Business Finance Assignment: Tasks Based On Double-Entry System & Accounting Equation

Question

Task:
The business finance assignment consists of the following tasks:
Task 1
For each transaction, decide whether it should be included in the cash budget for the business; Prepare a cash budget for the three months ending 31 March, 2022.

1. Anton invested £10,000 cash in the business on 1 January, 2022.
2. Anton plans to make drawings of £800 per month for each personal expenditure.
3. Anton purchases a computer for his personal use at a cost of £499 in January.
4. Anton also purchased a computer in January for business purposes at a cost of £720 cash.
5. He plans to buy a motor vehicle for £3,200 cash on 1 March, for business purposes.
6. Sales estimates are as following:
January = £4,200
February = £ 3,200
March = £2,950
7. Sales are made 30% cash and 70% on one months’ credit.
8. Purchases will be made for cash as follows:
January = £ 2,800
February = £1,500
March = £1750
9. Other expenses are estimated as follows:
• Electricity £285 payable at the end of the quarter.
• Telephone costs of £120 per month, payable at the end of each month by cash.,br. • Fuel cost for motor vehicle estimated to be £65 per month, payable in the same month.

TASK 2
2.1 What is Accounting Equation (Assets = Liabilities + Capital) and explain why the accounting equation will always work Also, provide an example with your explanation.
This is the content covered in Chapter 3 of Accounting: A smart approach by Carey, Mary/Knowles, Cathy 4th edition

2.2 What benefits might a company gain from having its shares listed on a stock exchange
This is content covered in Chapter 5 of Accounting: A smart approach by Carey, Mary/Knowles, Cathy 4th edition

2.3 Who do you think might be considered to be stakeholders in a large, listed company like Marks and Spenser

Use – Investopedia;
Mark and Spenser`s Annual Report
This is content covered in Chapter 5 of Accounting: A smart approach by Carey, Mary/Knowles, Cathy 4th edition

2.4 Is the profit that a business makes a reliable indicator of its cash balances What are the differences between Profit and Cash
No, profit and cash are not the same;
Definitions for Profit and Cash
Profit cannot be spent
Profit can be manipulated
Shareholders care about cash as dividends are paid in Cash;
Content covered in Chapter 2 of Accounting: A smart approach by Carey, Mary/Knowles, Cathy 4th edition
Conclusion:
Cash and Profit are the two sides of the same coin. Unprofitable business may survive in the short term if they have enough cash to pay off their expenses. However, a profitable business will/might collapse if they run short of cash in the short term.

Mention why they are different and explain each point:
Sales on credit;
Purchases on credit
Inventory
Purchase of Non-current Assets

Answer

Introduction
The concept of business finance explored in the present context of business finance assignment is defined as the cash funded into the business and the credit employed in the business operations (Hertati et al., 2020). Finance is the building block of a business that is required for purchasing assets, raw materials and commences business activities. Business finance is required to meet the contingent situation of the business that arises, as well as it is necessary for promoting sales. In this assignment, a cash budget is prepared for the business in the next three months to ascertain the amount of inflow and outflow of cash. Moreover, this assignment contains the basic concepts of finance like the double-entry system and accounting equation.

Task 1: Preparation of cash budget
A cash budget is a budgetary estimation of the total cash inflow and cash outflow during a future time period. The cash budget deals with materials, labour, overheads and R&D. This budget is prepared by the business to indicate to the business managers about the expected inflows and outflows of cash to the business. In a situation when cash outflow is more than cash inflows, adequate cash management strategies need to be enforced, whereas when cash inflow is more than outflows, it is a situation of surplus (Connolly and Bank, 2018).

The business decides how to make use of this surplus. The prominent sources of the cash involve receipts from debtors, bill receipts, interest received from the loan, dividends received on shares and other income like a sale from fixed assets. The sources of cash payments involve payments to creditors, suppliers and lenders, payment of assets purchased, miscellaneous payment of wages, rent, postage, telephone and entertainment expenses.

In the given case, Anton's business has a number of sources of cash inflow and cash outflow. For instance, the total cash receipts for the month of January, February and March 2022 are £11260, £3900 and £3125, respectively. It involves capital investment in January in 2022 of £10000, cash sales and credit sales. On the other hand, the sources of cash payments are drawings made every three months of £800, purchase of a computer for personal use for £720, purchase of a motor vehicle for £3200, cash purchase, electricity, telephone and fuel. All these payments made the total cash payments as £4505 for January, £2485 for February and £6220 for March. Therefore, the net receipts are £6755, £1415 and £-3095 for January, February and March, respectively. Hence, it provides a vivid idea to the business about the possible cash balance to remain in the upcoming three months, and the company can hence make the required changes accordingly. In general, the business uses a cash budget to define whether it shall have an adequate cash balance to meet the anticipated cash requirements as well as the additional reserves to meet the contingencies for the company (Klopotan et al., 2018).

The following are the usefulness of cash budget-
It offers information about the different sources of cash receipts and cash payments.
It provides information about the future prospects of cash receipts and cash payments.
It offers information about the need for excess cash requirements and how they can be arranged by the company.
It ensures cash payments to be made on the due date
It enables planning for short-term repayments and long-term loans

Task 2
2.1. Define Accounting Equation. How it shall always work. Explain with an example 250
The accounting equation is a basic principle of accounting and the basic element of the balance sheet. The accounting equation is Assets=Liabilities+Shareholders^' Equity The accounting equation is based on the double-entry accounting system wherein it states all debits shall have an equivalent credit in the books of accounts. In the accounting equation, assets represent the valuable resources of the business, whereas liabilities mean the outstanding obligations of the business (Kraemer-Eis et al., 2019). The combination of liabilities and equity depicts how the company’s assets are financed.

The accounting equation works in the way that the businesses ensure that their financial statements are always balanced. It means any entry that is made requires debiting the balance sheet must have a corresponding credit entry (Bendell and Doyle, 2017). The purpose of the accounting equation is to have a closer view of the concept of double-entry accounting. The essential feature of the balance sheet comprises total assets, total liabilities and shareholders' equity. The accounting equation ascertains that all the uses of capital assets are equal to the sources of capital which are debt and equity. The double-entry accounting system mandates that all kinds of businesses transactions should affect at least two financial accounts- one debit and one credit.

For instance, when a business purchases raw materials in cash, it would affect the stock account of the business. This means the transaction should incur a reduction in the value of capital as a result of cash spending (Ossig, 2017). Based on the double-entry accounting system, within individual transactions, it impacts two independent accounts- stock and cash. The accounting entry is Stock Account Dr.

To Cash Account
2.2. State the benefits of listing shares on the stock exchange to the company
Listing of securities means an admission of the stock of the company into a registered trading platform known as the stock exchange. It ensures growth and development for the company. The company is allowed to raise capital from the stock floated in the stock exchange as well as strengthen its business structure and goodwill of the business.

The following are the benefits offered to the company by listing shares on the stock exchange-
Access to capital for growth: Most of the company requires additional capital for undergoing a long-term project that fosters the company's growth and business expansion plans. Therefore, a listing of stocks on the stock exchange is a method of overcoming the difficulty of raising capital from private sources (Kennickell et al., 2017). The listing facilitates in increasing the shareholders for the company and enhancing the credibility.

Enhancing visibility: A company gains better visibility after it goes into public. It enhances the credibility among the other businesses and investing the public due to compliances with different regulatory rules. It ensures transparency while conducting business operations. Moreover, it helps in boosting the corporate profile of the business through a listing of securities. It allows attracting new investors and customers towards it.

Liquidity: Listing of shares stimulates the liquidity performance of the business. It gives the shareholders an assurance and opportunity to realize the actual market value of their investments into the business (Ahlström, 2019). It fosters among the shareholders to transact into shares of the company, sharing risks and benefit from any kind of increase in the corporate value of the business.
Increasing employee morale and motivation: The opportunity of listing shares on the stock exchange increases visibility and improves the public perception of the business. This helps in increasing the employee value and morale for the business. The decision of listing stocks leads to the hiring of new employees who possess knowledge about trading shares in the stock exchange and may facilitate stock-based payments like ESOP.

Transparency and efficiency: The listing of stocks facilities in bringing transparency and efficiency to business operations. The Board of Directors of the listed company is always accountable for their actions and decisions made for the company. The listed company must ensure that they follow the compliances by offering information and disclosure requirements to the shareholders and stock exchanges as mentioned in the listing agreement.

The collateral value of securities: Lenders, banks and financial institutions accept listed securities as collateral for extending credit (Chen and Bellavitis, 2020). A listed company secures eligibility to borrow funds from financial institutions and banks easily as it secures high credit ratings from credit rating agencies. Moreover, these companies are allowed to opt for raising excess funds from the public through the primary market with a high assurance of positive return.

Capacity to uphold control: In general, the listed companies are not dependent on the capital investment by the venture investors. In return for acquiring off shares of a privately-held company, the venture capitalist at a regular level uphold the possessing some kind of specific regulations to the company. The stock exchanges allow the companies to maintain greater control of inflow and outflow of funds and sovereignty due to the people who subscribe for the shares of the publicly-traded company holding listed rights for accessibility to the stakeholders.

2.3 Mention who are the stakeholders of a listed company like M&S
A stakeholder is a party who holds an interest in the company and can either affect or be affected by the business decisions. The main stakeholders of M&S are its shareholders, customers, colleagues, communities, suppliers and partners.

Shareholders: Engagement of shareholders with M&S is an ongoing process for the M&S that occurs through a wide range of mediums like face-to-face meetings at the investors meeting, call the conversation with the management team, holding panels’ for private shareholders, interaction at AGM and through a variety of medium of shareholder specific communication tools issued via email (Corporate.marksandspencer.com, 2021). The key priorities for the shareholders of M&S are delivering sustainability, profitable growth of the business for long-term growth.

Customers: M&S ensures that its customers stand at the heart of all possible decisions made by the company for strategic formulations. In the year 2020, the M&S has focused on its customers by offering high quality, trusted value and a vast range of food items, moving towards the first price, right price approach, which shall improve the availability in its Clothing & Home business segment (Corporate.marksandspencer.com, 2021). The key priorities of the M&S towards its customers are to offer great quality and value-for use products that have a large availability across all its operating countries in right sizes; an offline store and online offering which is easy to shop.

Colleagues: The colleagues of M&S are the heart and soul of the retail business and pillar to its success. Therefore, M&S should adequately incorporate its views into the decision-making process of the Board in bringing in business transformation. The key priorities for the colleagues of M&S involve providing an inclusive and diversified place to work that can amplify the voice of the colleagues in the decision-making place for the company. Feedback, suggestions and concerns from colleagues should be shared with the Board.

Communities: The key priorities for the community are to make fair contributions to society by M&S Company. The retail outlet wants to project itself as a socially responsible business having a strong presence in the community through a well-shaped store estate (Corporate.marksandspencer.com, 2021). M&S follows an approach towards its community that preserves the links that the business has established with the community that serves as an essential element for the discussion of the Board.

Suppliers: M&S wants to secure a long-term relationship with its suppliers as an important part of being in the field of innovation and offering trusted, good quality valuable products to the customers. In the year 2019, the company has thoroughly focused on improving its supply chain system for engaging the efficiency of prompt and accurate payment procedures for goods and services (Corporate.marksandspencer.com, 2021). It drives into mutual benefit for both the suppliers and the company in achieving sales volume growth.

Partners: The corporate partners of M&S respond to the business concerns faced by M&S and acknowledge the same for maintaining jurisdictional and technical expertise knowledge. The business partners of M&S are digital, franchise and JV partners who form an important concern for Board discussions, from the participation of the senior members of the Ocado team at the Board meetings (Corporate.marksandspencer.com, 2021).

2.4 Difference between profit and cash
Profit and cash flow are two essential terms in business finance. Cash flow and profits are not the same things, and it is essential to understand the difference between the two in making important decisions about business performance and financial health. The main difference between cash and profit is that profit refers to the amount of money that is available with the business after meeting all the expenses recorded in the income statement, whereas cash flow involves the net flow of cash into and outside the business. It is a debatable topic to mention which one is more important- cash flow or profit. From the viewpoint of the investors and owners, they consider the health of the overall business. Therefore, it is important to understand both concepts.

The main difference between profit and cash is-

Conclusion
Based on the overall analysis, it can be concluded that knowledge about business finance is essential. It helps the owners of the company in making the optimal allocation of the resources to be funded for purchasing non-current assets and current assets without much hesitation. The available sources of finance allow the management o solely focus on the commencement of the business operations. Adequate access to finance fosters in dealing with contingencies in a better way without any scope for disruption of business operations on a daily basis.

Reference List
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