Task 1: Cash Budget

Cash Budget of Kashi Textiles Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
For the 3 months ending 31 March, 2022
Particulars	Jan	Feb Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	March
Receipts	£	£	£
Capital	25000
Sales	4500	6890	5670
TOTAL RECEIPTS	29500	6890	5670
Payments
Computer	1980
Drawings	700	700	700
Purchases (Show working notes)
10% same month	328	512	410
50% next month	1640	2560	2050
40% in 2 months time	1312	2048	1640
Accountants fees	250	250	250
Delivery charges	100	100	100
Telephone costs			425
Other expenses	250	250	250
Hire charges	250	250	250
TOTAL PAYMENTS	6810	6670	6075
Net Receipts / (Payments)	22690	220	-405
Balance brought forward	22690	220	-405
Balance carried forward	22690	220	-405

A company can be defined as the natural legal entity that is created by an association of group and by the group of people for working together in order to accomplish a collective objective. A company be either commercial or an industrial entity. A company is referred as a registered entity that works legally as an artificial person, with an independent legal, entity with perpetual succession (Warren, Jonick and Schneider 2020). A company has common seal for its signature purpose with a common capital that consists of exchangeable shares and carries a limited liability.  

The important features of a company is given below;

1. Artificial Person:As per the law a company is regarded as a lawful artificial person since a company has its own name and bank accounts. A company is allowed to own property under its name, it can file a lawsuit against other professionals or companies or it can form partnership with other companies. A company does all the activities that an individual is legally permitted to do. Hence, a company functions as an artificial
2. Separate legal entity:A company is regarded as a separate legal entity and it is fully works independently from its people that control the company operations. The company will not be considered accountable for if their members do not pay debt. This is also applicable on company as its members are not required to pay the debt of company, if it is not able to pay its creditors.
3. Limited Liability:The liability of every shareholders is restricted till the price of shares only. In other words, it is limited in companies by shares. While for limited companies by guarantee, the shares contributed by shareholders are treated as an asset for company (Schroeder, Clark and Cathey 2019). If the company turns bankrupt, the shareholders are required to pay small amount so that the loss of company can be covered.
4. Perpetual existence:Not like partnership, proprietorship or any other form of business, a company is not reliant on its board of directors, shareholders, owners or its employees. A large number of people might come and go in company, but it stays. Hence, the presence of a company is very much stable.

The advantages and disadvantages of forming a public company is given below;

Advantages:

1: Raising capital through issuing of shares in public: The public company has advantage in raising capital through shares, especially when the company is registered on a recognized stock exchange. As public companies shares can be sold in public and anyone can buy to invest their money, the capital raising can be done easily.

2: Widening the base of shareholders to spread risk: By offering shares in public allows the company with an opportunity of spreading the company ownership risk amid big number of shareholders (Weygandt, Kimmel and Kieso 2018). This might enable some early investors in company to sell some of their shares at profit and also retaining substantial amount of stake in company.

2: Ownership and issues of control: In public companies, it is difficult to impose control on the shareholders of company and directors that are eventually accountable to. It is possible that original owners or directors can simply lose control of company direction, may face disputes or may spend huge amount of time in managing expectations of shareholders.

2: More vulnerable to takeovers: A public company can turn vulnerable due to hostile takeover given that most of the shareholders are agreeing to bid for takeovers. As shares are transferrable freely, a possible buyer can create its shareholding in advance for launching the bid attempt.

Cash is considered as a lifeblood for any business and a business is required to produce adequate amount of cash from its operating activities in order to fulfil its expenses and have sufficient cash leftover for repaying its investors and growing the business. A company may fudge its earnings, however its cash flow gives an impression regarding its health (Kimmel, Weygandt and Kieso 2020). A company is required to produce sufficient amount of cash from its business activities to survive. In other words, cash is important for business to repay investors, expenses and expand the business operations.

Task 2: Answer to Question A

Having cash in hand and managing it is considered vital to a successful business. For instance, even though the business produces profits, it do not implies that a business will survive, grow and prosper. Cash is important in meeting day-to-day operations of business. Furthermore, a profitable business may face trouble if the cash gets dried up. By generating sufficient amount of cash a business is able to avoid taking debt. In this way, a business is able to implement more control over its activities. Without producing sufficient amount of cash to fulfil its daily business needs, a business will have to face difficulty to carryout routine activities that involves purchasing of raw materials and paying the employees. A business must have sufficient amount of cash to pay dividends to the shareholders and keep them happy.

A profit that a business makes should not be considered as a reliable indicator of its cash balance. Even though a company is producing profit through its sales revenue than it pays in expenses, it is required to manage the cash flow (Edmonds et al., 2021). The profit that a business produce is not considered same as cash. Cash is something that is used for paying bills, staff loans and to suppliers. This means that even though a business is profitable it may face difficulties when cash gets dried up.

Profit represents the actual amount of money left once the total cost gets deducted from revenue. Certainly, higher the number of profit, more better it is for business. Hence, by posting a positive cash flow it implies that more money is flowing into the business instead of going out. It is simply as important as profit when ascertaining the performance of business.

The main reason for the existence of corporate governance report is to assist in building an environment of trust, transparency and responsibility that is important in fostering long-term investment, business integrity and financial stability. This eventually helps in supporting strong growth and highly inclusive society. Companies indulge in corporate governance so that it can align the long-term shareholder goals, employees and management. It involves identifying a civic duty to provide benefits to locals where companies operate.

Corporate governance is existent because it helps in increasing transparency. Companies have understood that having auditors that vouch for financial results cannot be considered sufficient (Wild 2019). Consequently, companies have adopted measures to increase transparency from stepping in and authorising an expensive regulatory framework. Corporate governance is enacted to decrease the conflict of interest among the shareholders. Corporate governance is aimed at relieving the managements from conflict of interest with shareholders.

Task 2: Answer to Question B

The principles of corporate governance is given below;

Transparency: The more an entity is informed, the more certain they can become. Transparency in the world of business pays dividends. Entities that have transparency regarding their ongoing operations and with respect to financial reports they earn the trust of people, something that cannot be measured. Transparency is regarded as vital component of regarding all levels of operations in business entity, particularly at high management level where big decisions are made and main plans are formed. By keeping all the investors and other stakeholders informed this principle helps in building relationship of trust and solidarity which lead to rewards of high values and ease access to funding.

Accountability: In actual sense, accountability implies willingness to take responsibility for someone’s actions. Accountability needs to be looked from the positive standpoint because it helps in identifying the accomplishments as well. Accountability helps in providing the shareholders with confidence in business which results in unfavourable circumstances in company, the person that is accountable are simply dealt in appropriate way. Accountability helps in establishing a place within a system where every person is considered responsible for their private respective work and related duties. Accountability helps in assuring that the management is responsible towards board and also helps in making sure that board is responsible towards shareholders.

Independence: This principle of corporate governance involves the ability of making decisions without any kind of constraint or influence. Independence is viewed as an important tool for smooth functioning of any business. Independence involves the ability to stand strong when there is any inappropriate influences. Independence involves the ability of making pure, strong judgement on any given issue. The principle of independence refers to the ability of adhering to professionalism and doing right things by the company. Independence allows the company to act with integrity and take decisions by taking account shareholders interest. Because of this, companies appoint independent directors to assure that there is no influence or force of hand and to make sure that directors does not has any individual interest with the company thereby effecting his ability of making decisions without restrictions.

Gearing or financial gearing can be defined as the comparative amounts of debt and equity which a company uses for supporting its operations. Gearing is used for assessing the failure risk of business. When the proportion of debt to equity is high, a business considered as highly geared. Gearing is helpful in showing dependence of a company on debt in its capital structure. The capital structure of a company is divided in two sources, namely debt and equity. Debt is regarded as a liability while equity represents ownership of company assets.

Task 2: Answer to Question C

A company is needed to pay interest on regular basis and repay it when it is due. Hence, gearing is useful in showing the degree up to which the operations of company is dependent on debt rather than on equity. To lower the gearing ratio, companies may choose to pay off their debts quickly.   

Advantages: The advantages of gearing are as follows

Avoids Dilution: Gearing helps in avoiding dilution as the existing owners may not have the desire of diluting their ownership by simply issuing shares to a new investors. Hence, debt is only regarded as an alternative for raising of funds. This is very commonly used in business that are held closely.

Raising cash: A company may requires huge amount of cash for acquisition purpose and it is not able to raise adequate amount of cash from its investors to meet its requirement. In such a case gearing is used by a business (Thomas and Ward 2019). While alternatively, a company might be suffering from shortfall of cash from its operations and may require added amount of cash to bolster its operations. In such circumstances, lenders would perceive high risk of payment and may impose high interest charge.

Increased return on equity: A company may look to increase its return on equity measurement and it can very easily do this by using new debt to buy back its shares from investors.

The major disadvantage of gearing is that the overall cost relating to debt can increase because of changes in the interest rate in market. If a company is not able to get adequate amount of return on the use of hedge funds, it may not be able to pay interest or pay back the capital amount. In either situation, excess amount of gearing acts as a significant risk of insolvency. This can be a problem at the time of industry downturn and this happens when cash flow declines inevitably. Hence, the usage of financial gearing should be prudent to permit some added funds flow in, while not jeopardising the business.

Banks may show interest in gearing because it helps in determining whether borrower has the ability of repaying the loan. Banks scrutinizes the gearing level of company because it is useful in providing a reflection of risk level involved within a company. For instance, a company with high gearing ratio can face the high risk of failing payment. Banks would prefer staying away from such high risk payment defaulter borrowers. Hence, a steady cash flow permits the company to promptly pay off its liabilities and reduce the level of default risk.  

References

Edmonds, T.P., Edmonds, C.T., Edmonds, M.A., McNair, F.M. and Olds, P.R., 2021. Fundamental financial accounting concepts. McGraw-Hill.

Kimmel, P.D., Weygandt, J.J. and Kieso, D.E., 2020. Financial accounting: tools for business decision-making. John Wiley & Sons.

Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and analysis: text and cases. John Wiley & Sons.

Thomas, A. and Ward, A.M., 2019. EBOOK: Introduction to Financial Accounting, 9e. McGraw Hill.

Warren, C.S., Jonick, C. and Schneider, J., 2020. Financial accounting. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2018. Financial Accounting with International Financial Reporting Standards. John Wiley & Sons.

Wild, J., 2019. Financial Accounting: Information for Decisions, 9e.