"Managing Financial Resources-11Analysis of Unit Cost / Price The X. ltd produces high quality executive chairs in the market. Every year the companyproduces 2000 chairs and per unit cost of the chair is £220. The cost price of the chair iscalculated through two different methods which are the markup method and other is the capitalemployed methods. According to Cochrane (2005), the mark up can be defined as the productwhich is purchased at one price and it is sold at even higher prices, through the mark up cost thecompany earns higher profit. The company mainly sells for what cost it charges in the productand the revenues are higher than the expenses. In the view point of Chandra (2008), the capitalemployed is calculated through deducting the current liabilities from the current asset; whereas,in other words it is also known as an equity loan which is linked with the interest. The capitalemployed is represented by the total sum of capital which is used for the production to attainprofit. In both the cases the unit cost of the remained the same. The calculation of the firstmethod through the markup showed the cost price of £286. In method one, 30% markup wascharged on the cost price; whereas, in option two the return was calculated on 25% of the capitalemployed which was £1,000,000 and the desired return was £250,000. The total cost in thecapital employed method was £440,000 and the sales desired were £690,000, the sales price ofthe chair is estimated to be £345.Capital BudgetingAccording to Chandra (2008), the capital budgeting tools help the managers analyze thefeasibility of a project. Different capital budgeting tools are used for different types of projects.In this case, feasibility of two projects needs to be checked; both the projects are conventionalprojects as they require cash outflow just once in their entire life (Brigham and Joel, 2010). Theproject A requires initial cash outlay of £100,000 and will produce cash flows for next threeyears. The present value of cash inflows is calculated to be £86,619; this clearly indicates that thepresent value of inflows is less than the initial cash outlay which means that the project is notfeasible for investment. On the other hand, Project B requires initial investment of £60,000 andthe present value of cash inflows by Project B are calculated to be £57,250; the present value ofcash inflows of project B is also lower than the initial cash outlay so this project is also Managing Financial Resources-12unfeasible for investment. It must be noted that NPV of project B is better than that of Project Abecause it has smaller negative value.The accounting rate of return for Project A is 2%, whereas the accounting rate of return ofProject B is 6%. Though the accounting rate of return of Project B is better but both the projectsare not acceptable because the cost of capital is significantly higher than the accounting rate ofreturn of both the projects.The payback period shows the time span required to cover the investment on the project (Khanand Jain, 2008). The payback period for Project A and Project B is 2.7 years and 2.33 yearsrespectively. The payback period for both projects is greater than 2 years; which shows that bothprojects have higher payback periods and shows not be accepted. Task – 4Main Financial StatementsThere are four types of financial statements prepared by the companies; those are incomestatement, balance sheet, statement of cash flows and statement of owner’s equity (Chandra,2008). The income statement is prepared at the end of the year; top line of the income statementis sales and bottom line is net profit. The income statement covers all types of cash and non-cashexpenses incurred during the year and it shows the performance of the company for a specificperiod (Brealey et al. 2007). The balance sheet is also known as statement of financial positionbecause it shows the financial position of the company at a specified date. The balance sheet canbe prepared at any date during the year; it is not necessary to prepare the balance sheet at the endof the year / period (Brigham and Joel, 2010).The statement of cash flows is considered most important type of financial statement in most ofthe cases. The statement of cash flows is prepared at the end of the period and it shows thefinancial needs or surplus of the company. Negative cash at hand shows that the company needsto raise financing and a big positive figure for cash at hand shows that the company can investsome amount in fixed assets or investment instruments (Brigham and Joel, 2010). According toKhan and Jain (2008), the statement of owner’s equity shows the company’s earnings for the Managing Financial Resources-13owners of the company; it is also prepared at the end of the accounting period. All these financialstatements are considered important in accounting and these four statements are prepared by allthe listed companies. Different Financial Statement FormatsAccording to Financial Accounting Standards Board (2006), there are different formats toprepare the financial statements of any company. There are two different formats to prepare anincome statement; those are known as the single step income statement format and multi-stepincome statement model. In the single step income statement model, all the revenues andexpenses are summed and then total expenses are deducted from total revenues to reach at the netincome. There is a simple formula for single step income statement; which is total revenuesminus total expenses (Brigham and Joel, 2010). In accordance with Rajasekaran and Lalitha(2011), the multi-step income statement calculates the net profit after deducting expenses andadding revenues at different stages.There are two formats to prepare a cash flow statement; which are direct cash flow statement andindirect cash flow statement. The direct cash flow statement starts with sales and the bottom lineprovides cash at the year end. On the other hand, the indirect cash flow statement starts with netincome of the company and the bottom line of this format also shows the cash at year end(Rajasekaran and Lalitha, 2011). According to Khan and Jain (2011), there is only one equationto prepare the balance sheet for the company; the simple equation for the balance sheet is:Total Assets = Total Liabilities + Total EquityIn this case, the multi step method has been used for preparation of income statement of A plcand B plc. The cash flow of the company could not be prepared because the data was insufficientand the balance sheet has been prepared on the standard format. The financial statements areattached in appendix. Managing Financial Resources-14Ratio AnalysisThe ratio analysis of A plc and B plc has been performed to compare the performance andfinancial position of both companies in year 2014 (Bauman and Shaw, 2005).Liquidity RatiosThe liquidity ratios show the ability of the company to meet its short-term debt obligations(Brigham and Joel, 2010). The current ratio of these two companies shows that B plc has higherliquidity than A plc as indicated by its current ratio of 2.79. It must be noted that bothcompanies’ current ratio is greater than 2, which shows the excess liquidity of the company. Thequick ratio of B plc (1.45 times) is also higher than that of A plc (0.75 times) but both thecompanies have quick ratio greater than 0.7 which shows sufficient liquidity for both companies.Investment RatiosAccording to Kinney and Raiborn (2012), the investment ratios show a company’s performancefrom investors’ point. The two investment ratios calculated for this analysis are Earnings perShare (EPS) and Price to Earnings ratio. The EPS of B plc is £0.42 which is significantly greaterthan the EPS of A Plc (£0.31). The share price of A plc and B plc at the end of the year is £7 and£8 respectively and the Price to Earnings ratio for these two companies is 22.4 times and 19.1times respectively. The lower price to earnings ratio of B plc shows that it provides higher returnto its shareholders for every dollar invested by them in the company.Gearing RatiosThe gearing ratios measure the stability of the firm in terms of dependency on debt (Brigham andJoel, 2010). The debt to equity ratios for A plc and B plc are 89.06% and 62.1% respectively.This shows that A plc has higher dependency on debt than B plc and hence A plc iscomparatively riskier. The times interest earned ratio shows that the company A has earned 7.8times their interest expense. On the other hand, B plc has earned 6.07 times their interestexpense; this shows that A plc has performed better in terms of times interest earned. Overall, ratio analysis indicates comparatively better position of B plc in 2014.Managing Financial Resources-15ConclusionOn the basis of this analysis, it can be concluded that different sources of financing havedifferent financial and non-financial implications. It has been found that the equity financing isexpensive than the debt financing but it has lower risk. The sources of finance provideinformation to key decision makers to help them in decision making. It can also be concludedthat different pricing methods lead to different prices of the same product. On the basis of capitalbudgeting analysis performed for Project 1 and project 2, it has been found that both the projectsare not profitable for the company. The ratio analysis concluded that B plc has betterperformance and financial position in 2014."