Financial Management Report: Investment Appraisal and Control Systems

This report provides a critical discussion of management accounting and its methods for planning and measurement within an organization, analyzing performance, and explaining internal and external control systems essential for effective business activities, integrating with management accounting reporting. The role of management accountants is increasingly important, supported by various internal and external control systems, each with potential drawbacks. The report assesses a project for Jho Low Limited using investment appraisal techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period (PBP), Profitability Index (PI), and Discounted Payback Period (DPBP), concluding that the project would enhance profitability and return on investment. The analysis covers job costing, price optimizing, cost accounting, and inventory management systems, highlighting their roles and limitations in financial decision-making. The report uses calculations to show how these techniques can be applied to financial decision-making, ultimately supporting long-term financial sustainability.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The report provides a critical discussion of management accounting and its methods as a tool of
planning and measurement for an organisation to analyse its performance along with including
explanations for various internal and external control systems and their essentials with effective
business activities for integrating with management accounting reporting. This would assist in
developing an in-depth knowledge of the management accounting systems. It could be seen that
the role of management accountants is increasing day by day in global business organisations for
improving the overall business operations. For this, there are different internal and external
control systems in place, which could be integrated with the organisational processes; however,
they are subject to certain drawbacks. Finally, by using investment appraisal techniques, it has
been assessed that by accepting the concerned project, Jho Low Limited would be able to
increase its profitability and return on investment.

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Table of Contents
Introduction:....................................................................................................................................3
1. Role of management accountants and use of internal and external control systems:..................3
2. Different ways of financial decision-making for supporting long-term financial sustainability:8
Conclusion:....................................................................................................................................11
References:....................................................................................................................................12

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Introduction:
The report provides a critical discussion of management accounting and its methods as a
tool of planning and measurement for an organisation to analyse its performance along with
including explanations for various internal and external control systems and their essentials with
effective business activities for integrating with management accounting reporting. This would
assist in developing an in-depth knowledge of the management accounting systems. More
specifically, the objective of the report is to assist the management of Jho Low Limited in
undertaking investment decision with the help of different investment appraisal techniques.
1. Role of management accountants and use of internal and external control systems:
In the current era, the role of management accountants is increasing in business
organisations, which is discussed briefly as follows:
Stewardship accounting:
The management accountants are involved in designing the framework of financial
accounts and cost along with preparing reports for routine operational and financial decision-
making (Aerts & Walton, 2013).
Short-term and long-term planning:
Management accountants play a critical role to estimate future economic and future
business events in order to earn future plans, which include strategic management accounting,
long-term plans, formulation of corporate strategy and market study.
Development of management information system:

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The routine reports and reports for long-term decision-making are passed over the
managerial personnel at each level for undertaking corrective actions at the appropriate period.
These reports are used by the management accountants in order to undertake significant
decisions.
Maintenance of optimum capital structure:
The role of the management accountants is crucial for raising funds along with their
applications. They need to decide regarding maintaining an effective mix between debt and
equity. The accumulation of funds via debt is less costly compared to the tax benefits (Atrill,
2014). However, this is deemed to be risky, since interest on debt needs to be incurred
irrespective of the earnings of the organisation. Hence, the management accountants have to
maintain sound capital structure along with providing adequate consideration to different cost of
leverage, capital theories and chance of trading on equity.
Involvement in management process:
The management accountants are involved in performing staff functions and they possess
line authority over the accountants and other staffs as well. Moreover, they educate executives on
the requirement for control information and on the ways of using the same (Bromwich &
Scapens, 2016). They transfer relevant information from irrelevant and the same is reported
clearly to the management and sometimes to the interested outside parties.
Control:
The management accounts are engaged in analysing accounts and preparing reports such
as budgets, standard costs, cash and fund flow analyses, variance analysis and interpretation,

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liquidity management, evaluation of performance and responsibility accounting in relation to
control/.
Decision-making:
The management could obtain necessary information from the management accountants
when it comes to undertaking short-term decisions such as make-or-buy, optimum product mix,
product pricing, product discontinuance and others and long-term decisions like project
financing, investment appraisal and others (Bekaert & Hodrick, 2017).
The various types of internal and external control systems and their role in line with
different organisational processes associated with Jho Low Limited are discussed as follows:
Job costing system:
This system is used for assigning manufacturing cost to the individual products by
monitoring the overall expenses. Jho Low Limited could utilise this system for maintaining track
of its order expenses in case of identical products. The procedure of this system is described
below:
Receiving enquiry: The customers are worried regarding material quality and the price and time
taken for order completion.
Projected job price: This is conducted by the accountant by bearing in mind the preferences and
tastes of the customers (Chenhall & Moers, 2015).
Order receiving: Jho Low Limited could place orders based on providing assurance to the
customers regarding the prices.
Production order: This is placed for initiating the process of production.

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Cost recording: Every cost aspect is recorded in the process of production.
Job completion: On completion, the accounts department would be provided with a report for
final job costing to contrast with the estimated cost.
Thus, with the help of job costing, Jho Low Limited could ascertain the profitability of
each job individually and it provides all budgetary control benefits. However, this system is
expensive in terms of operations, since it needs detailed clerical operations and there might be
increase in possibility of errors (Hopper & Bui, 2016).
Price optimising system:
This is used for obtaining control of resource prices and it could be used for controlling
the prices of different products at a time as well. With the help of this system, Jho Low Limited
could ascertain the demand fluctuations at different price levels (Kaplan & Atkinson, 2015). In
addition, the organisation needs to use the system in order to tailor the prices for customer
segments through stimulation of their responses to varying price levels.
By using this system, Jho Low Limited could ascertain pricing policies for initial pricing,
promotional pricing and discount pricing. However, this system is automated and therefore, there
are chances that good and harmful products could be sold side by side.
Cost accounting system:
With the help of this system, Jho Low Limited could anticipate the product cost, while it
is possible to conduct analysis of business profitability, cost control and inventory. There are two
essentials of sound cost accounting system, which are stated as follows:

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 Cooperation and involvement of executives needed by different departments, which aids
in appropriate ascertainment of product costs
 The system needs to meet the needs of different users and accordingly, it could adapt to
the requirements of the organisation (Lavia López & Hiebl, 2014)
However, one of the significant drawbacks of this system is the consideration of past costing
records, while the management is planning to undertake decisions for the future.
Inventory management system:
This kind of management accounting system is associated with handling and supervision
of stock along with non-capitalised assets of the organisation. The organisational processes in
Jho Low Limited could be merged with this kind of system for accomplishing effective and
sound inventory flow within the organisation and at the selling point. This system requires two
essentials, which are stated as follows:
 Forecast and replenishment of strategies, which would help the organisation in advance
planning and cost requirements
 Physical and monetary management of inventory, which would assist in providing
benefits like cost minimisation and sound maintenance of inventory (Messner, 2016)
However, if periodic inventory system is used, the purchasing work could be peaked at the
review dates.

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2. Different ways of financial decision-making for supporting long-term financial
sustainability:
For assisting in the decision-making process of Jho Low Limited, different investment
techniques have been used for project evaluation and they mainly include net present value
(NPV), internal rate of return (IRR), payback period (PBP), profitability index (PI) and
discounted payback period (DPBP). The detailed calculations of these techniques in the context
of the proposed project are provided as follows:
Table 1: Calculation of annual cash flows for the proposed project
(Source: As created by author)

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Table 2: Calculation of investment appraisal techniques for the proposed project
(Source: As created by author)
In the words of Nielsen, Mitchell and Nørreklit (2015), NPV could be defined as the
difference between the present value of stream of cash inflows and present value of stream of
cash outflow over a particular period. When the NPV of any project is positive and higher, it
implies the viability of the same. In this case, the NPV of the concerned project is computed as
$3,442,981, which is significantly higher and it is even higher than the initial investment. Thus, it
denotes that Jho Low Limited would be able to earn considerable amount of profit by investing
in the project.

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IRR signifies the annualised effective compounded rate of return of an investment,
which makes the NPV equal to nil. When the IRR of any project is found to be exceeding the
cost of capital, it denotes better rate of return on an investment and vice-versa (Quattrone, 2016).
For the project of Jho Low Limited, it could be seen that the IRR is obtained as 35.28%, which is
considerably more than the cost of capital of 10%. In addition, the management requires a
minimum of 14% rate of return and the IRR is observed to have exceeded the expectations of the
management by 21.28%. This denotes that the organisation would be able to make increased
return on investment by investing in this particular project.
Payback period could be described as the time taken for the project in generating cash
flows, which repays the initial investment cost. If the time is lower than the economic life of the
project, an organisation could decide to take forward the project (Shields, 2015). In this case, the
project is estimated to have an economic life of 11 years and the payback period is computed as
2.73 years, which is significantly lower than the former. This denotes that Jho Low Limited
would be able to recoup the investment amount before the third year of the project and thus,
considerable benefits would be generated from the project.
Profitability index is defined as an index, which intends to detect the association between
benefits and costs of a proposed project. If the value is found to be above 1, it is a green signal to
the organisation to proceed with the project and vice-versa (Van Der Stede, 2015). In this case,
PI is computed as 2,38, which implies that by accepting this project, Jho Low Limited would be
able to earn more benefits compared to the costs incurred in future.
Discounted payback period is similar to that of normal payback period; the only
exception is that it takes into account the time value of money (Weetman, 2013). The discounted
payback period for the concerned project is calculated as 3.36 years, which is significantly lower

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compared to the economic life of the project. Therefore, in terms of this investment appraisal
technique as well, Jho Low Limited is advised to go forward with the project for maximising its
overall return on investment.
Conclusion:
From the above discussion, it could be seen that the role of management accountants is
increasing day by day in global business organisations for improving the overall business
operations. For this, there are different internal and external control systems in place, which
could be integrated with the organisational processes; however, they are subject to certain
drawbacks. Finally, by using investment appraisal techniques, it has been assessed that by
accepting the concerned project, Jho Low Limited would be able to increase its profitability and
return on investment.