Introduction to Accounting and Finance Assessment
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This study provides a comprehensive account of the basic accounting and managerial accounting structures, principles and strategies used in the field of accounting and finance. It covers topics such as financial reports, income statements, balance sheets, financial analysis methods, and more.
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UGB 163 – INTRODUCTION TO ACCOUNTING AND FINANCE ASSESSMENT
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Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................3
Part A – Collins Colman Limited............................................................................................................3
Part B – Parks mead Limited.................................................................................................................10
Part C – Skipsey Clifford Plc.................................................................................................................15
CONCLUSION.............................................................................................................................................21
REFERENCES..............................................................................................................................................22
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................3
Part A – Collins Colman Limited............................................................................................................3
Part B – Parks mead Limited.................................................................................................................10
Part C – Skipsey Clifford Plc.................................................................................................................15
CONCLUSION.............................................................................................................................................21
REFERENCES..............................................................................................................................................22
INTRODUCTION
Accounting and finance principles are closely interrelated but separate domains. Accounting
deals mainly with the acknowledgment of sales that can be calculated in quantitative value
(Ainsworth and Deines, 2019). Although the field of finance refers to the analysis of the
company's owners in the form of papers. These two components suggest that sufficient
statements are reported in an appropriate way and transmitted to the various management. They
allow funds to be procured and distributed in a reasonable way on the part of managers are
accountable for making rational decisions about them. The purpose of this study is to provide a
comprehensive account of the basic accounting and managerial accounting structures, principles
and strategies used. For this reason, the principle of preparing of financial reports including such
income statements, balance sheets, expenditure calculation, break-even point, protection margins
in terms of amount and profit is ignored. In addition various financial analysis methods used as a
financial planning method in capital money management actions, alongside advantages and
budget constraints, are studied.
MAIN BODY
Part A – Collins Colman Limited
A corporation tries to calculate the net profit received over a particular time span for a company
and determine whether or not it is likely to expand or step in the path that is in line with its vision
and purpose (Helfaya, 2019). For this purpose, the Income Statement is available to receive in
the interaction of the company's value after getting tax, value, amortization and other expenditure
into account. Thus, supplying the managers as well as shareholders in a single company like
Collins Colman Limited with an analysis of organizational productivity. It is seen as under:
Statement of Income for the year ended 31st December 2019
Particulars £ Particulars £
To Opening Stock - By Revenue3 759600
To Purchases1 630000 By Closing Stock4 273600
Accounting and finance principles are closely interrelated but separate domains. Accounting
deals mainly with the acknowledgment of sales that can be calculated in quantitative value
(Ainsworth and Deines, 2019). Although the field of finance refers to the analysis of the
company's owners in the form of papers. These two components suggest that sufficient
statements are reported in an appropriate way and transmitted to the various management. They
allow funds to be procured and distributed in a reasonable way on the part of managers are
accountable for making rational decisions about them. The purpose of this study is to provide a
comprehensive account of the basic accounting and managerial accounting structures, principles
and strategies used. For this reason, the principle of preparing of financial reports including such
income statements, balance sheets, expenditure calculation, break-even point, protection margins
in terms of amount and profit is ignored. In addition various financial analysis methods used as a
financial planning method in capital money management actions, alongside advantages and
budget constraints, are studied.
MAIN BODY
Part A – Collins Colman Limited
A corporation tries to calculate the net profit received over a particular time span for a company
and determine whether or not it is likely to expand or step in the path that is in line with its vision
and purpose (Helfaya, 2019). For this purpose, the Income Statement is available to receive in
the interaction of the company's value after getting tax, value, amortization and other expenditure
into account. Thus, supplying the managers as well as shareholders in a single company like
Collins Colman Limited with an analysis of organizational productivity. It is seen as under:
Statement of Income for the year ended 31st December 2019
Particulars £ Particulars £
To Opening Stock - By Revenue3 759600
To Purchases1 630000 By Closing Stock4 273600
To Wages2 143010
To Gross Profit (Balancing
figure) 260190
Total 1033200 Total 1033200
To Electricity Bill Payments5 9270 By Gross Profit b/d 260190
To Van Running Expenses 40320
To Irrecoverable Debts 1800
To Rent paid to owner6 108000
To Rates7 6930
To Depreciation on Van 11000
To Net Profit for the year 82870
Total 260190 Total 260190
Working Notes:
1. Purchases:
Particulars £
Credit Purchases 583200
Cash Purchases incurred 46800
Total Purchases made during the year 630000
2. Wages:
To Gross Profit (Balancing
figure) 260190
Total 1033200 Total 1033200
To Electricity Bill Payments5 9270 By Gross Profit b/d 260190
To Van Running Expenses 40320
To Irrecoverable Debts 1800
To Rent paid to owner6 108000
To Rates7 6930
To Depreciation on Van 11000
To Net Profit for the year 82870
Total 260190 Total 260190
Working Notes:
1. Purchases:
Particulars £
Credit Purchases 583200
Cash Purchases incurred 46800
Total Purchases made during the year 630000
2. Wages:
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Particulars £
Total Wages paid during the year 140400
Add: Wages owed for the last week of the year 2610
Total Wage Expenses 143010
3. Revenue for the year ended December 31, 2019:
Particulars £
Credit Sales 604800
Cash Sales 154800
Total Sales made during the year 759600
4. Determining Closing Stock Value:
Particulars £
Stock available as on 01.01.2019 -
Add: Total Purchases made during the year1 630000
Less: Cost of Goods Sold (=£291,600+£64,800) (356400)
Stock available as on 31.12.2019 273600
5. Electrical Bills Payments:
Particulars £
Total Wages paid during the year 140400
Add: Wages owed for the last week of the year 2610
Total Wage Expenses 143010
3. Revenue for the year ended December 31, 2019:
Particulars £
Credit Sales 604800
Cash Sales 154800
Total Sales made during the year 759600
4. Determining Closing Stock Value:
Particulars £
Stock available as on 01.01.2019 -
Add: Total Purchases made during the year1 630000
Less: Cost of Goods Sold (=£291,600+£64,800) (356400)
Stock available as on 31.12.2019 273600
5. Electrical Bills Payments:
Particulars £
Bills paid during the year 6840
Add: Wages owed for the quarter as on 31.12.2019 2430
Total Wage Expenses 9270
6. Rent paid:
Particulars £
Total Rent paid to the owner of the premise 135000
Less: Rent payments made in advance 27000
Total Rent Paid 108000
7. Rates:
Particulars £
Payments for the period 01.01.2019 to 31.03.19 2880
Payments for the period 01.04.2019 to 31.03.2019 (=5400*9/12) 4050
Total Rates for the year 6930
Statement of Financial Position as at 31 December 2019
Another part of financial statements that explains the financial situation of an organization at a
particular time is a description of the balance sheet (Jamil and Seman, 2019). It allows for
standardization with the financial condition of the organization in past years with respect to the
Add: Wages owed for the quarter as on 31.12.2019 2430
Total Wage Expenses 9270
6. Rent paid:
Particulars £
Total Rent paid to the owner of the premise 135000
Less: Rent payments made in advance 27000
Total Rent Paid 108000
7. Rates:
Particulars £
Payments for the period 01.01.2019 to 31.03.19 2880
Payments for the period 01.04.2019 to 31.03.2019 (=5400*9/12) 4050
Total Rates for the year 6930
Statement of Financial Position as at 31 December 2019
Another part of financial statements that explains the financial situation of an organization at a
particular time is a description of the balance sheet (Jamil and Seman, 2019). It allows for
standardization with the financial condition of the organization in past years with respect to the
current periods and between those firms working in the same sector. The preceding statement
shows Collins Colman Limited’s financial status:
ASSETS (I) £
Current Assets
Advance Rent 27000
Advance Rates 1350
Accounts Receivables1 77400
Closing Stock Value 273600
Total Current Assets (A) 379350
Non Current Assets
Delivery Van2 61000
Total Non-Current Assets (B) 61000
Assets (I) [= (A) + (B)] 440350
LIABILITIES AND SHAREHOLDER'S EQUITY (II)
Current Liabilities
Owed Wages 2610
Owed Electricity Expenses 2430
shows Collins Colman Limited’s financial status:
ASSETS (I) £
Current Assets
Advance Rent 27000
Advance Rates 1350
Accounts Receivables1 77400
Closing Stock Value 273600
Total Current Assets (A) 379350
Non Current Assets
Delivery Van2 61000
Total Non-Current Assets (B) 61000
Assets (I) [= (A) + (B)] 440350
LIABILITIES AND SHAREHOLDER'S EQUITY (II)
Current Liabilities
Owed Wages 2610
Owed Electricity Expenses 2430
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Accounts Payables3 111600
Bank Overdraft4 24840
Total Liabilities (C) 141480
Owners Equity (D)
Capital 216000
Add: Net Profit for the year 82870 298870
Shareholder's Equity and Liabilities (II) [=(C)+(D)] 440350
Working Notes:
1. Accounts Receivables as on 31.12.2019:
Particulars (£) (£)
Credit Sales 604800
Less:
Cash recived from accounts receivables 525600
Irrecoverable debt 1800 527400
Closing Balance 77400
2. Depreciation Charged on Delivery Van using Straight-Line Method:
Particulars (£)
Bank Overdraft4 24840
Total Liabilities (C) 141480
Owners Equity (D)
Capital 216000
Add: Net Profit for the year 82870 298870
Shareholder's Equity and Liabilities (II) [=(C)+(D)] 440350
Working Notes:
1. Accounts Receivables as on 31.12.2019:
Particulars (£) (£)
Credit Sales 604800
Less:
Cash recived from accounts receivables 525600
Irrecoverable debt 1800 527400
Closing Balance 77400
2. Depreciation Charged on Delivery Van using Straight-Line Method:
Particulars (£)
Cost of Delivery Van Purchased on 01.01.2019 72000
Less: Depreciation on Van ((72000-6000)/6)* 11000
Cost of Van as on 31.12.2019 61000
*-It is important to note that salvage value of van is £6000 with an expected useful life of 6
years.
3. Accounts Payable:
Particular (£)
Goods purchase on credit 583200
Less: Account Payables repaid during the year 471600
Closing balance of Accounts Payables 111600
4. Cash and Cash Equivalents at the end of the year:
Cash/Bank Account
Particular (£) Particular (£)
To Capital Account 216000 By Purchases 46800
To Cash recived from receivables 525600 By Cash paid to Creditors 471600
To Cash Sales 154800 By Delivery Van Expenses 40320
To Balance C/d (Overdraft) 24840 By Wage Payments 140400
By Electricity Bill Expenses 6840
Less: Depreciation on Van ((72000-6000)/6)* 11000
Cost of Van as on 31.12.2019 61000
*-It is important to note that salvage value of van is £6000 with an expected useful life of 6
years.
3. Accounts Payable:
Particular (£)
Goods purchase on credit 583200
Less: Account Payables repaid during the year 471600
Closing balance of Accounts Payables 111600
4. Cash and Cash Equivalents at the end of the year:
Cash/Bank Account
Particular (£) Particular (£)
To Capital Account 216000 By Purchases 46800
To Cash recived from receivables 525600 By Cash paid to Creditors 471600
To Cash Sales 154800 By Delivery Van Expenses 40320
To Balance C/d (Overdraft) 24840 By Wage Payments 140400
By Electricity Bill Expenses 6840
By Rates 8280
By Rent 135000
By Delivery Van Purchased 72000
Total 921240 Total 921240
Part B – Parks mead Limited
(a) Contribution:
Particulars (£' per unit) Actual (£) Budgeted (£)
Units Produced 78000 60000.00
Total Sales (A) 40.00 3120000 2400000
Material 15.75 1228500 945000
Labor 8.85 690300 531000
Variable Overhead 5.55 432900 333000
Total Variable Costs (B) 2351700 1809000
Contribution [(C) = (A)-(B)] 768300 591000
Contribution per unit [(D) = (C)/Units
Produced] 9.85 9.85
By Rent 135000
By Delivery Van Purchased 72000
Total 921240 Total 921240
Part B – Parks mead Limited
(a) Contribution:
Particulars (£' per unit) Actual (£) Budgeted (£)
Units Produced 78000 60000.00
Total Sales (A) 40.00 3120000 2400000
Material 15.75 1228500 945000
Labor 8.85 690300 531000
Variable Overhead 5.55 432900 333000
Total Variable Costs (B) 2351700 1809000
Contribution [(C) = (A)-(B)] 768300 591000
Contribution per unit [(D) = (C)/Units
Produced] 9.85 9.85
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(b) BEP and Margin of safety:
Break-even Point (BEP):
(i) In units of microwaves:
Particulars Actual Budgeted
Fixed Costs:
Production 177000 177000
Selling 142800 142800
Total (£) 319800 319800
Contribution per unit (£) 9.85 9.85
BEP (=Fixed Costs/Contribution per unit) 32467.01 32467.01
(ii) In (£):
Particulars Actual Budgeted
Selling price for each microwave (£) 40.00 40.00
Contribution per microwave sold (£) 9.85 9.85
Contribution Margin (=(Contribution per unit/Selling
price)*100) 24.63% 24.63%
Total Fixed Costs (=£177000+£142800) 319800 319800
BEP (£) 1298680.2 1298680.20
Break-even Point (BEP):
(i) In units of microwaves:
Particulars Actual Budgeted
Fixed Costs:
Production 177000 177000
Selling 142800 142800
Total (£) 319800 319800
Contribution per unit (£) 9.85 9.85
BEP (=Fixed Costs/Contribution per unit) 32467.01 32467.01
(ii) In (£):
Particulars Actual Budgeted
Selling price for each microwave (£) 40.00 40.00
Contribution per microwave sold (£) 9.85 9.85
Contribution Margin (=(Contribution per unit/Selling
price)*100) 24.63% 24.63%
Total Fixed Costs (=£177000+£142800) 319800 319800
BEP (£) 1298680.2 1298680.20
0
Margin of Safety (MOS):
(a) In units of microwaves:
Particulars Actual Budgeted
Units produced to be sold (given) 78000.00 60000.00
Break Even Point (as calculated in b(i)) 32467.01 32467.01
Margin of Safety 45532.99 27532.99
(b) In (£):
Particulars Actual Budgeted
Wardrobes sold (£) 3120000 2400000
BEP (£) 1298680.20 1298680.20
MOS (microwaves Sold- BEP) 1821319.80 1101319.80
(c) Profit when 54000 microwaves sold @ £40 per unit:
Particulars (£) per unit Amount (£)
Number of microwave produced and sold 54000
Total Sales (A) 40.00 3120000.00
Margin of Safety (MOS):
(a) In units of microwaves:
Particulars Actual Budgeted
Units produced to be sold (given) 78000.00 60000.00
Break Even Point (as calculated in b(i)) 32467.01 32467.01
Margin of Safety 45532.99 27532.99
(b) In (£):
Particulars Actual Budgeted
Wardrobes sold (£) 3120000 2400000
BEP (£) 1298680.20 1298680.20
MOS (microwaves Sold- BEP) 1821319.80 1101319.80
(c) Profit when 54000 microwaves sold @ £40 per unit:
Particulars (£) per unit Amount (£)
Number of microwave produced and sold 54000
Total Sales (A) 40.00 3120000.00
Material 15.75 850500.00
Labor 8.85 477900.00
Variable Overhead 5.55 299700.00
Total Variable Cost (B) 1628100.00
Contribution [(C)=(A) -(B)] 1491900.00
Fixed Costs (given) (D):
Production-related 177000.00
Sales-related 142800.00
Profit (E)=(D)-(C) 1172100.00
(d) Strategy for Parks mead Limited:
Given Information: The Corporation needs to know whether or not something is possible
to spend £ 135,000 on ads and promotions, as the average sale price of microwave will
increase for 8% by doing so. Thus, per microwave created and distributed, the current
sale price is £ 43.20 (= £ 40 + 0.08 * £ 40). It will also lead to a 15 percent rise in the
volume of revenue, bringing the amount of microwaves made and distributed from just
54,000 units to 62,100 (= 54,000 + 0.15 * 54,000) microwaves.
Particulars (£) per unit Amount (£)
Number of microwaves produced and sold 62100
Total Sales (A) 43.20 3369600.00
Material 15.75 978075.00
Labor 8.85 477900.00
Variable Overhead 5.55 299700.00
Total Variable Cost (B) 1628100.00
Contribution [(C)=(A) -(B)] 1491900.00
Fixed Costs (given) (D):
Production-related 177000.00
Sales-related 142800.00
Profit (E)=(D)-(C) 1172100.00
(d) Strategy for Parks mead Limited:
Given Information: The Corporation needs to know whether or not something is possible
to spend £ 135,000 on ads and promotions, as the average sale price of microwave will
increase for 8% by doing so. Thus, per microwave created and distributed, the current
sale price is £ 43.20 (= £ 40 + 0.08 * £ 40). It will also lead to a 15 percent rise in the
volume of revenue, bringing the amount of microwaves made and distributed from just
54,000 units to 62,100 (= 54,000 + 0.15 * 54,000) microwaves.
Particulars (£) per unit Amount (£)
Number of microwaves produced and sold 62100
Total Sales (A) 43.20 3369600.00
Material 15.75 978075.00
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Labor 8.85 549585.00
Variable Overhead 5.55 344655.00
Total Variable Cost (B) 1872315.00
Contribution [(C)=(A) -(B)] 1497285.00
Fixed Costs (given) (D):
Production 177000.00
Selling 142800.00
Marketing and Advertising Expenses 135000.00
Profit (E)=(D)-(C) 1042485.00
(e) Assumption of BEP:
Break-even Analysis may be described as the methodology commonly used by a given
organization to reach the point through which the entity will be able to receive profits
necessary to cover its manufacturing costs (Giner, Merello. and Pardo, 2019). As a
consequence, the accountant, when carrying out a break-even review, takes into account
the differing pricing ranges in relation to the differing amounts of the same commodity
ordered. This helps managers to assess the specific amount of revenue that will have
maximum coverage of the overall fixed costs of the company. It is necessary to
remember that Overall Fixed Costs are those items charged independent of the amount
generated and marketed by the company. The assessment of this expense factor thus
helps the manager within the company to conduct informed decision-making activities. It
is determined using the formula below:
Variable Overhead 5.55 344655.00
Total Variable Cost (B) 1872315.00
Contribution [(C)=(A) -(B)] 1497285.00
Fixed Costs (given) (D):
Production 177000.00
Selling 142800.00
Marketing and Advertising Expenses 135000.00
Profit (E)=(D)-(C) 1042485.00
(e) Assumption of BEP:
Break-even Analysis may be described as the methodology commonly used by a given
organization to reach the point through which the entity will be able to receive profits
necessary to cover its manufacturing costs (Giner, Merello. and Pardo, 2019). As a
consequence, the accountant, when carrying out a break-even review, takes into account
the differing pricing ranges in relation to the differing amounts of the same commodity
ordered. This helps managers to assess the specific amount of revenue that will have
maximum coverage of the overall fixed costs of the company. It is necessary to
remember that Overall Fixed Costs are those items charged independent of the amount
generated and marketed by the company. The assessment of this expense factor thus
helps the manager within the company to conduct informed decision-making activities. It
is determined using the formula below:
Some of the key hypotheses based on which Break-even Research is carried out have
been described as follows:
It is possible to bifurcate overall costs into revenues and expenses only. Semi-Variable
expenses are not taken into account.
The commodity price remains constant.
Unit Volume Sold = Unit Volume Made.
Fixed costs remain constant, independent of the number of manufactured units.
Increment thresholds for contingent costs remain stable.
Advances in infrastructure or changes in the effectiveness of labor are not taken into
consideration.
It can be claimed by evaluating certain conclusions that BEP Analysis is postulated on
premises that foster similarity (Beard, Schweiger, and Surendran, 2019). As a consequence,
regardless of their scale, design and sophistication, various organizations may conduct such
an operation.
Part C – Skipsey Clifford Plc.
(a) Calculation of payback period, ARR and NPV:
Payback Period
Initial Investment 8000000
Net Annual Cash inflow 2120000
Payback Period 3.7735849057
Accounting Rate of Return
Purchase Cost of New Machine 8000000
been described as follows:
It is possible to bifurcate overall costs into revenues and expenses only. Semi-Variable
expenses are not taken into account.
The commodity price remains constant.
Unit Volume Sold = Unit Volume Made.
Fixed costs remain constant, independent of the number of manufactured units.
Increment thresholds for contingent costs remain stable.
Advances in infrastructure or changes in the effectiveness of labor are not taken into
consideration.
It can be claimed by evaluating certain conclusions that BEP Analysis is postulated on
premises that foster similarity (Beard, Schweiger, and Surendran, 2019). As a consequence,
regardless of their scale, design and sophistication, various organizations may conduct such
an operation.
Part C – Skipsey Clifford Plc.
(a) Calculation of payback period, ARR and NPV:
Payback Period
Initial Investment 8000000
Net Annual Cash inflow 2120000
Payback Period 3.7735849057
Accounting Rate of Return
Purchase Cost of New Machine 8000000
Expected annual Cash inflow 3400000
Depreciation 1400000
Accounting Rate of Return 0.09
Net Present Value
Year Cash Inflow
Cash
Outflow
Net Cash
Inflows
Discounting
Factor
PV of Net Cash
Inflows
1 3400000 1280000 2120000 0.917 1944954.128
2 3400000 1280000 2120000 0.842 1784361.586
3 3400000 1280000 2120000 0.772 1637028.978
4 3400000 1280000 2120000 0.708 1501861.447
5 3400000 1280000 2120000 0.650 1377854.539
Salvage Value 1000000 0.650 649931.386
Sum of PV of Net Cash
Inflows £8,895,992
NPV £895,992
Recommendations: As per the above calculations, it is apparent that a good choice for Skipsey
Clifford Plc will be to buy new equipment worth £ 8,000,000. This is demonstrated by the three
strategies of investment assessment that claim that:
The payback time is generally years and 8 months for the stated project. Although the equipment
must be operated for at least 5 years, such estimate is shorter than the usable life of the
equipment. Thus, making it sustainable for the enterprise.
Depreciation 1400000
Accounting Rate of Return 0.09
Net Present Value
Year Cash Inflow
Cash
Outflow
Net Cash
Inflows
Discounting
Factor
PV of Net Cash
Inflows
1 3400000 1280000 2120000 0.917 1944954.128
2 3400000 1280000 2120000 0.842 1784361.586
3 3400000 1280000 2120000 0.772 1637028.978
4 3400000 1280000 2120000 0.708 1501861.447
5 3400000 1280000 2120000 0.650 1377854.539
Salvage Value 1000000 0.650 649931.386
Sum of PV of Net Cash
Inflows £8,895,992
NPV £895,992
Recommendations: As per the above calculations, it is apparent that a good choice for Skipsey
Clifford Plc will be to buy new equipment worth £ 8,000,000. This is demonstrated by the three
strategies of investment assessment that claim that:
The payback time is generally years and 8 months for the stated project. Although the equipment
must be operated for at least 5 years, such estimate is shorter than the usable life of the
equipment. Thus, making it sustainable for the enterprise.
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The rate of return for accounting is equivalent to WACC (Weighted Capital Cost), i.e. 9%.
Therefore the minimal equity investment condition is also met by this project.
NPV is optimistic, after taking into consideration the recover benefit as well as the original
expenditure.
The administration of Skipsey Clifford Plc is therefore advised to conduct the project evaluated
using the above-mentioned Evaluating Strategies investment.
(b) Report merits and limitations of various investment appraising techniques:
INVESTMENT APPRAISAL TECHNIQUES
Each company has undertaken certain forms of capital budgeting practices in order to further its
goals of increasing and achieving success in current and future cycles of its investments that
create value to the corporation. For this function, an organization's financial planner may
perform certain forms of investment assessment procedures, which may justifiably encourage
their judgments. As a consequence, in the sense of this article, the major merits and
shortcomings of such methods are being mentioned:
Pay-Back Period: This approach helps the financial planner to calculate the precise amount of
time it will take for his original expenditure to be needed for a given project (Oduro-Ofrikyi,
2019). As a consequence, the payback period is the duration over which the total cash inflows
from a project are proportionate to the number of original spending spent on it. It is computed
as below:
PBP = Initial Outlay/ Net Cash Inflows
Merits:
Clear predictor of the prospects of capital blockages as a prolonged duration will
prolong the return of initial expenditure.
This approach is more effective where there is a lot of doubt about the potential
annual cash flows of a company or in other sectors where technology changes
happen regularly.
Therefore the minimal equity investment condition is also met by this project.
NPV is optimistic, after taking into consideration the recover benefit as well as the original
expenditure.
The administration of Skipsey Clifford Plc is therefore advised to conduct the project evaluated
using the above-mentioned Evaluating Strategies investment.
(b) Report merits and limitations of various investment appraising techniques:
INVESTMENT APPRAISAL TECHNIQUES
Each company has undertaken certain forms of capital budgeting practices in order to further its
goals of increasing and achieving success in current and future cycles of its investments that
create value to the corporation. For this function, an organization's financial planner may
perform certain forms of investment assessment procedures, which may justifiably encourage
their judgments. As a consequence, in the sense of this article, the major merits and
shortcomings of such methods are being mentioned:
Pay-Back Period: This approach helps the financial planner to calculate the precise amount of
time it will take for his original expenditure to be needed for a given project (Oduro-Ofrikyi,
2019). As a consequence, the payback period is the duration over which the total cash inflows
from a project are proportionate to the number of original spending spent on it. It is computed
as below:
PBP = Initial Outlay/ Net Cash Inflows
Merits:
Clear predictor of the prospects of capital blockages as a prolonged duration will
prolong the return of initial expenditure.
This approach is more effective where there is a lot of doubt about the potential
annual cash flows of a company or in other sectors where technology changes
happen regularly.
Limitations:
It appears to ignore money's time worth, which a key element from the viewpoint
of capital is budgeting.
A smaller PBP too would not ensure the project's viability.
Accounting Rate of Return: This approach is known to be a financial ratio that is commonly
used in budgeting for money. It seeks to have a return on the basis of the net sales produced by
the project being introduced. ARR is determined in the following manner:
ARR= Average Net Profit/ Average Investment
Merits:
The definition of net earnings received after influence the amount and
depreciation is considered. Thus a good picture of the feasibility of the project is
given.
Facilitates contrast based on the measured standard values of one or more
ventures.
Limitations:
• It lacks the time factor that is important when choosing alternate uses of energy.
• The cash inflows that constitute the backbone for accounting income are not taken into
consideration.
Net Present Value: Net Present Value, amongst the most capital budgeting valuation methods,
is characterized as the worth of all potential net cash inflows which have been reduced to the
current (Falcone and Sica, 2019). It is computed as below:
NPV = Σ(Present Value of all future cash flows) – Initial Investment
Merits:
It lacks the time factor that is important when choosing alternate uses of energy.
The cash inflows that constitute the backbone for accounting income are not
It appears to ignore money's time worth, which a key element from the viewpoint
of capital is budgeting.
A smaller PBP too would not ensure the project's viability.
Accounting Rate of Return: This approach is known to be a financial ratio that is commonly
used in budgeting for money. It seeks to have a return on the basis of the net sales produced by
the project being introduced. ARR is determined in the following manner:
ARR= Average Net Profit/ Average Investment
Merits:
The definition of net earnings received after influence the amount and
depreciation is considered. Thus a good picture of the feasibility of the project is
given.
Facilitates contrast based on the measured standard values of one or more
ventures.
Limitations:
• It lacks the time factor that is important when choosing alternate uses of energy.
• The cash inflows that constitute the backbone for accounting income are not taken into
consideration.
Net Present Value: Net Present Value, amongst the most capital budgeting valuation methods,
is characterized as the worth of all potential net cash inflows which have been reduced to the
current (Falcone and Sica, 2019). It is computed as below:
NPV = Σ(Present Value of all future cash flows) – Initial Investment
Merits:
It lacks the time factor that is important when choosing alternate uses of energy.
The cash inflows that constitute the backbone for accounting income are not
taken into consideration.
Limitations:
The result of sunken costs is not undertaken.
Using this approach, it is hard to determine the appropriate rate of return.
(c) Key merits and demerits of using Budgets as a strategy planning tool
BUDGETS: A STRATEGIC PLANNING TOOL
It is the duty of a company to define, schedule, coordinate, handle and monitor resources in
order to sustain its viability and competitive market position while sacrificing on efficiency and
customer satisfaction (Chang, Pan and Shi, 2020). A corporate organisation tries to devise
budgets for this aim. A budget may be described as the process in which a financial schedule is
developed that involves projections of revenues and expenses to be obtained within a given
future timeframe. In this article, different types of budgets were evaluated, largely on the basis
of their advantages and disadvantages. It is enumerated in the following way:1. Activity Based Budgets: This form of budget entails the planning, after taking into
consideration of operating expenses, of a financial schedule and is primarily aimed at
assessing the profitability of operational operations. Last year's plan though does not
form the foundation for the present year.
Merits:
It weeds out needless processes, thus helping to be an efficient cost saver
(Kwilinski, 2019).
The question of bottlenecks is significantly reduced when the budget is activity-
based.
Limitations:
It is a dynamic mechanism that involves a thorough understanding of the
Limitations:
The result of sunken costs is not undertaken.
Using this approach, it is hard to determine the appropriate rate of return.
(c) Key merits and demerits of using Budgets as a strategy planning tool
BUDGETS: A STRATEGIC PLANNING TOOL
It is the duty of a company to define, schedule, coordinate, handle and monitor resources in
order to sustain its viability and competitive market position while sacrificing on efficiency and
customer satisfaction (Chang, Pan and Shi, 2020). A corporate organisation tries to devise
budgets for this aim. A budget may be described as the process in which a financial schedule is
developed that involves projections of revenues and expenses to be obtained within a given
future timeframe. In this article, different types of budgets were evaluated, largely on the basis
of their advantages and disadvantages. It is enumerated in the following way:1. Activity Based Budgets: This form of budget entails the planning, after taking into
consideration of operating expenses, of a financial schedule and is primarily aimed at
assessing the profitability of operational operations. Last year's plan though does not
form the foundation for the present year.
Merits:
It weeds out needless processes, thus helping to be an efficient cost saver
(Kwilinski, 2019).
The question of bottlenecks is significantly reduced when the budget is activity-
based.
Limitations:
It is a dynamic mechanism that involves a thorough understanding of the
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company's diverse operating operations.
The activity-based budget focuses mainly on meeting short-term targets that can
be harmful to long-term business.
2. Zero Based Budgets: This form of budget, which entails the creation of a financial
schedule for a given year is based, in the most portion, on spending for the New Year
and is posited on the basis of appropriate spending which is expected to be sustained
(Coles and Li, 2019). Hence the plan is set from start for any time taking null as the
basis.
Merits:
Inside the organization that uses this budget as an option of strategy formulation
mechanism, precision and productivity are improved.
Redundant practices are duly recognized and successfully reduced.
Limitations:
When the manager has to start each new cycle from start, it is also very way.
The method of planning will turn out to be costly for management.
1. Incremental Budgets: This form of budget includes, as the name implies, making
changes to a current financial schedule. Thus it was posited in the previous year with the
grounds of statistics and figures.
Merits:
• It is really straightforward to execute.
• Time and cost-effective, since there are few adjustments that need to be made to the
company's established financial schedule (Marriott and Teoh, 2019).
Limitations:
• This can lead to a shortage of creativity being created, as it also contributes to budgetary
slack.
• Owing to the simpler accessibility of the budget, excessive spending can become a
normal occurrence.
The activity-based budget focuses mainly on meeting short-term targets that can
be harmful to long-term business.
2. Zero Based Budgets: This form of budget, which entails the creation of a financial
schedule for a given year is based, in the most portion, on spending for the New Year
and is posited on the basis of appropriate spending which is expected to be sustained
(Coles and Li, 2019). Hence the plan is set from start for any time taking null as the
basis.
Merits:
Inside the organization that uses this budget as an option of strategy formulation
mechanism, precision and productivity are improved.
Redundant practices are duly recognized and successfully reduced.
Limitations:
When the manager has to start each new cycle from start, it is also very way.
The method of planning will turn out to be costly for management.
1. Incremental Budgets: This form of budget includes, as the name implies, making
changes to a current financial schedule. Thus it was posited in the previous year with the
grounds of statistics and figures.
Merits:
• It is really straightforward to execute.
• Time and cost-effective, since there are few adjustments that need to be made to the
company's established financial schedule (Marriott and Teoh, 2019).
Limitations:
• This can lead to a shortage of creativity being created, as it also contributes to budgetary
slack.
• Owing to the simpler accessibility of the budget, excessive spending can become a
normal occurrence.
CONCLUSION
It can be inferred from the aforementioned article that financial management play a key role in
deciding how a company's fiscal tools are used to boost profitability and overall operating
efficiency within a specific sector. Costing may be used by managers to assess the contribution
of capital per unit as well as sales. It also helps us to consider the break-even points and
guarantee that the distribution of capital does not lead to a loss of current income on a
commodity sold per unit. Investment Evaluating Strategies and Budget management, on the other
hand, allow fundamental analysis and the company's strategic planning efforts to be coordinated
with other relevant processes. This encourages the boss to make critical choices in an educated
manner.
It can be inferred from the aforementioned article that financial management play a key role in
deciding how a company's fiscal tools are used to boost profitability and overall operating
efficiency within a specific sector. Costing may be used by managers to assess the contribution
of capital per unit as well as sales. It also helps us to consider the break-even points and
guarantee that the distribution of capital does not lead to a loss of current income on a
commodity sold per unit. Investment Evaluating Strategies and Budget management, on the other
hand, allow fundamental analysis and the company's strategic planning efforts to be coordinated
with other relevant processes. This encourages the boss to make critical choices in an educated
manner.
REFERENCES
Ainsworth, P. and Deines, D., 2019. Introduction to accounting: An integrated approach. John
Wiley & Sons.
Helfaya, A., 2019. Assessing the use of computer-based assessment-feedback in teaching digital
accountants. Accounting Education, 28(1), pp.69-99.
Jamil, N.N. and Seman, J.A., 2019. The Impact of Fintech On The Sustainability Of Islamic
Accounting And Finance Education In Malaysia. Journal of Islamic, Social, Economics
and Development, 4(17), pp.74-88.
Giner, B., Merello, P. and Pardo, F., 2019. Assessing the impact of operating lease capitalization
with dynamic Monte Carlo simulation. Journal of Business Research, 101, pp.836-845.
Beard, D., Schweiger, D. and Surendran, K., 2019. Integrating soft skills assessment through
university, college, and programmatic efforts at an AACSB accredited
institution. Journal of Information Systems Education, 19(2), p.11.
Oduro-Ofrikyi, C., 2019. Assessing the financial performance of GCB bank using accounting
ratios,(2006-2015) (Doctoral dissertation, University of Education, Winneba).
Falcone, P.M. and Sica, E., 2019. Assessing the opportunities and challenges of green finance in
Italy: An analysis of the biomass production sector. Sustainability, 11(2), p.517.
Chang, Z., Hu, X., Pan, Z. and Shi, J., 2020. Rating shopping: evidence from the Chinese
corporate debt security market. Accounting & Finance.
Coles, J.L. and Li, Z.F., 2019. An empirical assessment of empirical corporate finance. Available
at SSRN 1787143.
Marriott, P. and Teoh, L., 2019. Computer-based assessment and feedback: Best Practice
Guidelines. The Higher Education Academy. Retrieved, 20.
Kwilinski, A., 2019. Implementation of blockchain technology in accounting sphere. Academy of
Accounting and Financial Studies Journal, 23, pp.1-6.
Ainsworth, P. and Deines, D., 2019. Introduction to accounting: An integrated approach. John
Wiley & Sons.
Helfaya, A., 2019. Assessing the use of computer-based assessment-feedback in teaching digital
accountants. Accounting Education, 28(1), pp.69-99.
Jamil, N.N. and Seman, J.A., 2019. The Impact of Fintech On The Sustainability Of Islamic
Accounting And Finance Education In Malaysia. Journal of Islamic, Social, Economics
and Development, 4(17), pp.74-88.
Giner, B., Merello, P. and Pardo, F., 2019. Assessing the impact of operating lease capitalization
with dynamic Monte Carlo simulation. Journal of Business Research, 101, pp.836-845.
Beard, D., Schweiger, D. and Surendran, K., 2019. Integrating soft skills assessment through
university, college, and programmatic efforts at an AACSB accredited
institution. Journal of Information Systems Education, 19(2), p.11.
Oduro-Ofrikyi, C., 2019. Assessing the financial performance of GCB bank using accounting
ratios,(2006-2015) (Doctoral dissertation, University of Education, Winneba).
Falcone, P.M. and Sica, E., 2019. Assessing the opportunities and challenges of green finance in
Italy: An analysis of the biomass production sector. Sustainability, 11(2), p.517.
Chang, Z., Hu, X., Pan, Z. and Shi, J., 2020. Rating shopping: evidence from the Chinese
corporate debt security market. Accounting & Finance.
Coles, J.L. and Li, Z.F., 2019. An empirical assessment of empirical corporate finance. Available
at SSRN 1787143.
Marriott, P. and Teoh, L., 2019. Computer-based assessment and feedback: Best Practice
Guidelines. The Higher Education Academy. Retrieved, 20.
Kwilinski, A., 2019. Implementation of blockchain technology in accounting sphere. Academy of
Accounting and Financial Studies Journal, 23, pp.1-6.
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