Key Concept Exercise: Financial analysis

A perplexing issue, particularly for many human resource management and marketing professionals, is the absence of a valuation in the traditional financial statements relating to human capital and other internally generated intangible assets, such as brands.

Often these value drivers of an organisation form a critical key success factor. Goodwill does appear in many financial statements and this includes intangible assets acquired by another organisation, which are often subject to large impairments losses.

However, this raises questions about the sustainability and volatility relating to goodwill valuations. It is against this background that accountants have decided to be cautious in respect of recognising intangible assets in the financial statements.

To prepare for this Key Concept Exercise:

· Read the Required Learning Resources for Week 3.

· Consider the controversy of whether human capital should be included in the financial statements.

· Consider how human capital could be defined and quantified in financial statements.

In formulating your Key Concept Exercise, consider the following questions:

· How do you define human capital?

· What is the importance of human capital?

· What are the reasons to measure or not measure human capital?

To complete this Key Concept Exercise:

By Day 4 (Sunday)

In an approximately 500-word response, address the following issues/questions:

With the rise of the ‘knowledge economy’, the traditional valuation of an enterprise as consisting solely of measurable assets, such as buildings, equipment and inventory, is increasingly being questioned. Human capital, although widely recognised as an important component of an enterprise’s total value, does not appear on a statement of financial position (balance sheet).

· Discuss whether or not you believe human capital should be included in the financial statements.

· Identify how you are defining human capital.

· What are some of the difficulties that may be encountered in attempting to quantify and record this (these) asset(s)?

· If recorded, would such values remain constant or be subject to change?

By Day 4 (Sunday) submit your Key Concept Exercise to Turnitin and to the Collaboration Forum.

Be sure to read over your Key Concept Exercise before submitting it to your Instructor. Make sure the spelling and grammar are correct and the language, citing and referencing you use when providing your opinion are appropriate for academic writing.

To submit your Key Concept Exercise to Turnitin, click on the “View/Complete” link for  Week 3 Key Concept Exercise– Turnitin.

PART 2

Individual Case Study Assignment 1: Cash flow forecasts and projected financial statements

For the following Individual Case Study Assignment, you assume the role of someone who has been asked to provide a business report for a group of friends who have invested in an organisation, Fashion Clothing. They had heard you are taking a finance module and have asked for your advice.

The scenario

A group of friends have formed a new business called Fashion Clothing, an online and mail-order clothing business, in which they have invested £200,000 of their own capital.

They intend to manufacture and sell quality clothes. They have set up the business and are selling direct to the final consumer, using a combination of aggressive marketing across a range of different media and also with the use of an automated website that accepts online orders.

To support this, they also have a department of telephone sales and support staff ready to help customers. The sales staff work in teams and receive a basic salary plus commission for each successful sale. By the start of July 20X5, they have spent £150,000 on tangible non-current assets, and they currently have the remaining £50,000 in their business bank account.

They provide you with the following forecasted figures for their first 6 months of trading:

  £
Sales for the next 6 months 1,350,000
Cost of the materials used up in sales 390,000
Labour costs for the 6 months 480,000
Other expenses for the 6 months, including marketing costs and £15,000 depreciation of tangible non-current assets 345,000
Materials purchased during the 6 months 520,000

Their projected cash receipts and payments are estimated to be as follows:

Month (20X5) Sales Receipts Payments for Materials Labour and Other Expenses
  £ £ £
July 150,000 120,000 These payments are divided equally over each of the 6 months.
August 120,000 100,000
September 150,000 60,000
October 210,000 60,000
November 260,000 60,000
December 285,000 60,000
Totals 1,175,000 460,000  

In addition to the above, they expect to have to pay a tax bill of £20,000 in December 20X5 and also plan to buy (and pay for) £30,000 additional tangible non-current assets in that same month. All transactions will go through their business bank account.

To complete this Individual Case Study Assignment:

By Wednesday (Day 7)

Provide a Business Report (1,000 words for the main body of the report) for the friends who have invested in Fashion Clothing, commenting on the business’ prospects and including the following five financial statements:

1. An opening statement of financial position at the start of July 20X5.

2. A monthly cash flow forecast, showing the bank balance at the end of each of the 6 months and indicating what level of overdraft facilities the friends need to negotiate with their bank manager. Explain what additional expense they should take into account as a result of needing this financial assistance (overdraft).

3. A projected income statement for the first 6 months of trading.

4. A projected statement of financial position for Fashion Clothing at the end of its first 6 months of operations.

5. A projected statement of cash flows for the first 6 months of trading and using the indirect method.

Since none of the investors have a background in accounting and finance, you should also explain what each of these statements means as a part of your report.

Keep the following in mind:

1. Using a spreadsheet may help you to produce your cash flow forecast. Remember here that £150,000 of the initial £200,000 has already been spent. Hence, your opening bank balance should be £50,000. Your closing bank balance should be included in your statement of financial position as at 31.12.20X5.

2. Think carefully about the £15,000 depreciation charge when working out your monthly cash outflows for labour and other expenses.

3. Also think carefully about the figures for closing stocks (inventories), creditors (payables) and debtors (receivables).

4. Please remember that your qualitative analysis and explanation of your five statements are just as important as the calculations themselves. These, together with your presentation of a professional report, will contribute towards your grade for this assignment.

5. Please be sure to re-visit the Key Concept Overviews for Weeks 1 and 2, as well as Week 3. These should serve as a reminder of the accruals concept, plus the difference between a cash flow forecast and a statement of cash flows. They also include detailed numerical examples that should assist with your calculations for your financial statements.

Ideally a business report should be produced with a suitable structure and quality of discussion around the following key areas:

Executive summary

Table of contents

List of figures

1. Introduction

2. Main financial findings.

2.1 Summary of the first 6 months business operations

2.2 Financial accounting statements

3. Analysis

3.1 Initial analysis in context of the three financial statements.

3.2 Investigations to increase efficiency

4. Conclusion

5. References

ANNEX I: Statement of financial position Fashion Clothing – 01.07.20X5 and 31.12.20X5

ANNEX II: Income statement Fashion Clothing – 6 months to 31.12.20X5

ANNEX III: Statement of cash flows Fashion Clothing – 6 months to 31.12.20X5

ANNEX IV: Projected cash flow forecast for the first 6 months of trading

By Day 7 (Wednesday)

· Submit your Individual Case Study Assignment to the Turnitin link provided.

Be sure to read over your Individual Case Study Assignment before submitting it to your Instructor. Make sure the spelling and grammar are correct and the language, citing and referencing you use when providing your opinion are appropriate for academic writing.

 

 
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