Assignment on Managerial finance (financial records/financial reporting)

Abstract

Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique. The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports.
The concern of a technical approach is primarily dimension. It asks: is money being assigned to the right categories. Generally accepted accounting principles (GAAP) followed.

• They may look at changes in asset balances or red flags that indicate problems with bill collection or bad debt.
• They will analyze working capital to anticipate future cash flow problems.

Task 1

1.1 The purpose and requirements for keeping financial records

Managing the business, together with making plans and solving problems, is much easier if records of past performance are available. There are some very good reasons for keeping different types of business and financial records.

• Records are required for tax preparation and filing and, if needed, for any audits. These include farm and personal records for filing income taxes and payroll records for employees. The farm may be liable for sales taxes on meat and other product sales.
• Lenders want definite financial information about the farm before giving new loans or extending new credit.
• Managing the business, including making plans and solving problems, is much easier if records of past performance are available.
• Monitoring and evaluating business performance cannot be done without the necessary information, problems may go undetected and opportunities missed.
• Records are needed to provide a paper trail or documentation, e.g., in the event of law suits, settling estates, etc.
• Records provide a sound basis for developing business agreements, both with family members and with others.

1.2 Techniques for recording financial information Analyses the legal and organizational requirements of financial reporting

Techniques for recording financial information Analyses

The financial statements are set for the purpose of presenting a periodical review or report of the progress made by the concern. It shows the position of the investment in the business and result achieved during the accounting period.

The Financial Statements supply a summary of the accounts of a business enterprise, the Balance Sheet reflecting the assets and liabilities and the income statement showing the results of the operations during a certain period.

Ø  Profit and Loss Account

Ø  Balance Sheet

Ø  Statement of Retained Earnings

Ø  Fund Flow Statements

Ø  Cash Flow Statement

Ø  Certain Schedules

Type of financial analysis

1. External Analysis: External Analysis of financial statements is made by those who do not have access to the detailed accounting records of the company, i.e. banks, creditors and general public.

2. Internal Analysis: Such analysis is made by the finance and accounting department to assist the top executive. These people have direct move toward to the appropriate financial records.

3. Horizontal Analysis: When the financial statements for a number of years are reviewed and analyzed, the analysis is called horizontal analysis.

4. Vertical Analysis: When ratios are calculated from the balance sheet of one year, it is called vertical analysis

5. Long term Analysis: In long term analysis the permanent assets, long term debt structure and the ownership interest is analyzed.

6. Short term Analysis: It is mainly apprehensive with the working capital analysis. The current assets and current liabilities are analyzed and cash position of the concern is determined.

Legal and organizational requirements of financial reporting:

It is very significant to reporting financial statement under common law. The company should follow IRS (International Reporting Standard) and GAAP (General Accounting Accepted Principles).

(a) The incentives provided to management: The control level will have immediate compensation and discuss option. Further that, they have the power to control the stock cost. Therefore, if their income can impact the stock cost, it may cause the control to generate undesirable actions.

(b) Company internal control: Some companies have neglected the importance of having effective internal control by having internal control because they spotlight on growth and share price. The senior management focuses on the strategic issues rather than operations and control function in the financial statement. If CFO is not the one who involve in the reporting process that may cause the dispensation of financial reporting to be more difficult.

(c) Oversight of Management by Board of Directors: Some boards do not understand the importance of building the healthy governance structure. The independence, skills, resources, information and adequate time need to be fulfilled by the director and audit committees to build healthy governance structure.

(d) Audit independence: The auditors may not be independent in some point of time because of the pressure of self-review threat, the audit fees and audit relationship with management. Therefore, safeguards are needed.

(e) Auditors’ quality control mechanisms and audit work in relation to fraud: The incompetence of auditors, weak independence and ineffective consultation processes of auditors which cause audit quality to be questioned because the auditors fail to set an appropriate environment. Auditors are not doing in line with market expectation whereby they can detect all the fraud created. Collusion issues also occur while doing audit

(f) Accounting standards: The ineffectiveness of the aspects and the important distinction of the aspects between countries are key flaws. More often than not, the traditional setters are under government requirements, deficiency of resources and hardship. Consequently, the stability of the cost-effective verifying may be affected.

(g) Regulation: Self control does not have efficient self tracking, it cause lack stability and stability. Therefore, efficient and deserving activities are unable to be carried out. The potency of rules in terms of independent tracking of rules are differs among the countries.

(h) Behavior of investment banks, lawyers and other advisers: Actions of financial commitment financial institutions tries to cover up scams in the financial declaration while the attorney and others cannot identify them because they just give an viewpoint based on the details.

(i) Ethical Behavior: Although auditors are the members of the professional bodies, they neglect the professional ethical guidance.

1.3 Usefulness of financial statements to stakeholders

Financial information is important because it impacts so many areas of our life. Stakeholders need financial information to be relevant for many forms of credit, and you need financial information to make purchases.

·         Owners and supervisors require fiscal reports to make important business choices impacting its ongoing functions. Economical research is then conducted on these claims, offering control with a more specific knowing of the numbers. These claims also are used as part of management's yearly review to the stockholders.

·         Employees need these reviews to make combined negotiating contracts with the management, in the case of work unions or for individuals in talking about their settlement, marketing, and positions.

·         Prospective traders make use of fiscal reviews to evaluate the stability of investing in an organization. Economical studies are used by traders and prepared by professionals (financial analysts), thus providing them with the basis to make investment choices.

·         Financial organizations (banks and other lending companies) use them to decide whether to allow an organization funds or increase debt investments (such as long-term loans from banks or debentures) to finance development and other significant expenses.

·         Government organizations (tax authorities) need fiscal reviews to determine the propriety and precision of taxation and other responsibilities announced and paid by an organization.

·         Vendors who increase credit to an organization require fiscal reviews to evaluate the credit reliability of the organization.

·         Media and the public are interested in fiscal reviews for a variety of reasons.

1.4 Difference between management and financial accounting

Financial and management accounting are both significant tools for a business. A business uses accounting to determine operational plans in the future, to review past performance and to test current business functions. Management and financial accounting have different audiences, as investors are not usually involved in the day-to-day operations of the business but are fretful about their investment, whereas managers need information quickly to make daily business decisions. Differences are given bellow;

Management Accounting	Financial Accounting
Management or managerial accounting is used by managers to make decisions about the day-to-day operations of a business.	Financial accounting is used to present the financial health of an organization to its external stakeholders. Board of directors, stockholders, financial institutions and other investors are the audience for financial accounting reports.
It is based not on past performance, but on current and future trends, which does not allow for exact numbers.	Financial accounting presents a specific period of time in the past and enables the audience to see how the company has performed.
Management accounting is presented internally, whereas financial accounting is meant for external stakeholders	Management accounting is often more of a guess or estimate, since most managers do not have time for precise numbers when a decision needs to be made.
There is no legal requirement for an organization to use management accounting.	Financial accounting is accurate and must stick to Generally Accepted Accounting Principles (GAAP)
Managerial accounting is concerned with providing information to managers i.e. people inside an organization who direct and control its operations	A financial accounting system produces information that is used by parties external to the organization, such as shareholders, bank and creditors.
Management accounting focuses on future & present.	Financial accounting focuses on history.
May pertain to smaller business units or individual departments, in addition to the entire organization.	Pertains to the entire organization or materially significant business units.

1.5 Explanation of the budgetary control process

Budgetary control is the procedure of creating a budget and regularly evaluating actual expenses against that strategy to figure out if it or the investing styles need modification to keep on track. This procedure is necessary to management investing and fulfills various financial targets. Government authorities depend intensely on budgetary control to handle their investing actions, and this strategy is also used by companies as well as private individuals, such as leads of family who want to make sure they live within their means

·          A disconnection between strategy, cost control and efficiency control as no line possession for costs existed

·         Budgeting pattern was too long as multi-levels of acceptance were required

·         Budgets were too specific, the focus being given to data collection rather than features, research and interpretation

·         Straight covered price range - seasonality was ignored

·         No allocated balance piece or income claims were produced

·         Program assistance was insufficient modern cost control however, has been described as a procedure wherein supervisors are provided with the versatility to utilize resources as needed, in return for their dedication to achieve certain efficiency outcomes. In addition, proper cost control allows efficient planning of the company’s functions and works as a tracking tool, managing activities and projects between the various organizational models. Creating sound price range means looking beyond your own surfaces.

·         Our economical control practice will review general economic and commercial styles along with factors unique to your business, in order to provide hands-on assistance and achieve efficient procedure modification, assuring the development of genuine economical efficiency objectives and costs. This will be assured by the fact that our experts have specialized experience in all different types of cost control (activity centered cost control, zero centered cost control, ideal cost control, cost control on a moving basis) and are capable of providing specialized advice on cost control outcomes presentation / featuring areas for Enhancement. The latter can be achieved through difference (actual compared to budget) reviews presentation and research, design of standard allocated vs. real getting back together reviews, behavioral issues quality, on-going system etc.

·         It is important to bring up that optimizing the cost control procedure alone, without “fine-tuning” the cost control system and the price range control points will provide only a portion of the expected benefits. That is why the supporting skill set of our economical control experts will make the difference in creating the best cost control structure suitable your company needs and unique features.

1.6 Evaluation of the use of different costing methods used for pricing purposes

As per the nature and peculiarity of the business, different Industries follow different methods to find out the cost of their product. There are different principles and procedure for doing the costing. However the basic principle and procedure of costing remain the same. Some of the methods are mentioned below:

1.      Unit Costing

2.       Job Costing

3.      Contract Costing

4.       Batch Costing

5.      Operating Costing

6.       Process Costing.

7.       Multiple Costing

8.       Uniform Costing.

Unit Costing: This technique also called 'Single outcome Costing'. This technique of charging is used for items which can be indicated in identical quantitative models and is appropriate for items which are produced by ongoing production activity. Costs are determined for practical models of outcome. Examples: Stone making, exploration, concrete production, milk, flour generators etc.

Job Costing: Under this method costs are ascertained for each work order separately as each job has its own specifications and scope. Examples: Painting, Car repair, Decoration, Repair of building etc.

Contract Costing: Under this method costing is done for big jobs which involves heavy expenses and stretches over a long period and often it is undertaken at different sites. Each contract is treated as a separate unit for costing. This is also known as Terminal Costing. Construction of bridges, roads, buildings, etc. comes under contract costing.

Batch Costing: This methods of costing is used where the units produced in a batch are uniform in nature and design. For the purpose of costing each batch is treated as a job or separate unit. Industries like Bakery, Pharmaceuticals etc. usually use batch costing method.

Operating Costing or Service Costing: Where the cost of operating a service such as nursing home, Bus, railway or chartered bus etc. this method of costing is used to ascertain the cost of such particular service. Each particular service is treated as separate units in operating costing. In the case of a Nursing Home, a unit is treated as the cost of a bed per day and for buses operating cost for a kilometer is treated as a unit.

Process Costing: This kind of costing is used for the products which go through different processes. For example, manufacturing cloths goes through different process. Fist process is spinning. The output of spinning is yarn. It is a finished product which can be sold in the market to the weavers as well as use as a raw material for weaving in the same manufacturing unit. For the purpose of finding out the cost of yarn, the cost of spinning process is to be ascertained. The second step is the weaving process. The out put of weaving process is cloth which also can be sold as a finished product in the market. In such case, the cost of cloth needs to be evaluated. The third process is converting cloth in to finished product such as shirt or trouser etc. Each process is to be evaluated separately as the out put of each process can be treated as a finished good as well as consumed as a raw material for the next process. In such industries process costing is used to ascertaining the cost at each stage of production.

Multiple Costing: When the output comprises many assembled parts or components such as in television, motor Car or electronic gadgets, costs have to be ascertained or each component as well as the finished product. Such costing may involve different methods of costing for different components. Therefore this type of costing is known as composite costing or multiple costing.

Uniform Costing: This is not a separate method of costing. This is a system of using the same method of costing by a number of firms in the same industry. It is treated as a common system of using agreed principles and standard accounting practices in the identical firms or industry. This helps in fixation of price of the product and inter-firm comparisons.

Types of Costing

There are different types or techniques of costing are used in cost accounting. Different types of costing is used in different industries to analyze and presenting costs for the purposes of control and managerial decisions. The generally used types of costing are as follows:

Marginal Costing: In Marginal Costing, it allocates only variable costs i.e. direct materials, direct labour and other direct expenses and variable overheads to the production. It does not take into account the fixed cost of production. This type of costing emphasizes the distinction between fixed and variable costs.

Absorption Costing: The technique of absorbing fixed and variable costs to production is called absorption costing. Under absorption costing full costs, i.e. fixed and variable costs are absorbed to the production.

Standard Costing: When costs are determined in advance on certain predetermined standards under a given set of operating conditions, it is called standard costing. Standard costing is to be compared with the actual costs periodically to analyze the changes in the cost to revise the standards to avoid any loss due to outdated costing.

Historical costing: When costs are determined in terms of actual costs and not in terms of predetermined standards cost is called Historical costing. In this system of cost accounting, costs are determined only after they have been incurred. Almost all organizations use historical costing system of accounting for costs.

Task -2

Material variance

1.      Materials purchase price variance:

 = (Actual quantity purchased × Actual price) – (Actual quantity purchased × Standard price)

= (1175×19.79574) – (1175×20)

= 23260 – 23500

= (260) Favorable

2.      Materials price usage variance formula
=(Standard Quantity x Standard Price) - (Actual Quantity x Standard Price)

= (1000 ×20) - (1175× 20)

= 20000- 23500

= (3500) Favorable

3.      Materials quantity variance formula
= (Actual quantity used × Standard price) – (Standard quantity allowed × Standard price)

= (1175 ×20) – (1000 ×20)

= 23500 – 20000

= 3500 Unfavorable

Direct Labor Variances

1. Direct labor rate / price variance formula:
   = (Actual hours worked × Actual rate) – (Actual hours worked × Standard rate)

= (1075× 22) – (1075×22.7163)

= 21500 – 24420

= (2920) Favorable

2. Direct labor efficiency / usage / quantity:
   = (Actual hours worked × Standard rate) – (Standard hours allowed* × Standard rate)

= (1075 ×22) – (550×22)

= 23650- 12100

= 11550 Unfavorable

*Standard hours allowed = Actual output × Standard hour required per unit

                                     = 1100 × (1/2)

                                    = 550

3.      Direct labor yield variance:
= (Standard hours allowed for expected output × Standard labor rate) – (Standard  

    hours allowed for actual output × Standard labor rate)

= (1000 ×22) - 1100× 22)

= (22000 – 24200)

= 2200 Favorable

Task- 3

	Project 1			Project 2
Year	Profit	Depreciation	NCB	Profit	Depreciation	NCB
1	58000	62000	120000	36000	36000	72000
2	(2000)	62000	60000	(4000)	36000	32000
3	4000	62000	66000	8000	36000	44000
scrap value			14000			12000

Depreciation (Project 1)  =  200000 – 14000

                                                        3

                                        =  186000

                                                 3

                                        = 62000

Depreciation (Project 2)  =  120000 – 12000

                                                        3

                                        =  108000

                                                3

                                        = 36000

a)      accounting rate of return (ARR) (Project 1)

    = 60000  ÷  3       ×   100

                 200000 + 14000

                  2 

=  20000   ×   100

               107000

= 18.69 %

a)      accounting rate of return (ARR) (Project 2)

    = 40000  ÷  3       ×   100

                 120000 + 12000

                  2 

=  13333   ×  100

               66000

= 20.20 %

b)      pay back (Project 1)

Year	NCB	Cumulated NCB
1	120000	120000
2	60000	180000
3	66000+ 14000=80000	260000

From the table we can see that to recover the initial cost of 200000 it will take more than 2 years, but less than 3 years.

Pay back period  = 2 years + 200000 - 180000

                                                      80000

                            = 2 years + .25

                            = 2.25 years

b)      pay back (Project 2)

Year	NCB	Cumulated NCB
1	72000	72000
2	32000	104000
3	44000+12000= 56000	160000

From the table we can see that to recover the initial cost of  120000 it will take more than 2 years, but less than 3 years.

Pay back period  = 2 years + 120000 - 104000

                                                      56000

                            = 2 years + .29

                            = 2.29 years

c)      NPV (Project 1)

= [120000/1.1 + 60000/(1.1)2 + (66000 + 14000)/(1.1)3] – 200000

= [120000/1.1 + 60000/1.21 + 80000/1.331] – 200000

= (109090.9 + 49586.8 + 60105.2) – 200000

= 218782.9-200000

=18782.9

=18783

c)      NPV (Project 2)

= [72000/1.1 + 32000/(1.1)2 + (44000+12000)/(1.1)3] – 120000

= [72000/1.1 + 32000/1.21 + 56000/1.331] – 120000

= (65454.5 + 26446.3 + 42073.6) – 120000

= 133974.4-120000

= 13974

d)     Internal rate of return (Project 1)

Let us assume 20% discounting rate:

          NPV

    =  [120000/1.20 + 60000/(1.20)2 + (66000 + 14000)/(1.20)3] – 200000

    = [120000/1.2 + 60000/1.44 + 80000/1.728] – 200000

    = (100000 + 41666.7 + 46296.3) – 200000

    = 187963-200000

    =(12037)

   

    IRR

     = .10 +   18783            ×   (.20-.10)

           218783-187963

    

      = .10 +  18783   ×  .10

                    30820

      = .10 + .6094419 × .10

      = .10 + .0609441

      = .1609

      = 16.09 %

d)     Internal rate of return (Project 2)

Let us assume 20% discounting rate:

          NPV

= [72000/1.20 + 32000/(1.20)2 + (44000+12000)/(1.20)3] – 120000

= [72000/1.2 + 32000/1.44 + 56000/1.728] – 120000

= (60000 + 22222 + 32407) – 120000

= 114629-120000

=  (5371)

   

    IRR

     = .10 +   13974            ×   (.20-.10)

           133974-114629

    

      = .10 +  13974   ×  .10

                    19345

      = .10 + .7223571 × .10

      = .10 + .0722357

      = .1722

      = 17.22 %

	Project 1	Project 2
a) ARR	18.69 %	20.20 %
b) Pay back	2.25 years	2.29 years
c) NPV	£ 18783	£ 13974
d) IRR	16.09 %	17.22 %

Conclusion

Now a day’s accounting and finance is the yard stick for running a business effectively. Managerial finance is such kind of element. It helps to evaluate, manage and forecast effectively.

References

• Mastering Financial Management, Clive Marsh, Financial Times Prentice Hall, MIT Open Courseware - 15.414 Financial Management, Summer 2003.

• Gitman, Lawrence (2003), Principles of Managerial Finance, 10th edition, Weston, Fred and Brigham, Eugene (1972), Managerial Finance, Dryden Press, Hinsdale Illinois, 1972
• Chen, Henry editor, (1967), Frontiers of Managerial Finance, Gulf Publishing, Houston Texas, 1967
• Brigham, Eugene and Johnson, Ramon (1980), Issues in Managerial Finance, Holt Rinehart and Winston Publishers, Hindale Illinois, 1908

• Mastering Financial Management, Clive Marsh, Financial Times Prentice Hall, ISBN 978-0-273-72454-4
• MIT Open Courseware - 15.414 Financial Management, Summer 2003.

• Gitman, Lawrence (2003), Principles of Managerial Finance, 10th edition, Addison-Wesley Publishing, 2003,
• Weston, Fred and Brigham, Eugene (1972), Managerial Finance, Dryden Press, Hinsdale Illinois, 1972
• Chen, Henry editor, (1967), Frontiers of Managerial Finance, Gulf Publishing, Houston Texas, 1967
• Brigham, Eugene and Johnson, Ramon (1980), Issues in Managerial Finance, Holt Rinehart and Winston Publishers, Hindale Illinois, 1908

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