Accounting: Characteristics of Externally Reported Information, Types of Cost Incurred in Manufacturing, Principles of Budgeting, Financial Accounting Advantages and Disadvantages, and More

This article covers various topics related to accounting such as characteristics of externally reported information, types of cost incurred in manufacturing, principles of budgeting, advantages and disadvantages of financial accounting, and more. It also includes tables and computations for better understanding.

ACCOUNTING

TABLE OF CONTENT
Answer 2 (A).........................................................................................3
Answer 2 (B)..........................................................................................3
Answer 2 (C)..........................................................................................4
Answer 3...............................................................................................4
Answer 4...............................................................................................6
Answer 5...............................................................................................7
Answer 6...............................................................................................7
Answer 7...............................................................................................8
Answer 8...............................................................................................9
Answer 9.............................................................................................10
References:.........................................................................................11

Answer 2 (A)
The characteristics of externally reported information are:
(a) The information is means to an end;
(b) The range of information is greater than financial statement;
(c) The nature of such information is historical;
(d) The measures involved are inaccurate and inexact;
(e) The information is based on assumption of general purpose; (Financial and Management
Accounting, 2018)
(f) The usefulness of such information is enhanced when explained.
Answer 2 (B)
The types of cost incurred in manufacturing of a product includes the following:
On the basis of nature
(a) Variable Cost
(i) Raw material;
(ii) Direct labour;
(iii) Variable Manufacturing;
(b) Fixed Cost
(i) Fixed labour;
(ii) Fixed Manufacturing;
In short there are three cost associated with manufacturing:-
(a) Direct Material;
(b) Direct Labour; (AccountingCoach, 2018)
(c) Factory Overhead or Manufacturing overhead.
The example of real life business is the manufacturing of shoe is given here-in-under:

Answer 2 (C)
The six principles of budgeting has budgeting includes to be conservative and not optimistic;
(Budgeting Principles).There should be team work and consultation; (Budgeting Principles),Time
allowed should be plenty; (Budgeting Principles),Documentation must be perfect; (Budgeting
Principles),Provide Training; (Budgeting Principles);Get Sign off. (Budgeting Principles)
The methodology that inspires me the most is be conservative and not optimistic as one should no
count the chicken before its hatched. The conservative approach help business to meet any
unforeseen circumstances and help business to prepare appropriately for the future.
Answer 3
Project X Project Y
Year Cash Flow ($) Cumulative Pay back Cash Flow ($) Cumulative
Pay
back
0 -100000 -100000 -100000 -100000
1 50000 -50000 10000 -90000
2 40000 -10000 20000 -70000
3 30000 20000 2.33 30000 -40000
4 20000 40000 40000 0 4
5 10000 50000 50000 50000
On perusal of the above, it can be understood that payback for project X is 2.33 years while for
Project Y is 4 years.
Sl No Particulars Project X Project Y
1 Initial Investment 100000 100000

2 Average investment 50000 50000
3 Average Cash flow 30000 30000
4 Accounting Rate of Return 60% 60%
On perusal of the above, it can be understood that Accounting Rate of Return for both project is 60%
and hence on the basis of this both shall be chosen.
Project X Project Y
Year
Cash Flow
($)
Discounting
Factor
Present
value
Cash Flow
($)
Discounting
Factor
Present
value
0 -100000 1.0000 -100000 -100000 1 -100000
1 50000 0.8929 44643 10000 0.8929 8928.57
2 40000 0.7972 31888 20000 0.7972 15943.88
3 30000 0.7118 21353 30000 0.7118 21353.41
4 20000 0.6355 12710 40000 0.6355 25420.72
5 10000 0.5674 5674 50000 0.5674 28371.34
6 NPV 16269 17.92
On perusal of the above, it can be understood that Net Present Value of Project X is greater than
Project Y and accordingly Project X shall be chosen.
Project X Project Y
Yea
r
Cash Flow
($)
Discounting
Factor
Present
value
Cash Flow
($)
Discounting
Factor
Present
value
0 -100000 1.0000 -100000 -100000 1 -100000
1 50000 0.8929 44643 10000 0.8929 8928.57
2 40000 0.7972 31888 20000 0.7972 15943.88
3 30000 0.7118 21353 30000 0.7118 21353.41
4 20000 0.6355 12710 40000 0.6355 25420.72
5 10000 0.5674 5674 50000 0.5674 28371.34
6 NPV 16269 17.92
7
Total
Inflow 116269 100017.92
8 PI 1.1627 1.0002
On perusal of the above, it can be understood that Profitability Index of Project X is greater than
Project Y and accordingly Project X shall be chosen.

Answer 4
(i) Risk Return Trade off: The said term implies that higher risk is associated with higher returns
and lower risk is associated with lower returns. The aforesaid trade off which the investor
faces at the time of investment in the market is known as risk return trade off. Example
decision taken while investing $ 1 Mio in saving account or securities market. (Bennett,
Coleman & Co. Ltd, 2018)
(ii) Time Value of Money: The term implies that amount which is available now in hand is more
than the same amount which shall be available in future. The concept that has been taken into
consideration is the real value of money at present and in future. The core concept behind the
same is that money can earn interest. Thus, it can be concluded that dollar today is less than
yesterday and more than tomorrow. (psu.instructure.com)
(iii) Cash is King: The term is an old adage and used to denote failure of business on account of
cash crunch in the business. Further, all the analysis under capital budgeting is based on cash
flows. Further, cash is required for expansion, working capital management etc. Thus, cash is
pipeline of the business and is must for survival. (Smith, 2018)
(iv) Incremental Cash flows: The term means additional cash flow that may be generated by
modifying an existing asset or purchasing a new asset or undertaking a new project. This
simply means net addition to the existing cash flow of the organisation;
(v) Agency Problem: The agency Problem is that the managers are not the owners of the
company and managers generally take decision that are in their own interest and not in long
term interest of the owners of the company. For example reduction in R&D expense to boost
current revenue. (10 Axioms of Financial Management, 2011)
(vi) Taxes bias business decisions: Tax plays a crucial role in business decision making as the rate
of tax can significantly impact the profit of business as the tax rate is very high in Australia
(30%). The terms means business decision are biased towards projects that are tax favourable
or funding the project through modes that are tax biased like issue of debt to fund the project
as interest is tax deductible.
(vii) All risk is not equal: The term means that all risk are not equal as some can be diversified away
like non-systematic risk while cannot. It also means that one should not put all their eggs in
one basket. Further, the diversification creates an offset between good and bad results.
(viii) Ethical dilemmas are everywhere in Finance : Unethical behaviour in finance drives away the
trust of investors and generally results in loss of investors confidence. The value of
shareholders suffer and generally takes a lot of time to recover. (10 Axioms of Financial
Management, 2011)
The phrase means one should know the above axioms to understand and interpret finance and
financial market as these is what finance revolves around. Further, to understand these axioms one
is not required to study finance as axiom lays the base for finance.

Answer 5
Accounting in layman terms means systematic and comprehensive recording of transactions of a
company. It is also a process of summarising, analysing and reporting of transactions to regulator,
tax authorities and collection agencies.
The Advantage and disadvantage of accounting has been presented here-in-below:
Advantage
(a) It makes financial information about business available;
(b) It enable comparative study;
(c) It helps in analysing the past and present performance of the company;
(d) It helps in decision making by managers of the company;
(e) It replaces memory and jot everything on paper;
(f) It facilitated loan on the basis of information produces;
(g) It helps in payroll processing;
(h) It helps in tax management. (Advantages and Disadvantages of Financial Accounting, 2018)
Disadvantage
(a) It is not fully exact and is based on judgement and the same shall result in different
interpretations; (Advantages and Disadvantages of Financial Accounting, 2018)
(b) It does not indicate resalable value of the assets of the company;
(c) Accounting ignores qualitative elements and focusses on quantitative events only.
(d) It ignores the effect of price level change; (Advantages and Disadvantages of Financial
Accounting, 2018)
(e) Window dressing of balance sheet.
Answer 6
Net Income
Sl No Particulars Amount
1 Revenue 14390
Less
2 Salaries and wages -7145
3 Rent Expense -2740
4 Depreciation Expense -665
5 Supplies Expense -580
6 Interest Expense -45
7 Net Income 3215
The net income of the owner stands at AUD 3215.

Owner Capital
Sl No Particulars Amount
1 Opening Balance 10640
2 Profit 3215
3 Less: Drawings -800
4 Closing Balance 13055
The closing balance of owner’s capital after adjusting for profit and drawings stand as AUD 13,055.
Balance Sheet
Sl No Particulars Amount
1 Owner capital 13055
2 Accounts Payable 2140
3 Salary Payable 360
4 Interest Payable 40
5 Un earned Service revenue 580
6 Accumulated Depreciation 840
7 Notes Payable 6000
Total 23015
Asset
1 cash 7680
2 Accounts Receivable 810
3 Prepaid Rent 1965
4 Supplies 1160
5 Equipment 11400
Total 23015
The balance sheet of the owner has been presented here-in-above.
Answer 7
Sl No Particular Amount
1 Sales Price 90
2 Variable Cost 63
3 Contribution 27
4 Fixed cost 1080000
5 Break even quantity 40000
40,000 units of the product should be sold to break even.
Sl No Particular Amount
1 Sales Price 90
2 Variable Cost 63
3 Contribution 27
4 Fixed cost 1080000
5 Break even quantity 40000

6 Profit 60000
7 Quantity to be sold 42223
The quantity of the goods that need to be sold to generate profit of AUD 60000 is 42,223.
Sl No Particular Amount
1 Sales Price 90
2 Variable Cost 63
3 Contribution 27
4 Fixed cost 1080000
5 Break even quantity 40000
6 Profit 60000
7 Quantity to be sold 42222
8 Current sold quantity 45000
9 Current contribution 1215000
10 Current Profit 135000
11 Additional Expense 108000
12 More unit to be sold 4000
The additional quantity that must be sold by the company to recover the advertisement cost of
$1,08,000 is 4000 units.
Sl No Particular Amount
1 Sales Price 108
2 Variable Cost 69.3
3 Contribution 38.7
4 Fixed cost 1290000
5 Break even quantity 33333.33
6 Break even Sales 3600000
The break-even point stands at 33,334 units.
Answer 8
The table for computation of receipt has been detailed here-in-below:
Collection from Customers
Sl
No Particulars June July August September
1 Credit Sales 135000 145000 90000
2 Cash Sales 90000 255000 195000
3 Collection in same month (1*60%) 81000 87000 54000
4 Collection in next month (1*40%) 54000 58000 36000
5 Total Collection (2+3+4) 171000 396000 307000 36000
The table for computation of payments made has been enumerated here-in-below:
Payment for purchase of inventory

Sl
No Particulars June July August September
1 Credit Purchase
30000
0
25000
0
10500
0
2 Payment in month of purchase (1*50%)
15000
0
12500
0 52500
3 Payment in following month (1*50%)
15000
0
12500
0 52500
4 Total Payment (2+3)
15000
0
27500
0
17750
0 52500
The cash budget has been presented here-in-below:
Cash Budget
Sl No Particulars July August
1 Opening Cash Balance 50000 50000
2 Collection from customer 396000 307000
3 Payment for purchase of inventory -275000 -177500
4 Selling Administrative Expenses -48000 -48000
5 Dividends -103000
6 Purchase of equipment -30000
7 Financing 30000 -30000
8 Interest on financing -200
9 Closing Balance 50000 71300
On perusal of the above, it may be seen that the financing requirement arose in July and was repaid
in August along with interest of AUD 200.
Answer 9
The analytics for business decision making has been detailed here-in-below:-
Cost Characteristic and decision making ramifications
(a) Characterisation of cost I.e sunk cost Vs Relevant cost and considering relevant cost;
(b) Analysing cost and benefit from a particular project;
(c) Understanding of complicating matters
Business Decision Logic
(a) This involves whether to outsource or make a product inhouse;
(b) Consideration of capacity while outsourcing;
(c) Consideration of qualitative issues under outsourcing;

(d) Treatment for special and derivation of cost on the basis of variable cost and any incremental
cost;
(e) Continuation, discontinuation of a department, product, project etc;
(f) ABC Analysis;
(g) The 80/20 methodology;
Capital Expenditure decisions
(a) Management Stewardship for ranking and evaluating alternatives ;
(b) Logical justification for choosing a particular project .
Compound Interest and Present Value
(a) Developing of values on the basis of compound interest;
(b) Computation of present value of different projects;
Evaluation of Long –term projects
(a) Computation of net present value of the projects;
(b) Considering the impact on cash flows on account of change in interest;
(c) Emphasizing on after tax cash flows for decision making;
(d) Computation of accounting rate of return; (Larry.M.Walther)
(e) Computation of internal rate of return;
(f) Computation of payback period; (Larry.M.Walther)
References:
10 Axioms of Financial Management. (2011). Retrieved September 29, 2018, from
10axioms.blogspot.com: http://10axioms.blogspot.com/
AccountingCoach. (2018). What are manufacturing costs? Retrieved September 29, 2018, from
www.accountingcoach.com: https://www.accountingcoach.com/blog/what-are-
manufacturing-costs
Advantages and Disadvantages of Financial Accounting. (2018). Retrieved September 29, 2018, from
thevistaacademy.com: http://thevistaacademy.com/advantages-disadvantages-financial-
accounting/
Bennett, Coleman & Co. Ltd. (2018). Definition of 'Risk Return Trade Off'. Retrieved September 29,
2018, from economictimes.indiatimes.com:
https://economictimes.indiatimes.com/definition/risk-return-trade-off
Budgeting Principles. (n.d.). Retrieved September 29, 2018, from www.leoisaac.com:
http://www.leoisaac.com/budget/bud013.htm
Financial and Management Accounting. (2018). Retrieved September 29, 2018, from
www.slideshare.net: https://www.slideshare.net/THEMHK/whbm01

Larry.M.Walther. (n.d.). Analytics for Mangerial decision making. Retrieved September 29, 2018,
from eclass.teicrete.gr:
https://eclass.teicrete.gr/modules/document/file.php/DS107/Books/Analytics%20for
%20Managerial%20Decision%20Making%20%28Walther%20-%20Skousen%29.pdf
psu.instructure.com. (n.d.). Retrieved September 29, 2018, from What is time value of money?:
https://psu.instructure.com/courses/1806581/pages/introduction-what-is-time-value-of-
money
Smith, K. (2018). Reasons Why Cash Is King for Businesses & Individuals. Retrieved September 29,
2018, from www.moneycrashers.com: https://www.moneycrashers.com/why-cash-is-king/