PRESTON UNIVERSITY

PESHAWAR
Program: BBA
Subject: Corporate FinanceSemester:
Spring 2020
Mid-TERM ASSIGNMENT
Instructions:

1. This is an assignment in-lieu of Mid-term Assessment and is not an examination.

2. All questions are compulsory.

3. You must submit the assignment by email directly to the email address of the teacher.

4. You are required to depict your understanding and knowledge of the subject by individually
attempting all of the given questions.

5. The workload for this assignment is about 2-3 hours. However, considering the connectivity difficulties
and limited/interrupted access to Internet, the maximum time

allowed is 24 hours, starting on May 2nd, 2020 at 4.00 pm).

6. You are advised to submit your assignment as soon as possible without waiting till the last hour.

7. No assignment will be accepted for any reason whatsoever if submitted after the deadline.

Attempt all of the following questions:

1. Define risk & return, characteristics line & its beta also define why beta a measure of systematic risk
and what is its meaning?

Answer:
Risk:
Risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about
the effects/implications of an activity with respect to something that humans value, often focusing on
negative, undesirable consequences. Many different definitions have been proposed.

Return

Definition
A return, also known as a financial return, its simplest terms, is the money made or lost on an
investment over some period of time. A return can be expressed nominally as the change in dollar value
of an investment over time.

A characteristic line is a straight line formed using regression analysis that summarizes a particular
security's systematic risk and rate of return. The characteristic line is also known as the security
characteristic line.

Characterstic line gives you regressing historical returns on the stock versus historical returns on the
market & Beta the slope of its characterstic line. Beta measures the volatility of returns on a security
relative to returns on the market which is the portfolio of all risky assets.

Beta and Beta is a measure of a stock's volatility in relation to the market. It measures the exposure of
risk a particular stock or sector has in relation to the market. A beta of 1 indicates that the portfolio will
move in the same direction, have the same volatility and is sensitive to systematic risk.

.2. How many types of financial statements and explain each types in detail with examples?

Financial Statements represent a formal record of the financial activities of an entity. These are written
reports that quantify the financial strength, performance and liquidity of a company. Financial
Statements reflect the financial effects of business transactions and events on the entity.

Four Types of Financial Statements

The four main types of financial statements are:

1. Statement of Financial Position

Statement of Financial Position, also known as the Balance Sheet, presents the financial position of an
entity at a given date. It is comprised of the following three elements:

Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery, etc)

Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)

Equity: What the business owes to its owners. This represents the amount of capital that remains in the
business after its assets are used to pay off its outstanding liabilities. Equity therefore represents the
difference between the assets and liabilities.

2. Income Statement

Income Statement, also known as the Profit and Loss Statement, reports the company's financial
performance in terms of net profit or loss over a specified period. Income Statement is composed of the
following two elements:

Income: What the business has earned over a period (e.g. sales revenue, dividend income, etc)

Expense: The cost incurred by the business over a period (e.g. salaries and wages, depreciation, rental
charges, etc)

Net profit or loss is arrived by deducting expenses from income.

View detailed explanation and Example of Income Statement

3. Cash Flow Statement

Cash Flow Statement, presents the movement in cash and bank balances over a period. The movement
in cash flows is classified into the following segments:

Operating Activities: Represents the cash flow from primary activities of a business.
Investing Activities: Represents cash flow from the purchase and sale of assets other than inventories
(e.g. purchase of a factory plant)

Financing Activities: Represents cash flow generated or spent on raising and repaying share capital and
debt together with the payments of interest and dividends.

View detailed explanation and Example of Cash Flow Statement

4. Statement of Changes in Equity

Statement of Changes in Equity, also known as the Statement of Retained Earnings, details the
movement in owners' equity over a period. The movement in owners' equity is derived from the
following components:

Net Profit or loss during the period as reported in the income statement

Share capital issued or repaid during the period

Dividend payments

Gains or losses recognized directly in equity (e.g. revaluation surpluses)

Effects of a change in accounting policy or correction of accounting error

View detailed explanation and Example of Statement of Changes in Equity

Link between Financial Statements

The following diagram summarizes the link between financial statements.

Relationship between financial statements

3. What is the purpose of the statement of cash flows? Explain in detail with examples. Also discuss the
benefits that can be derived by the firm from cash budgeting?

Answer;

What is the Purpose of the Cash Flow Statement?

Preparation of a cash flow statement serves various purposes like stating the cash movements with
respect to cash inflows and outflows, the performance of strategic decisions taken by the management,
and provides relevant information about the financial well-being of an organization so that its liquidity
status can be derived and projected to the readers of its financial statements.

Cash flow statement is a financial statement that depicts the details of such transactions during an
accounting period. It gives a clear picture of the amount of cash flowing into the firm and the amount of
cash flowing out of the firm. Additionally, along with the information of cash inflow and outflow, it also
provides the sources of these activities.

Such disclosure helps in understanding if the core business of the firm is self-sustainable and has long
term growth prospects. Because of the clarity it provides, a cash flow statement is considered as an
important document demanded by both regulators and investors.

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Purpose of Cash Flow Statements

Home » Accounting » Cash Flow Statement » Purpose of Cash Flow Statements

Purpose of Cash Flow Statements

What is the Purpose of the Cash Flow Statement?

Preparation of a cash flow statement serves various purposes like stating the cash movements with
respect to cash inflows and outflows, the performance of strategic decisions taken by the management,
and provides relevant information about the financial well-being of an organization so that its liquidity
status can be derived and projected to the readers of its financial statements.

Cash flow statement is a financial statement that depicts the details of such transactions during an
accounting period. It gives a clear picture of the amount of cash flowing into the firm and the amount of
cash flowing out of the firm. Additionally, along with the information of cash inflow and outflow, it also
provides the sources of these activities.

Such disclosure helps in understanding if the core business of the firm is self-sustainable and has long
term growth prospects. Because of the clarity it provides, a cash flow statement is considered as an
important document demanded by both regulators and investors.

Top 5 Purpose/Objective of the Cash Flow Statements

#1 – The Explanation for the Changes in Cash

The objective of the Statement of cash flow is to provide a detailed description of how and in what
amounts the cash is flowing in and flowing out of the firm. More than that it explains how the cash was
generated and how it was used further during a particular accounting period.

Consider the following cash flow statement where the cash generated, cash distributed and on what
activities it was done is clearly depicted.

Operating activities Cash received from clients (5000) Cash payment to vendors employee salary Cash
flow from operating activities (4000) (4000) (13000) Investing activities Cash received from sale of land
20000 Cash received from sale of old machinery net cash flow 20000 40000 Financing activities interest
payment Net cash flow cash and cash equivalents at the beginning of year cash and cash equivalents at
the end of year (5000) 22000 5000 27000 Looking at the final numbers one might say that the firm is
doing well as it has a cash surplus of 27000. Such an interpretation should be enough for the stock prize
to shoot upwards. However, analyzing further a prudent investor should be able to identify that the core
activities of the firm have posted negative numbers. It's only the non-core activities like sale of land and
old machinery because of which the final number looks better. Such activities are only one time
payments and should be taken.

Ex 2.

Cash Flow from Operating Activities -13000 Investing activities Cash received from sale of land 20000
Cash received from sale of old machinery Net Cash Flow 20000 40000 Financing activities Interest
Payment -5000 Here the management is trying to liquidate its assets when the core operating activities
of the business are yielding negative numbers, should raise alarm bells. Investors should take a clue that
such negative numbers are not at the expense of a growth strategy. In fact, there might be a scenario
that the firm is finding it difficult to find investors or raise money from the market. Management in such
a scenario is trying its best to remain solvent. This requires further investigation and investors should
follow.

Benefit derived by firm from cash budgeting:

cash budget is an estimation of a person's or a company's cash inputs and outputs over a specific period
of time

Monitoring your cash flow just got easier: keep track of your accounts from anywhere at any time. Try
Debitoor free.

Cash budgets are generally used to estimate whether a company has a sufficient amount of cash to
uphold regular operations. It can also be used to determine whether too much of a company’s cash is
being spent in unproductive ways.

By creating a cash budget - wherein a company develops a summary of the anticipated revenues,
operating expenditures, sale and purchase of assets, and admission or settlement of debt – it is possible
to determine when more cash resources are needed, as well as when there will be an excess of cash.

What is considered cash?

Cash is the amount of assets that a company has available to spend at any given time. These include
bank balances, bank account deposits, and more. Liquidity is another word for cash.

Why should I have a cash budget?

A cash budget is very important, especially for smaller companies. It allows a company to establish the
amount of credit that it can extend to customers without having problems with liquidity.

A cash budget helps avoid a shortage of cash during periods in which a company encounters a high
number of expenses.

If your company cannot pay expenses because due to a cash shortage, this issue must be resolved
immediately by bringing in more revenue, deferring or eliminating some of your costs, or by getting
approval for a larger loan from your bank.

These solutions are costly, time-consuming, and not guaranteed, so it's best to plan for higher expenses
ahead of time, if possible.