Required:

Calculate the estimated payback period for this proposed investment. (Assume that cash inflows occur evenly throughout the year.) (5 Marks)

Estimated payback period:

The payback period refers to the time frame within which the company will recollect its investment.

 Year 0 1 2 3 4 5 cash flow -700000 180000 180000 180000 180000 180000 Cumulative Cash flow -700000 -520000 -340000 -160000 20000 200000 payback period 3.89 3+(160000/180000)

Calculate the project's accounting rate of return. (5 Marks)

Accounting rate of return:

The accounting rate of return is calculated for assessing the profitability of the project. The ARR will be presenting the profits for making the capital investment by comparing the return and the investment.

In this case, the Accounting rate of return is calculated as follows:

 Accounting rate of return Total cash Inflows 900000 less: Investment 700000 net Income 200000 Accounting rate of return (net Income/investment) 28.57%

What is capital investment analysis? Why are capital investment analysis decisions often difficult and risky? (5 Marks)

Capital Investment analysis:

The capital investment analysis refers to assessing the profitability and other attributes that an investor is willing to know for its planned investment. With the help of capital investment analysis, one can estimate whether a project is selectable or not based on the resulting outcomes. For the investment analysis, the following tools are used.

• Net present value
• Internal rate of return
• Payback period
• Discounted Payback period
• Accounting rate of return and others

Difficulties:

In the case of investment analysis, all the calculations are made based on the estimated values, which are highly volatile due to changes in the policy, economic situation, tax rate, inflation and others. As all of the capital investment tools are based on the projected cash flows, therefore any change in cash flows will give a different return which might compromise the investor's confidence. Thus, the capital investment analysis is considered to be difficult as it takes a lot of experience in making assumptions and projections, and it is risky because the cash flows will get influence because of changes in the external and internal business factors (Crouzet and Eberly, 2019).

Question 2

Enciso Corporation is preparing its cash budget for November. The budgeted beginning cash balance is \$31,000. Budgeted cash receipts total \$135,000 and budgeted cash disbursements total \$141,000. The desired ending cash balance is \$50,000. The company can borrow up to \$100,000 at any time from a local bank, with interest not due until the following month.

Required:

Prepare the company's cash budget for November in good form.

In the given case, the cash budget for the Enciso is prepared, and the results are showing the company has some shortfall in maintaining its desired minimum balance. Therefore, it has to borrow the balance amount for maintaining the minimum cash balance of \$50000 at the end of November.

 Cash Budget for the month of November Opening cash \$ 31,000.00 Add: collection \$ 1,35,000.00 Add: Others Total cash Available \$ 1,66,000.00 Payments Disbursements \$ 1,41,000.00 net Cash before Loan \$ 25,000.00 Add: Borrowings \$ 25,000.00 less: Repayments Closing cash \$ 50,000.00

Question 3

Calculate the unknowns for the following situations based on the data below. All situations are independent of each other.

Total fixed costs \$200,000

Unit sale price \$100

Unit variable cost \$40

Answer the following: (5 x 5 marks each)

Calculate the break-even point in units

The breakeven point is the unit measure where the company is able to cover its all cost relating to production by making sales.

The BEP can be calculated by comparing the Fixed cost by the contribution margin.

 Total Fixed cost 200000 Units sales 100 unit variable cost 40 contribution 60 BEP 3333.333

The break-even sales units will be 3333.33 units

Calculate the break-even point in dollar sales

The dollar sales of BEP will show the exact amount of sales that the company is required to make in order to cover its production-related cost. This can be calculated by multiplying the BEP units with the sales price.

The BEP sales = BEP sales unit * sales price

= 3333.33 * \$ 100

= \$ 333333.3.

Assume the unit sale price increases by 10%. Other data is unchanged. Calculate the break-even point in units

 If units sales Price increases by 10% Total Fixed cost 200000 Units sales 110 unit variable cost 40 contribution 70 BEP 2857.143 BEP sales 314285.7

If the sales price increase by 10%, then in such case, the BEP is 2857.14 units.Assume the unit variable cost increases by 10%. Other data is unchanged. Calculate the break-even point in units

 variable cost increases by 10% Total Fixed cost 200000 Units sales 100 unit variable cost 44 contribution 56 BEP 3571.429 BEP sales 357142.9

If the variable cost increases by 10%, then the Breakeven units will be 3571.42.

Assume total fixed costs increase by \$5,000. Other data is unchanged. Calculate the break- even point in units

 if Fixed cost increase Total Fixed cost 205000 Units’ sales 100 unit variable cost 40 contribution 60 BEP 3416.667 BEP sales 341666.7

If the Fixed cost increases, then in such case, the BEP sales unit will be 3416.67 units.

Question 4

The Morgan Sports Equipment Company just reported the following financial figures.

Morgan Sports Equipment Company

Assets Liabilities and Equity

Inventories €1 312 478 Notes payable 2 113 345

Accounts receivable 1 845 113 Accounts payable €1 721 669

Cash 677 423

 Total current assets €3 835 014 Total current liabilities €3 835 014 Net sales €9 912 332 Cost of goods sold €5 947 399

Calculate the firm’s days’ sales outstanding. (4 marks)

firm’s days’ sales outstanding

 Days sales outstanding net sales 9912332 Accounts Receivable 1845113 Days sales outstanding 67.94

The sales days outstanding is 68 days.

What is the firm’s days’ sales in inventories? (4 marks)

 Days sales inventory COGS 5947399 Inventories 1312478 Days sales inventory 80.55

The inventories days outstanding is 81 days.

What is the firm’s days’ payable outstanding? (4 marks)

 Days payable outstanding COST 5947399 Accounts Payable 1721669 Days payable outstanding 105.66

The payable days outstanding is 107 days.

What is the firm’s operating cycle? How does it compare to the industry average of 72 days? (4 marks)

 Operating Cash Cycle Inventory days 80.54857 Receivable days 67.94226 Operating Cash Cycle 148.49

The operating cycle is calculated by adding the receivable days and the inventory days, which suggest the block and realization of case form acquisition the investors to its collection. In this case, the operating cycle for the firm is 42 .82 days, whereas the industry average is 72 days. Thus the company has better cash operating cycle (Julianto, Marjono and Labangge, 2021).

What is the firm’s cash conversion cycle? How does it compare to the industry average of 42 days? (4 marks)

 CCC Inventory days 80.54857 Receivable days 67.94226 payable days 105.6612 CCC 42.83

The cash conversion cycle suggests the time required by an entity for investment cash for the acquisition of material, manufacturing its, making sales of the production and realizing the same for collection. The cash conversion cycle for the company was 148 days, where the average industry cash conversion cycle for the industry is 43 days. This the cash conversion cycle for the firm should be considered poor compared to the industry standard (Go?a?, 2020).

Question 5

The following information for Kinnis, Inc., a retail furniture and design firm, is presented at December 31, 2020 and 2019:

December 31

 Assets Current assets: 20202019 Cash \$ 42,000 \$ 54,000 Accounts receivable 480,000 345,000 Inventory 5,010,000 4,950,000 Prepaid expenses 84,00079,000 Total current assets 5,616,000 5,428,000 Building and equipment 1,591,000 1,193,000 Total assets  Liabilities and Stockholders’ Equity \$7,207,000\$6,621,000 Current liabilities:  Accounts payable \$ 705,000 \$ 628,000 Bank loan payable 679,000 625,000 Other accrued payables 215,000 315,000 Total current liabilities 1,599,000 1,568,000 Long-term debt 1,729,000 1,791,000 Total liabilities  Stockholders’ equity: 3,328,000 3,359,000 Common stock 1,307,000 1,305,000 Retained earnings 2,572,000 1,957,000 Total stockholders’ equity 3,879,000 3,262,000

Total liabilities and stockholders’ equity \$7,207,000\$6,621,000

There were 100,000 shares of common stock outstanding at the end of both years. The income tax rate is 35%. Interest expense totaled \$139,000 for 2020 and \$158,000 for 2019. The market price per share was \$110 at the end of 2019 and \$134 at 2020. Net income was \$615,000 for 2020 and \$739,000 in 2019. Net sales totaled \$4,568,000 and \$3,253,000 for 2020 and 2019, respectively.

Calculate the following for 2020 and 2019: (4 x 5 marks each = 20 marks)

Earnings per share

 Earnings Per share 2020 2019 net Income \$ 6,15,000.00 \$ 7,39,000.00 Share outstanding \$ 1,00,000.00 \$ 1,00,000.00 EPS \$ 6.15 \$ 7.39

Price-earnings ratio

 price to earnings 2020 2019 price \$ 134.00 \$ 110.00 EPS \$ 6.15 \$ 7.39 EPS 21.79 14.88

Return on total assets

 Return on Total Assets 2020 2019 net Income \$ 6,15,000.00 \$ 7,39,000.00 Total Assets \$ 72,07,000.00 \$ 66,21,000.00 Return on Total Assets 8.5% 11.2%

Return on common stockholders’ equity

 Return on Stockholders Equity 2020 2019 net Income \$ 6,15,000.00 \$ 7,39,000.00 Total Equity \$ 38,79,000.00 \$ 32,62,000.00 Return on Stockholders Equity 15.9% 22.7%

Comment on any trends apparent in the ratios (5 marks).

Based on the calculation made above, the trend analysis for all ratios is discussed as follows.

Earnings per Share:

The EPS is a measure of earnings made by the company for every share it has issued. The EPS can be calculated by comparing the net income with the number of shares outstanding. In this case, the EPS for 2019 was \$7.39, which is decreased to \$6.15 per share. In this case, there is no new issue, and a direct decrease in EPS suggests that the company; profitability impacted by almost 16.78% in 2020 compared to the results of 2019.

Price to Earnings ratio:

The price to earnings ratio is calculated by comparing the price per share with the earnings. In this case, the P/E ratio for the company was 14.88 times in 2019, which is increased top 21.79 times in 2020, which indicates that the shareholder is willing to pay more for the earnings (Cheng, Li and Zhang. 2020). Therefore, the trends suggest an increase in P/E of 46.38% in 2020.

Return on Total Assets:

The return on total assets is calculated by comparing the net income with the total asset. The return on assets for 2019 was 11.2%, which decreased to 15.9% due to an increase in total assets and a decrease in net income. Thus, there is a negative trend of 23.55% in the case of return on assets for the company.

Return on stockholders’ equity:

The return on equity is a profitability measure that calculates the company's income based on the equity investment (Alpi, 2018). The return on stockholders’ equity was 22.7% in 2019, which is decreased to 15.9%. The decrease in return of equity by 30.02% is identified in 2020 compared to the previous year.

Reference List

Alpi, M.F., 2018. Pengaruh Debt To Equity Ratio, Inventory Turn Over, Dan Current Ratio Terhadap Return On Equity Pada Perusahaan Sektor Farmasi Yang Terdaftar Di Bursa Efek Indonesia. The National Conference on Management and Business (NCMAB) 2018.

Cheng, C.A., Li, S. and Zhang, E.X., 2020. Operating cash flow opacity and stock price crash risk. Journal of Accounting and Public Policy39(3), p.106717.

Crouzet, N. and Eberly, J.C., 2019. Understanding weak capital investment: The role of market concentration and intangibles (No. w25869). Financial management assignment National Bureau of Economic Research.

Go?a?, Z., 2020. Impact of working capital management on business profitability: Evidence from the Polish dairy industry. Agricultural Economics66(6), pp.278-285.

Julianto, D., Marjono, M. and Labangge, A., 2021. ANALISIS BENEISH M-SCORE UNTUK MENDETEKSI FINANCIAL STATEMENT FRAUD PADA PT. GARUDA INDONESIA Tbk PERIODE 2017-2019. Jurnal Ekonomi STIEP (JES)6(1), pp.44-51.

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