Many businesses around the world still fail because their capital investment decisions are based upon a calculation on the back of an envelope and do not take any of the correct factors into account. Even larger businesses often get this wrong. This is a true sign of poor resource management.
Do you agree or disagree? Discuss the alternative methods of investment appraisal and describe the limitations of these to help justify your arguments. How do you think that capital budgeting decisions should ideally be made by different types of organisations?
Also,
1) The answer must raise appropriate critical questions.
2) Do include all your references, as per the Harvard Referencing System,
3) Please don’t use Wikipedia web site.
4) I need examples from peer reviewed articles or researches.
5) Turnitin.com copy percentage must be 10% or less.
Appreciate each single moment you spend in writing my paper
Best regards
SAMPLE ANSWER
Finance and accounting
Concept Exercise Week 6 PART B
I am in agreement with the statement. Many companies fail given that their capital investment decisions do not consider the appropriate factors. This is an indication of poor resource management. Capital investment decision basically mixes several aspects of finance and accounting. Many business factors mix to make business investment arguably the most significant fiscal management decision. Capital investment decisions are made to allocate the capital funds of the company most effectively to ensure the best return possible (Goodman et al. 2014). The most vital facets of capital investment decisions are assessing the projects and allocating capital depending on the project’s requirements. It is therefore of major importance to take correct factors into consideration when making capital investment decisions.
Alternative methods of investment appraisal: Internal Rate of Return – the IRR of a project is understood as the cost of capital or the discount rate which makes the project’s NPV zero. In essence, the IRR could be found through trial and error; the net present value is calculated at dissimilar discount rates until a discount rate is found which makes the net present value zero, or adequately close to zero (Kida, Moreno & Smith 2010). IRR limitations: firstly, does not consider the cost of capital and therefore should not be employed to compare projects of dissimilar length. Moreover, as an investment tool, the IRR must not be utilized in rating projects that are mutually exclusive. It should only be utilized in deciding whether or not one particular project is worth investing in (Kida, Moreno & Smith 2010). When it is compared to the NPV, the IRR method could sometimes give answers that are contradictory.
Net Present Value: a project’s NPV represents the absolute increase in shareholder wealth that is created by a given project. This investment appraisal technique supposes that every cash flow produced by a given investment would be reinvested at the organization’s cost of capital. Gupta and Banga (2009) noted that this is realistic given that the firm’s cost of capital actually matches up to the rates available in the marketplace, or the return which could be attained by investing in other projects. Limitations: the limitation of this investment appraisal technique is that it does not measure the size of the project. In addition, the NPV is based upon future cash flows as well as discount rate, both of which cannot be estimated with absolute 100% accurateness. In addition, there is always an opportunity cost to making an investment but the calculation of NPV does not consider this.
Payback period method: payback period is understood as the amount of time that it would take for the cash flows that are generated by a given project to pay back the original cash outflows – for initial costs, working capital, and capital investment – at the beginning of the project. This technique is based upon cash flows and not profits and disregards non-cash items like depreciation. Limitations: it overlooks the time value of money; it does not consider cash flows which are beyond the periods of payback thereby overlooking a project’s profitability (Farrant et al., 2009).
Ideally, capital budgeting decisions should be made to increase the value of the company by taking on a good project at the ideal time. In making the decision, the manager or owner should ensure that the company’s limited resources are allocated to the project that would best attain the company’s strategic goals. Capital budgeting decision should seek to maximize shareholder’s wealth by getting assets and generating profit.
Goodman, T, Neamtiu, M, Shroff, N, & White, H 2014, ‘Management Forecast Quality and Capital Investment Decisions’, Accounting Review, 89, 1, pp. 331-365, Business Source Complete, EBSCOhost, viewed 2 July 2015.
Gupta, A, & Banga, C 2009, ‘Capital Expenditure Decisions and the Market Value of the Firm’, IUP Journal Of Applied Finance, 15, 12, pp. 5-17, Business Source Complete, EBSCOhost, viewed 2 July 2015.
Kida, T, Moreno, K, & Smith, J 2010, ‘The Influence of Affect on Managers’ Capital-Budgeting Decisions’, Contemporary Accounting Research, 18, 3, pp. 477-494, Business Source Complete, EBSCOhost, viewed 2 July 2015.
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Administration in Health Care Institutions: Budgeting
Administration in Health Care Institutions: Budgeting
Order Instructions:
All health care organizations have complicated budgeting policies and procedures. The more the nurse understands the process, the more effectively they can participate in the process. The budget process usually starts with an interdisciplinary approach.
1.Describe the potential members of the interdisciplinary team for budget development and the role of each individual.
2.What are the specific responsibilities of nursing in the development of the budget?
Are the responsibilities for budget specific only to the leadership of the nursing department or are they found throughout the organization
SAMPLE ANSWER
Administration in Health Care Institutions: Budgeting
The health sector requires considerably large amounts of financing. The management of funds in institutions within the sector calls for strategic budgeting plans. In most organizations, the executive formulates financing plans, and different departments implement them. At times, budgets may not concur with the financial status of health care firms. Under such circumstances, managers have an extra responsibility to match budgetary needs to organizations’ financial resources. Involving interdisciplinary participation in organizations’ budgeting is a common approach that managers consider in easing management. Involving members of varied disciplines helps organizations to develop an integrated budget.
Financial budgeting teams should constitute of the management as well as clinical practitioners. The management controls funding and should, therefore, play centrally in budgeting. Practitioners from different bodies require presenting their requirements to the managerial body for consideration. Nurses, pharmacists, and physicians are the lead clinicians in matters of budgeting. When the three departments communicate, appropriate budgets would be easy to design (Edwards, 2011). Financial experts are also important in budgeting as they would advise other team members on the profitability of the approaches they propose.
Nursing practice predominates the activities undertaken in hospitals. Also, hospitals spend most of their resources through nursing activities. Nurse leaders manage most of the activities within healthcare especially the workforce (Douglas, 2010, Pg. 270). Therefore, they could identify most of the budgetary needs of their hospitals and present them to interdisciplinary teams. As such, the professionals should enjoy representation in management committees.
Though budgeting mainly involves leaders, nurses are also important in budget development. Nurses should communicate their suggestions to their leaders who may in turn forward them to the interdisciplinary financial management teams. Nurses interact with patients more than does other professionals, and they could help connect budgeting with patient care. Nurses should also implement budgets in manners that reduce the costs of care provision (Sherman & Bishop, 2012).
References
Douglas, K. (2010). Taking action to close the nursing financial gap: learning from success. Nursing Economics, 28(4), 270-273
Organization Financial Management Issue Order Instructions: interview co-workers or those responsible for finance in your organization on the financial management issue that you identified in Week 1. Your interview should capture salient information about the issue including information which you derived from the literature Potential questions you might want to use, include How long has the organization tried to address this issue?
Organization Financial Management Issue
What measures have been taken to address this issue in the past? What future steps have been planned to address this issue? What problems does the organization foresee as blocks to addressing this issue? How did your perception of the financial issue differ from the perception of those who are actually working on finances in the organization? Take the information you have learned from the interviews and create a 2-3 page paper with your findings. Be sure to explain the roles of the individuals you interviewed. As you reflect on the results of the interview, use current literature to further explain the important points.
Post your response in a Word document to the W2: Assignment 2 Dropbox. Cite all sources in APA format.
Organization Financial Management Issue Grading Criteria Maximum Points
The interviews contained information on the financial management issue in the organization including a description of the organization, the role within the organization of each individual interviewed and their viewpoint on the financial issue under study.
15
Interview included at least two people in the organization.
5
The interviews contained details of the measures taken to address the issue.
15
The interviews contained details on the future steps that have been planned to address the issue.
15
The interviews contained information on the blocks that the organization foresees in resolving this issue.
10
Contained statistical information providing background on the financial issue, including numbers of patients or nurses affected and some indication of the actual dollar cost and its percentage of the total hospital budget and any additional information to illustrate and further describe the financial issue.
15
Utilized current literature to further explain some of the identified issues.
15
Used APA style (which includes grammar, spelling, and punctuation, as well as formatting).
10
Over the past five years it has been noted that the budgeting of treatment of diabetes at St. Patrick’s Hospital has been a major financial issue. This has been reported to affect about 300 patients who are usually referred to other hospitals. As a nurse who works for the hospital which is a public hospital, I was tasked with the task of interviewing several staff members from the hospital concerning this issue.
For the purposes of the interview, I chose two staff members to interview, that is the Chief finance officer of the hospital whose main role is to oversee the allocation of funds to various departments and the doctor in charge of chronic diseases department whose main financial role is to oversee the usage of funds allocated for chronic diseases treatment . According to the chief finance officer, the hospital has had a shortage of funds when it comes to the budgeting of treatment of diabetes for the past five years. The hospital mainly depends on the government for funds to be used in buying of the drugs to be used in the treatment of diabetes of which the funds are insufficient. The chief finance officer had two main reasons to explain the reason why the funds are insufficient. Firstly, he noted that the drugs have become costly compared to how they were five years ago. He added that the government has continued to allocate the same amount of money that it used to allocate five years ago that is $100 million without putting into consideration the appreciating price which is at an approximated $150 million. Out of the $100 million, the hospital is required to use 0.05% for diabetes treatment. The finance officer furthers on by stating that 0.1% is required for full diabetes treatment in the hospital. A quick check on this reveals that according to a research done in 2013, it was discovered that diabetes drugs are the most expensive compared to any other drugs and that in between 2012 and 2013, the price had risen by 14% and that the price will continue to rise between 10% and 13% annually through 2016 with $245 billion being used in the USA for diabetes in 2013. The same was reflected in traditional medications such as diabetes therapies whereby the cost had risen by 0.5% between 2012 and 2013. (Chawla, 2014, pg 7)
Secondly, the chief finance officer was able to identify the tremendous increasing number of diabetic patients over the past five years as being the other reason as to why budgeting of diabetes has been a major financial issue. Interviewing the doctor in charge of chronic diseases was able to give us salient insight on this point. The doctor who is a member of the association was able to avail to us crucial statistics from the American Diabetes Association. According to the association, in 2010, there were 25.8 million reported cases of diabetes in the USA and in 2012, the number had risen to 29.1 million and he mostly associated this to the living style of the American People. (Chawla, 2014, pg 7)
All in all, the chief finance officer, who although acknowledges that nothing much has been done states that in the past they have tried to address this issue through sourcing of more funds from the government which has proven to be futile.
The hospital has taken several measures to address this issue; the doctor states that it has organized an annual marathon in conjunction with the American Diabetes Association. The marathon is aimed at raising proceeds that will be used in the treatment of diabetes. Time limit may become a barrier in performing this measure since a lot of time is required in the organizing of a successful marathon that will raise sufficient funds. The chief finance officer reveals that the hospital is sourcing funds from other alternative organizations such as the World Health Organization but he also states that these organizations might fail to corporate and this may be a barrier. The chief finance officer also states that funds allocated to other departments will have to be cut by 2% which will be directed to diabetes treatment. (In Dunham-Taylor & In Pinczuk, 2015, pg 224)
In conclusion, before the interview, my perception on the best way in addressing the financial issue was through regulating the number of diabetic patients but through the interview I was able to learn that that was practically impossible but rather the best method was through raising more funds.
1) The answer must raise appropriate critical questions.
2) Do include all your references, as per the Harvard Referencing System,
3) Please don’t use Wikipedia web site.
4) I need examples from peer reviewed articles or researches.
5) Turnitin.com copy percentage must be 10% or less.
Note: To prepare for this essay please read the required articles that is attached or sent by email.
Appreciate each single moment you spend in writing my paper
Best regards
SAMPLE ANSWER
Budgets and variances
Part A: Flexed and actual budget
Original budget and actual budget
Actual
Static (Original Budget)
Units
810
800
£
£
Sales revenue
753,300
760,000
Less
Direct materials
(192,500)
(192,000)
Direct labour
(221,000)
(200,000)
Fixed overheads
(130,000)
(128,000)
Operating profit
209,800
240,000
Actual budget and flexed budget
Actual
Flexed
Units
810
810
£
£
Sales revenue
753,300
769,500
Less
Direct materials
(192,500)
(194,400)
Direct labour
(221,000)
(202,500)
Fixed overheads
(130,000)
(129,600)
Operating profit
209,800
243,000
Part B: Variances
Actual
Flexed
Variance
Favourable / unfavourable
Units
810
810
£
£
£
Sales revenue
753,300
810 x 930 = 753,300
769,500
810 x 950 = 769,500
-16,200
U
Less
Direct materials
(192,500)
810 x 237.65 = 192,500
(194,400)
810 x 240 = 194,400
-1,900
F
Direct labour
(221,000)
810 x 272.8 = 221,000
(202,500)
810 x 250 = 202,500
18,500
U
Fixed overheads
(130,000)
810 x 160.5 = 130,000
(129,600)
810 x 160 = 129,600
400
U
Operating profit
209,800
243,000
-33,200
U
Part C: Business Report
A flexible budget is used in making a comparison between the actual results and the original budget. Variances are computed in order to measure how the company performed during a certain period. It is worth mentioning that in a flexible budget, the fixed costs remain constant while the semi-variable and variable costs change consistent with a standard that is preset at the commencement of a given period (Stephenson & Porter 2011). Whenever a flexible budget is adjusted to actual activity level, it is called a flexed budget. This is the budget that the company would have prepared at the start of the accounting period, had the top managers of the company known the exact actual output (Marple, 2009).
Generally, computing variances could be helpful in understanding why the actual results were different from the expectations and it is important to create a flexible budget. Flexed budget adjusts the original/static budget for the actual production volume or sales (Mak & Roush 2014). In the Orchid Limited case, a company which manufactures furniture, the original/static budget presumed that a total of 800 units would be produced and sold in a given month. The flexed budget rearranges the original/static budget to reflect the new number, making all the appropriate adjustments to expenditures and sales basing upon the unanticipated change in volume. In order to prepare a flex budget, it is important to have the original/static budget, properly understand cost behaviour, and know the actual number of goods that were made and sold. Orchid Limited had a great accounting period as actual sales came to 810 units.
The budget of Orchids Ltd is flexed in order to find out the amount of overhead that this firm should have, supposing that 810 units are made. Some costs are variable given that they alter in response to the levels of activity, whereas some other costs remain the same and are fixed. For instance, direct materials and direct labour are variable costs whereas other costs remain the same and are fixed, for instance fixed overheads (Garret 2010). Direct materials and direct labour are variable costs since the more furniture Orchid Ltd makes, the more labour and materials it needs. Conversely, overhead costs such as fixed overheads are fixed because in spite of the number of furniture made, the costs would remain the same. In the original/static budget, making 800 furniture units would result in variable cost per unit of £240 for direct materials and £250 for direct labour. To calculate the value of the flexed budget, the variable cost per unit is multiplied by the actual production volume. For income items such as operating profit and revenue in the case of Orchid Ltd, the flexed budget variance is favourable whenever the actual figures exceed the flexed budget figures and vice versa. On the other hand, for cost items, excess of flexed budget figures over actual figures implies favourable variance and vice versa.
Budget (Flexed)
Actual (Result)
Output
810 units
810 units
Sales variances
Variance 16,200
769,500
753,300
Direct material variances
Variance 1,900
194,400
192,500
Direct labour variances
Variance 18,500
202, 500
221,000
Fixed overhead variance
Variance 400
129,600
130,000
Budget (Original)
Actual (Result)
Output
800 units
810 units
Sales variances
Variance 6,700
760,000
753,300
Direct material variances
Variance 500
192,000
192,500
Direct labour variances
Variance 21,000
200, 000
221,000
Fixed overhead variance
Variance 2,000
128,000
130,000
Sales variances
Total variance between actual sales and original budget is £6,700 (Unfavorable). This is caused by:
Sales volume (activity) variance: in the original budget, 800 units had been planned. In the actual sales, 810 units were made. Sales volume variance is 10 units since 10 more units were sold, which favourable.
Sales price variance: in the original budget, the planned selling price was £950 per unit. In the actual sales, the selling price was 753,300 / 810 = £930. Therefore, the variance is because the sales price per unit of furniture was reduced by £20, which is unfavourable.
Direct material variances:
Usage/Price: in the flexed budget, direct material should have cost £194.400, but it did cost just £192,500. Therefore, the usage/price is £1,900, which is favourable. However, in the original/static budget, the planned cost of direct material was £192,500 but the actual cost was £192,500. As such, the usage/price is £500 which is unfavourable. The variance is because of an increase in market prices, poor buying, and purchase of higher quality materials which were more costly.
Direct labour variances:
Efficiency: in the flexed budget, direct labour should have cost £202, 500 but in the actual result it cost £221,000. Thus the efficiency/rate is £18,500 – unfavourable. In the original budget, the management planned £200,000 for direct labour but it cost £221,000, the efficiency/rate being £21,000 which is unfavourable. The cause for this could be the hiring of better employees, poor negotiation of employee salary, an increase in market labour rates, poor equipment which keep breaking down, lower quality materials that are not easy to utilize efficiently, or poorer training (Yahya-Zadeh 2012).
Fixed overhead variance:
Spending: since fixed costs are fixed, flexing is unnecessary to account for dissimilar activities. Nonetheless, the overspend of £2,000 is unfavourable and an adverse effect.
To improve its cost control, it is recommended that Orchid Ltd should maintain the price per unit of furniture to at least £950; it should not reduce the price per unit. Secondly, labour efficiency should be improved by procuring high-quality new technology machinery that do not keep breaking down; high-quality materials should be employed since they can be used efficiently; and the company should ensure tough negotiation in employee pay. To improve material usage variances, high-quality materials should be used and there has to be better management of materials. Sales price variances could be reduced through market price increase, and planned increase in prices (Stephenson & Porter 2011).
References
Garret, K 2010, ‘Spotlight on variance analysis’, Accountancy, 106, 1167, pp. 88-89, Business Source Complete, EBSCOhost, viewed 27 June 2015.
Mak, Y, & Roush, M 2014, ‘Flexible Budgeting and Variance Analysis in an Activity-Based Costing Environment’, Accounting Horizons, 8, 2, pp. 93-103, Business Source Complete, EBSCOhost, viewed 27 June 2015.
Marple, RP 2009, ‘Combining the forecast and flexible budgets’, Accounting Review, 21, 2, p. 140, Business Source Complete, EBSCOhost, viewed 27 June 2015.
Stephenson, T, & Porter, J 2011, ‘Comparing Budgets to Performance’, Strategic Finance, 93, 2, pp. 36-43, Business Source Complete, EBSCOhost, viewed 27 June 2015.
Yahya-Zadeh, M 2012, ‘Comprehensive variance analysis based on ex post optimal budget’, Academy Of Accounting & Financial Studies Journal, 16, pp. 65-85, Business Source Complete, EBSCOhost, viewed 27 June 2015.
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This essay is intended to get you thinking about the use of budgeting in an organisation. There are many different types of budgets. This week, you will consider different budgeting approaches such as flexible, zero-based and rolling budgets in organisations.
Consider the following questions:
•Consider the value of budgeting for an organisation.
•Consider the different budgeting approaches.
•Consider the behavioural aspects of budgeting.
•Consider different budgeting approaches in an organisation.
•Consider how the budgeting approaches may differ among various organisations, such as a Fortune 500 company, a small business or a non-profit.
•What are the characteristics of a budgeting system among the various organisations?
•What are some of the ethical issues related to budgeting and the successful implementation of a budget?
Address the following issues/questions:
‘I don’t need a budget; I run my own business so it’s all in my head. Bothering with a budget would just be a waste of time and money!’
Do you agree or disagree with this point of view? Discuss the value of budgeting for organisations of all sizes and types in terms of effective resource management. Explain what characteristics of a budgeting system are most likely to contribute towards its successful implementation and how a lack of these might result in ethical problems.
Also,
1)The answer must raise appropriate critical questions.
2) Do include all your references, as per the Harvard Referencing System,
3)Please don’t use Wikipedia web site.
4)I need examples from peer reviewed articles or researches.
5) Turnitin.com copy percentage must be 10% or less.
Note: To prepare for this essay please read the required articles that is attached or sent by email.
Appreciate each single moment you spend in writing my paper
Best regards
SAMPLE ANSWER
MFR.COLL.W5
Budgets are among the most important tools for business success and therefore I do not agree with the statement construing that there is no need for a business owner to have a budget. Even where the owner knows everything about his business, budgets promote proper planning and documentation of organizational income and expenditure. They ensure that the business expenditure is optimal through an analysis of all budget items and that the business is making the best possible profit out of the resources invested. Besides this, budgets create other forms of value for the business as discussed in this paper.
A budget is a planning tool and having one ensures that the business can effectively manage its income to cater for expenditure in order to realize desired profitability. Herrmann-Nehdi (2011, p. 97) notes that a budget gives an overview of the company’s income and expenditure and that through budget analysis, the business can choose priority areas to focus on to improve returns.
A budget to a large extent informs decision making in organizations. Herrmann-Nehdi (2011, p. 104) argues that it is easier to make a decision based on a budget because the budget consists details of all the financial resources of the organization and how they will be spent. Accordingly, the management is always aware of what the business is capable of at any particular time in terms of finances. In addition, the management can easily revise the budget to accommodate new developments by determining various courses of action meant to free some financial resources; such as cost cutting, outsourcing and utilizing credit facilities among others. This can only be accomplished if there was initially a budget detailing the cost of various activities.
Budgets are useful in designing business focus by identifying products that are profitable for the business and comparing them against unprofitable ones. This way, the business can choose the product that provides maximum benefits and whose budget is sustainable.
Budgets play the role of keeping expenditure within the limits specified by the business. This means that the likelihood of overspending or allocating excessive resources to a product are eliminated; thus saving business owners a significant amount of cash (Hollensen, 2011, p. 87). Without a budget, there are high chances of unplanned expenditure which often impact the organization’s profitability potential.
Effective budget implementation is to a large extent enhanced by various characteristics of a budgeting system. The budgeting process is however impacted by ethical issues as established in the section below.
Budgets create some form of certainty for the business; which helps managers to predict and control future operations. Hollensen (2011, p. 90) notes that since budgets are prepared at the beginning of the financial period, they guide the organization and employees on what to expect during the year. Ethical issues emerge from poor budget management which may lead to significant errors, which often mislead employees and may be detrimental to the organization. This is especially so when companies engage management consultants who may not take the budget making seriously. Some are even known for duplicating previous budgets they have developed for other companies and giving them to others without considering the strategic objectives of the organization.
A budget is meant to create a sense of ownership in the business process by allowing employees to share the management’s goals. This way, employees can effectively implement the budget to promote the organization’s overall objectives. Ethical issues often arise when budgets appear restricting or when the management imposes a budget that is overbearing on the implementers (Lafley and Roger, 2013, p. 63). This will not only lead to poor execution but the employees may also feel like the management has no concern for their welfare. This is especially so in the modern work place where the organization is expected to promote employee welfare as part of their ethical obligations (Hollensen, 2011, p. 9).
Budgets should always represent what is anticipated to happen in the correct manner in order to ensure that the implementers do not find themselves in a compromising position when budget estimates do not align with the estimates. Carreras, Mujtaba and Cavico (2011, P. 8) notes that an inaccurate budget can lead to ethical issues as they encourage managers to fabricate budgets to align it with the forecasts; leading to budgetary slack. An example would be a situation in which managers budget higher expenditure and lower revenues. This results in unfair rewarding of the managers for apparently exceeding their targets, which is considered inappropriate for any business (Santosuosso, 2013, p. 4). This therefore calls for accuracy as a budgeting system characteristic in order to promote effective implementation.
Finally, a budget should flexible in order to accommodate business uncertainties and therefore allow an organization to go ahead with plans that are considered strategically important. Where budgets are not flexible, ethical issues are likely to emerge as executors use the rigidity of the budget as an excuse not to execute strategy (Carreras, Mujtaba and Cavico, 2011, p. 9-10). This not only impacts the organization but it could also lead to poor business reputation and loss of confidence of customers.
References
Carreras, A., Mujtaba, B. G., & Cavico, F. J. (2011). Don’t Blame The Budget Process: An Exploration Of Efficiency, Effectiveness, And Ethics. Business and Management Review Vol. 1(3), 05 – 13. Retrieved from http://www.businessjournalz.org/articlepdf/BMR_1304.pdf
Herrmann-Nehdi, A. (2011). Creativity and strategic thinking: The coming competencies. Lake Lure, NC: Herrmann International, Hollensen, S 2011, Global Marketing. A Decision-Oriented Approach, 5th Edition, FT Prentice Hall, London.
Lafley, A.G. & Roger M. (2013). Playing to Win: How Strategy Really Works. Harvard Business
This is the last section of this paper and so far to be honest it has not gone very well as expected. The writer will have to complete this section and then I will send back all section of the paper with the comments from the prof for the entire paper and we make all amendments using the templates. The paper must be exactly as the templates before it will be finally graded for the final grades. But for this 2 days the writer should complete this section first and reverts while I gather all the other section so that we can revise it and make amendments base on the templates provided.
Hear beloe the writer will complete this section as you will notice it is clearly mentioned in one of the questions that we will need a table or an appendix so the writer should take note of that. Also they have mentioned that the writer will have to refer back to previous work to be able to complete this sections of the paper so let him take note of all that as we don’t have any chances hear to miss on anything. He must also obtain the latest information mentioned hear and include that in the paper in the appendix section, while referencing it in the discussion.
• Investment Analysis and Recommendation Paper – continued
This week you will prepare the final section of your Investment Analysis and Recommendation Paper, consisting of the capital structure choices, as well as an executive summary of your research.
You will examine the mix of debt and equity that your firm uses. After finding this information:
• Compare this to an industry average or a main competitor. What are the differences?
• Based on what you know about your selected company, do these differences seem appropriate?
• Relate your company’s capital structure choices to the appropriate capital structure theory (ies).
Also, as a component of your executive summary, obtain the current stock price for your company and use it as an additional calculation. Based upon all of your research, would you recommend investing in this company? Justify your answer.
SAMPLE ANSWER
Debt and Equity
Competitive Review of Debt and Equity Mix
The cost of equity is more expensive than the cost of debt. But the optimal structure of the company shows that equity capital is preferable to the company than the debt. The ratio of debt to equity in 2014 – 2012 was 4:6
APC
2014
2013
2012
Equity
19,725
21,857
20,629
Debt
15092
13065
13269
debt/Equity
0.4
0.4
0.4
Table 5
Market Value of Equity
APC
2014
Shares outstanding
52 million
Price as of 13.36 per share
Market value of equity
721 million
CAPM
27.35
(Yahoo Business Finance, n,d).
Debt
The cost of debt for APC for 2014 was 5.1 while for the years 2013 and 2014 it was 5.2 and 5.5 respectively.
APC (millions)
2014
2013
2012
Long term Loan
15092
13056
13269
Interest paid
772
686
742
Cost of debt
5.115
5.254
5.592
Table 6
Cost of Debt
APC
2014
Long term debt
Current Portion of Debt
Total Debt
15092 m
–
15092
Cost of Debt % before taxes
4%
Tax Rate
35.8%
(5)
Weighted Cost of Capital
Table 7
Weighted Cost of Capital Raw Data
Company name
Value $
%
Equity (Rs)
19,725
0.566
Debt (Rb)
15092
0.433
Total Value
34,817
1
(6)
= 15,092/34817 x 0.57 + 15092/34817 x 0.47 (1-0.358)
= 4.51%
Capital Budgeting Assumptions
The assumptions made are that the business has been taken as a going concern and it has been assumed that the directors of the business have no intention of closing the company in the near future (Brooks & Mukherjee, 2013).
Capital Structure Theories
The capital structure of APC reveals that the debt to equity ratio 4:6. It means that the ratio is optimal for the operations of the company. The capital structure theories can be traced to Modigliani and miller. The theories assume that the cost of capital is reflected by the country’s risk free rate which is also assumed to be constant while the growth rate is assumed to be zero as all the earnings supposedly paid out as dividends. The investors are assumed to have homogenous expectations while the market is perfect. The risk free rates have been taken as 4% while the calculated interest rates for APC are approximately 5% (Ross, Westerfield & Jaffe, 2013).
The theories state that the cost of equity is more expensive than the cost of equity especially where the concerned company has a lot of assets. The trade off theory applies partially to the capital structure of the firm as its struggling to maintain a balance between the debt and equity capital.
Summary
The shares of the company are fair and the prices of the shares are also high. In the last five years the shares of APC have fluctuated constantly between 80 and 83 but the lowest share price was 47.41 recorded in August 2010 while the highest was 112.69 recorded in August 2014. At 84.79 dollars the shares are very expensive but the company is facing a positive future given that the profits are reducing (Berk, DeMarzo, Harford, Ford, Mollica & Finch, 2013).
The company should analyze why the cost of sale is increasing rapidly from 10% in 2013 to 13% in 2014. I would certainly not invest in this company in the short term as the profits are currently non-existent and the situation is worsening. The net income for the last financial period dropped by a significant margin while the cost of goods also increased from 10% in 2013 to 13% in 2014.
Reference
Ross, S. R., Westerfield, R. W., &Jaffe, J. (2013). Corporate finance (10thed.). NY: McGraw-Hill.
Breakeven analysis is calculated to determine the minimum sales that an
Organization must meet to cover all the expenses and commence in making a profit (Cafferky & Wentworth, 2010). In our case, where; Unit variable cost= £30, Fixed Cost=£250,000, Sales= 50,000.
Solution
Total Variable cost= Unit Variable Cost*Sales =£30*50,000=1,500,000
Total Cost= Total Variable Cost + Fixed Cost=£1,500,000+£250,000=1750000
Breakeven point= Total Cost/ Unit sales
Therefore, the breakeven selling price is= Total Cost/ Sales
= 1750000/250000 = £7 per unit
If the planned selling price is £48 per unit, then;
Solution
Breakeven Sales Units = 250000/ (48-30) = 13,889
Budgeted Sales Units = 50000
Margin Safety = (50000-13889)/50000=0.72222*100
Therefore, the margin safety is 72.22%
The following information is about two organizations, A and B.
Which firm has higher operating gearing?
According to Alhabeeb (2012) Operating Gearing can be arrived using the following the formula {[quantity* (Price- Variable Cost per Unit)]/ Quantity* (Price –Variable Cost per unit) – Fixed Operating Cost}. Therefore;
For Organization A= [160,000*(0.60-0.20)] /160,000*(0.60-0.20)-60,000=64,000/4,000
=16
For Organization B= [160,000* (0.60-0.50)]/160,000*(0.60-0.50)-12,000
= 4
Therefore, firm A has a higher operating gearing compared to firm B
What is the expected net income of both firms?
The expected net income for firm A is 4,000 [(160,000*0.60)-(60,000+0.20*160,000)]. Which is similar to the expected net income for firm B [(160,000*0.60) – (12,000+0.50*160,000)]= 4,000. Therefore, the expected net income for both firms is 4000
If the sales are 140,000 units, then the expected net income for firm A will be 4000 [(140,000*0.60) – (60,000+ 140,000*0.20)]. For firm B, the expected net income is 2000 [(140,000*0.60)- (12,000+140,000*0.50)]. Consequently, if the sales were 180, 000 units, then the expected net income for firm A will be 20, 000 [(180,000*0.60) – (60,000+140,000*0.20)]. Consequently, the expected net income for firm be will be 6,000 [(180,000*0.60)- (12000+180,000*0.50)]
The firm that is facing more risk in terms of current sales prediction is firm B that has a lower operating Gearing. Firms with higher operating gearing can make more money as compared to firms with lower operating gearing from incremental revenues (Richards, 2013). This tendency is because they don’t have to increase their cost of production to make those sales (Mclaney & Atrill, 2010). But firms with lower operating gearing have to increase their cost of production to increase sales.
References
CAFFERKY, M. E., & WENTWORTH, J. (2010). Breakeven analysis the definitive guide to cost-volume-profit analysis. [New York], Business Expert Press. http://site.ebrary.com/id/10404343.
Richards, D. (2013). How to do a breakeven analysis.
Alhabeeb, M. J. (2012). Break‐Even Analysis. Mathematical Finance, 247-273.
MCLANEY, E. J., & ATRILL, P. (2010). Accounting: an introduction. Harlow, Financial Times Prentice Hall.
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For the following Individual Case Study, you assume the role of someone who has been asked to provide a Business Report for a group of friends who have invested in an organisation, Fashion Clothing. They had heard you are taking an Accounting and Finance Module and have asked for your advice.
The scenario
A group of friends have formed a new business called Fashion Clothing, an online and mail-order clothing business, in which they have invested £200,000 of their own capital. They intend to manufacture and sell quality clothes. They have set up the business and are selling direct to the final consumer, using a combination of aggressive marketing across a range of different media and also with the use of an automated Web site that accepts online orders. To support this, they also have a department of telephone sales and support staff ready to help customers. The sales staff work in teams and receive a basic salary plus commission for each successful sale. By the start of July 20X5, they have spent £150,000 on tangible non-current assets, and they currently have the remaining £50,000 in their business bank account.
They provide you with the following forecasted figures for their first 6 months of trading:
£
Sales for the next 6 months
1,350,000
Cost of the materials used up in sales
390,000
Labour costs for the 6 months
480,000
Other expenses for the 6 months, including marketing costs and £15,000 depreciation of tangible non-current assets
345,000
Materials purchased during the 6 months
520,000
Their projected cash receipts and payments are estimated to be as follows:
Month (20X5)
Sales Receipts
Payments for Materials
Labour and Other Expenses
£
£
£
July
150,000
120,000
These payments are divided equally over each of the 6 months.
August
120,000
100,000
September
150,000
60,000
October
210,000
60,000
November
260,000
60,000
December
285,000
60,000
Totals
1,175,000
460,000
In addition to the above, they expect to have to pay a tax bill of £20,000 in December 20X5 and also plan to buy (and pay for) £30,000 additional tangible non-current assets in that same month. All transactions will go through their business bank account.
Required
You are asked to provide a Business Report (1,000 words for the main body of the report) for the friends who have invested in Fashion Clothing, commenting on the business’ prospects and including the following five financial statements:
Since none of the investors have a background in accounting and finance, you should also explain what each of these statements means as a part of your report.
An opening statement of financial position at the start of July 20X5.
A monthly cash flow forecast, showing the bank balance at the end of each of the 6 months and indicating what level of overdraft facilities the friends need to negotiate with their bank manager. Explain what additional expense they should take into account as a result of needing this financial assistance (overdraft).
A projected income statement for the first 6 months of trading.
A projected statement of financial position for Fashion Clothing at the end of its first 6 months of operations.
A projected statement of cash flows for the first 6 months of trading and using the indirect method.
Keep the following in mind:
Using a spreadsheet may help you to produce your cash flow forecast. Remember here that £150,000 of the initial £200,000 has already been spent. Hence, your opening bank balance should be £50,000. Your closing bank balance should be included in your statement of financial position as at 31.12.20X5.
Think carefully about the £15,000 depreciation charge when working out your monthly cash outflows for labour and other expenses.
Also think carefully about the figures for closing stocks (inventories), creditors (payables) and debtors (receivables).
Please remember that your qualitative analysis and explanation of your five statements are just as important as the calculations themselves. These, together with your presentation of a professional report, will contribute towards your grade for this assignment.
Please be sure to re-visit the Key Concept Overviews for Weeks 1 and 2, as well as Week 3. These should serve as a reminder of the accruals concept, plus the difference between a cash flow forecast and a statement of cash flows. They also include detailed numerical examples that should assist with your calculations for your financial statements.
Ideally a business report should be produced with a suitable structure and quality of discussion around the following key areas:
Executive summary
Table of contents
List of figures
Introduction
Main financial findings.
2.1 Summary of the first 6 months business operations
2.2 Financial accounting statements
Analysis
3.1 Initial analysis in context of the three financial statements.
3.2 Investigations to increase efficiency
Conclusion
References
ANNEX I: Statement of financial position Fashion Clothing – 01.07.20X5 and 31.12.20X5
ANNEX II: Income statement Fashion Clothing – 6 months to 31.12.20X5
ANNEX III: Statement of cash flows Fashion Clothing – 6 months to 31.12.20X5
ANNEX IV: Projected cash flow forecast for the first 6 months of trading
To complete the assignment:
By Day 7, submit your Individual Assignment to the Turnitin link provided.
Be sure to read over your Individual Assignment before submitting it to your Instructor. Make sure the spelling and grammar are correct and the language, citing and referencing you use when providing your opinion are appropriate for academic writing.
SAMPLE ANSWER
Executive Summary
Fashion clothing targets to sell trendy fashion clothing to clients who prefer to buy expensive garments at a price slightly above the average market price. With an initial capital of $200,000, the company has its goal on an average daily turnover of the same amount. The business in fashion clothing industry requires heavy investment in stock as most customers have different sizes and preferences and they require a large variety made up of different sizes and designs.
The objective of Fashion clothing is sell unique products that are appealing to clients and which have been designed with utmost accuracy and according to the clients exact details. The apparels are meant to be custom made per the client’s requests.
The mission of the company is to allow many potential clients to place orders that that they are assured of good quality and timely delivery.
Fashion clothing is a company that intends to take advantage of the delays in deliveries of orders that is common in the apparel industry. The company plans to sell most of its custom made designer clothes through the internet hence its strategy is to stock a few items for display only while the materials for the major orders that have been placed by customers can be obtained directly from the supplier’s shops and delivered to the business premises directly before they are manufactured according to the sizes and designs requested by the clients.
The main component of the internet based sales is timely delivery of the finished product to the client. The company must has already strategized to have an efficient delivery system to maintain its potential clients.
Contents Pages
Introduction………………………………………………………………………………4
Main financial findings………………………………………………………………..4
2.1 Summary of the first 6 months business operations…………………………..5
3.1 Initial analysis in context of the three financial statements…………………..6
3.2 Investigations to increase efficiency………………………………………….7
Conclusion………………………………………………………………………………7
References………………………………………………………………………………8
Appendices………………………………………………………………………………9
List of Figures
ANNEX I: Statement of financial position Fashion clothing – 01.07.20X5 and 31.12.20X5…9
ANNEX II: Income statement Fashion Clothing – 6 months to 31.12.20X5
ANNEX III: Statement of cash flows Fashion Clothing – 6 months to 31.12.20 X5
ANNEX IV: Projected cash flow forecast for the first six months of trading
1. Introduction
Fashion Clothing is a new company in the market. Its initial investment amounts to $200,000 and
75% has already been invested in the business while the balance is in the bank.
The company has forecasted its initial sales for the first six months of trading and it hopes to breakeven in the third and final quarter of 20X5.
The major products that the company intends to manufacture are fashionable and trendy dresses for women and gentlemen suits for men. Shirts and ties for men will be introduced after the first phase of the projection.
Ladies designs seem to be more prevalent in the market than men’s original suits and ties. Fashion Clothing intends to provide a wide array of Ladies clothing for display together with matching huts, belts and shoes which will be obtained from the market to enhance the sale of matching items.
For children, fashion clothing intends to have a retail section that has been franchised from other larger apparel manufacturers to boost its sales for the first two years of trading. This strategy would make it possible for the company to decide if it’s profitable enough to introduce their own manufacturing line for children clothing.
Main financial findings
The projected cash flow statement indicates that the company will incur losses throughout its trading periods in the next six months
2.1 Summary of the first 6 months business operations
Jul
Aug
Sep
Oct
Nov
Dec
Sales
£ 150,000.0
£ 120,000.0
£ 150,000.0
£ 210,000.0
£ 260,000.0
£ 285,000.0
Total expenses
£ 276,667.0
£ 276,667.0
£ 276,667.0
£ 276,667.0
£ 279,666.0
£ 341,666.0
Loss
-£ 126,667.0
-£ 156,667.0
-£ 126,667.0
-£ 66,667.0
-£ 19,666.0
-£ 56,666.0
Balance C/fwd
-£ 76,667.0
-£ 233,334.0
-£ 360,001.0
-£ 426,668.0
-£ 446,334.0
-£ 503,000.0
For the first six months the company will register losses as the sales are not enough to honor all the financial obligations and commitments that the company has entered into, in July for instance the total sales would amount to £150,000 while the total expenses would amount to £276,667 pounds. In august, the sales would amount to £120,000 while the total expenses would be the same as in the month of July hence a loss of £126,667 and £156,667 would be incurred for July and August respectively. The cash at bank that was brought forward would subsidize the loss in July to £76,667 but the remaining loss would be carried over to August which will result in a total loss of £233,334. The trend is the same till December where the grand loss would amount to £503,000. The total sales for the whole period would amount to£1,175,000 while the total expenses for the same period would be £1,728,000. The difference is a loss of 553,000 while the balance at the bank reduces the loss to £503,000 (Hermanson, Edwards & Invacevich, 2011, p.70).
2.2 Financial accounting statements
The income statement registered a loss of £523,000. The assets are like cash at bank and the assets acquired during the financial year are not entered in this account. However, the depreciation charged on the asset is entered in this account. A provision for depreciation is normally created to ensure that the asset is replaced when it wears out but in this case it has not been provided for. The tax incurred for the period has also been paid (Garrison, Noreen & Brewer, 2009, pg. 68)
The balance sheet indicates that the total equity is £323,000 while the current liabilities have amounted to £664,000 while the current liabilities are £503,000. The debtors could also be responsible for the problems that Fashion Clothing may be facing but s not mention in any part of the projections. The cash flow also indicates that the net cash flow from investing and financing activities amounted to £592,000.
Analysis
3.1 Initial analysis in context of the three financial statements
The three statements indicate that the projected financial results would mean that the company is incapable of meeting its financial obligations and it’s insolvent. The sales revenues are not enough to meet the primary obligations or expenses and it has to rely on bank overdraft or another source of income to finance its activities. The total amount paid as expenses exceeds the amounts earned as sales. The extra amount spent must have been received most likely from the bank or from creditors. But it’s not clear as the projected figures don’t include any creditors or may be debtors who are yet to pay for the gods received. The liquidity ratios for the company are also very discouraging. The current ratio for 20X5 for Fashion Clothing is 1.3. The current assets can only repay the total assets 1.3 times only instead of the ideal standards of for current ratios is supposed to be 2. That’s for every current liability the current assets should be able to cover it twice. The quick ratio or the acid test ratio fashion clothing is not even applicable as the current assets are made up of stocks only. To calculate the quick ratio the inventory is subtracted from the current assets and divided by the current liabilities. Hence Fashion Clothing liquidity status is zero. It’s bankrupt unless its directors look for a way to bail it out. The company needs long term financing in order for its liquidity to improve (Williams, Haka, Bettner & Carcello, 2008, p.40).
3.2 Investigations to increase efficiency
The sales department must be able to strategize on the best strategy to improve its sales. The company must increase its efficiency in production and maybe reduce its prices to boost sales. The liquidity ratios are not favorable and it should focus on obtaining long term debts to finance its operations.
Conclusion
To conclude, the directors of the company must work out a way to increase sales and marketing activities to boost its revenues. In the meantime, the directors should also look for ways of financing the company’s operations before it stabilizes. The company has a good strategy of using the internet to get clients on the market and it can be successful as the market is large and it’s yet to be exploited fully.
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011) Accounting Principles: A Business Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73.
Williams, J. R., Haka, S.F., Bettner, M.S. & Carcello, J.V. (2008). Financial & Managerial Accounting, McGraw-Hill Irwin, p. 40.
Appendices
ANNEXTURES
ANNEX I: Statement of financial position Fashion clothing – 01.07.20X5 and 31.12.20X5
01.07.20X5
Fashion Clothing
Statement of Financial Position as at 01.07.20X5
DR
CR
Bank
50,000
Assets
150,000
capital
200000
Fashion Clothing
Statement of Financial Position as at 31.12.20X5
Cost
Dep
NBV
Non-current assets
180,000
18,000
162,000
Current assets
Inventory
664000
664000
Total Assets
826,000
Current liabilities
Bank o/d
503000
503,000
Net Assets
323,000
Share holders equity
200,000
Retained loss
523,000
Total equity
323,000
ANNEX II: Income statement Fashion Clothing – 6 months to 31.12.20X5
Fashion Clothing
Income Statement for the year ending 31.12.20X5
Sales
1,175,000
Cost of sales mate
390,000
GP
785,000
Less Exp
Labor
480,000
Other expenses
330,000
Depreciation
18,000
Material purchases
460,000
Total Exp
1,288,000
EBIT
-503,000
Tax payment
20,000
Total loss
-523,000
ANNEX III: Statement of cash flows Fashion Clothing – 6 months to 31.12.20 X5
Fashion Clothing
Income Statement for the year ending 31.12.20X5
Cash generated from operations
-523,000
Add depreciation
18,000
Increase in stock
664000
Cash generated from operations
159,000
Less tax paid
20,000
139,000
Add bank overdraft
503000
Net cash from operations
642,000
Net Financing and investments
592,000
Net cash flow
50,000
ANNEX IV: Projected cash flow forecast for the first six months of trading
Fashion Clothing
Projected cash flow forecast for the first six months of trading
Jul
Aug
Sep
Oct
Nov
Dec
Balance B/fwd
£ 50,000.0
-£ 76,667.0
-£ 233,334.0
-£ 360,001.0
-£ 426,668.0
-£ 446,334.0
Sales
£ 150,000.0
£ 120,000.0
£ 150,000.0
£ 210,000.0
£ 260,000.0
£ 285,000.0
Cost of sales mate
£ 65,000.0
£ 65,000.0
£ 65,000.0
£ 65,000.0
£ 65,000.0
£ 65,000.0
Labor
£ 80,000.0
£ 80,000.0
£ 80,000.0
£ 80,000.0
£ 80,000.0
£ 80,000.0
Other expenses
£ 55,000.0
£ 55,000.0
£ 55,000.0
£ 55,000.0
£ 55,000.0
£ 55,000.0
Depreciation
£ –
£ –
£ –
£ 3,000.0
£ 15,000.0
Material purchases
£ 76,667.0
£ 76,667.0
£ 76,667.0
£ 76,667.0
£ 76,666.0
£ 76,666.0
Non Current asset
£ –
£ –
£ –
£ –
£ –
£ 30,000.0
Tax payment
£ –
£ –
£ –
£ –
£ –
£ 20,000.0
Total expenses
£ 276,667.0
£ 276,667.0
£ 276,667.0
£ 276,667.0
£ 279,666.0
£ 341,666.0
Profit
-£ 126,667.0
-£ 156,667.0
-£ 126,667.0
-£ 66,667.0
-£ 19,666.0
-£ 56,666.0
Balance C/fwd
-£ 76,667.0
-£ 233,334.0
-£ 360,001.0
-£ 426,668.0
-£ 446,334.0
-£ 503,000.0
References
Flynn, D., 2003, Understanding finance and accounting (rev. 2nd Ed). Durban: Butterworths.
Gitman, L.J., 2000, Principles of managerial finance (9th ed.). Menlo Park, Calif.: Addison Wesley.
Should human capital value should be included in financial accounting
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Dear Admin,
Note: To prepare for this essay please read the required articles that is attached then answer the following questions:
A perplexing issue, particularly for many human resource management and marketing professionals, is the absence of a valuation in the traditional financial statements relating to human capital and other internally generated intangible assets, such as brands. Often these value drivers of an organisation form a critical key success factor. Goodwill does appear in many financial statements and this includes intangible assets acquired by another organisation, which are often subject to large impairments losses. However, this raises questions about the sustainability and volatility relating to goodwill valuations. It is against this background that accountants have decided to be cautious in respect of recognising intangible assets in the financial statements.
To prepare for this essay:
•Consider the controversy of whether human capital should be included in the financial statements.
•Consider how human capital could be defined and quantified in financial statements.
•How do you define human capital?
•What is the importance of human capital?
•What are the reasons to measure or not measure human capital?
In an approximately 550-word response, address the following issues/questions:
With the rise of the ‘knowledge economy’, the traditional valuation of an enterprise as consisting solely of measurable assets, such as buildings, equipment and inventory, is increasingly being questioned. Human capital, although widely recognised as an important component of an enterprise’s total value, does not appear on a statement of financial position (balance sheet).
•Discuss whether or not you believe human capital should be included in the financial statements. Identify how you are defining human capital. What are some of the difficulties that may be encountered in attempting to quantify and record this (these) asset(s)? If recorded, would such values remain constant or be subject to change?
Also,
1) The answer must raise appropriate critical questions.
2) Do include all your references, as per the Harvard Referencing System,
3) Please don’t use Wikipedia web site.
4) I need examples from peer reviewed articles or researches.
5) Turnitin.com copy percentage must be 10% or less.
Note: To prepare for this essay please read the required articles that is attached
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SAMPLE ANSWER
There has been much debate concerning whether human capital value should be included in financial accounting. Many professional accountants who are of the opinion that human capital should not be included in the balance sheet base their views on the limitations associated with this factor. As it is widely known, financial accounting has many limitations and there is no single aspect of it that has no complications. According to Ionel, Alina & Dumitru (2010) the limitations associated with human capital accounting, or inclusion of it in balance sheet, should not be used as a factor to eliminate human capital from the balance sheet. This view emanates from recognition of human capital as an asset in a business organization which is at times of more value than the tangible assets of an organization. What is crucial therefore, is the proper analysis of the value of the available human capital so as to come up with the right value. In consideration of human capital as an asset of an organization in the sense that it adds to productivity (in great ways than most of the other assets) it is crucial that it is included in the financial statements. Akintoye (2012) maintains that; inclusion of human capital in the balance sheet is a crucial aspect that could serve the purpose indented in the seeking the financial statements. For instance, if an investor is interested in buying stock from the organization or lending funds. Such moves would be more guided when the financial statements include the human capital values.
However, it is crucial to note that, inclusion of human capital in the financial statement is tinged with myriads of limitations. It is paramount to note that the limitations should not in any way bar accountants from including this crucial aspect in financial statement. What is crucial is to look for means of overcoming the difficulties. Corrêa Dalbem, de Lamare Bastian-Pinto & de Andrade (2014) note that; such limitations include difficulties of recognizing the value of certain human capital. This aspect may be very much limiting but utilization of some accounting baselines such as ratio comparison would shed lights in the value of a human capital ingredient. Ratios are compared with past periods, similar businesses as well as planned performance. In the case of human capital, past performance of the given personnel, the expected performance in similar business as well as the planned performance would be of much importance I gaining insight in o the value. Performance of the human capital must also be in the interest of the organization for the human capital to be recognized as of (positive) value to financial statement. This idea points to the example of directors in an organization, who although they are not the real owners of the organization, they are supposed to work for the interest of the organization like a real owner would do. The position on this should be captured in the financial statement so as to make it more guiding and meaningful.
It is crucial to note that; although human capital needs to be included in financial statement, the values do not remain constant. For instance, some personnel may add up their education level, and this brings change to the records. This is very much unlike most of the other assets included in balance sheet, but this still should not bar accountants from including it in the financial statement.
References
Akintoye, IR 2012, ‘The Relevance of Human Resource Accounting to Effective Financial Reporting’, International Journal Of Business Management & Economic Research, 3, 4, pp. 566-572, Business Source Complete, EBSCOhost, viewed 10 June 2015.
Corrêa Dalbem, M, de Lamare Bastian-Pinto, C, & de Andrade, A 2014, ‘The financial value of human capital and the challenge of retaining it’, Brazilian Business Review (English Edition), 11, 1, pp. 46-68, Business Source Complete, EBSCOhost, viewed 10 June 2015.
Ionel, V, Alina, C, & Dumitru, M 2010, ‘HUMAN RESOURCES ACCOUNTING — ACCOUNTING FOR THE MOST VALUABLE ASSET OF AN ENTERPRISE’, Annals Of The University Of Oradea, Economic Science Series, 19, 2, pp. 925-931, Business Source Complete, EBSCOhost, viewed 10 June 2015. https://ideas.repec.org/a/ora/journl/v1y2010i2p925-931.html
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Note: To prepare for this essay please read the required articles that is attached then answer the following questions:
•Consider the role that accounting and finance play in organisations and how accounting and finance information can add to the value chain of an organisation.
Also,
1) The answer must raise appropriate critical questions.
2) Do include all your references, as per the Harvard Referencing System,
3) Please don’t use Wikipedia web site.
4) I need examples from peer reviewed articles or researches.
5) Turnitin.com copy percentage must be 10% or less.
Note: To prepare for this essay please read the required articles that is attached
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SAMPLE ANSWER
Introduction
The role of accounting and finance
Accounting provides the basis for assisting managers in organizations, creditors, bond holders, suppliers, customers and many other stake holders make effective decisions.
The major role of accounting is to provide financial information in a way that it’s understandable to most stakeholders. Accounting provides financial information for the following three reasons,
External reporting: Entails preparation of financial reports that are used by investors, government authorities, creditors among other stakeholders.
Routine internal financial reports: These are reports that are generated periodically by the accountants to be used by the management of the company for making internal decisions.
Non-routine internal reports: These financial reports are mostly generated to support decisions and other projects that need clarification when necessary. Accounting information is prepared in different formats depending on the users of the financial information
There are also three types of accounting information; Management accounting, Financial accounting and cost accounting. Management accounting focuses on financial information that
assists managers make decision in organization. The reports generated for the management are mostly routine but they can also fall on non-routine reports (Garrison, Noreen & Brewer, 2009).
Financial accounting generates reports, measures and also records all the business transactions according to the principles as set out by the policies and concepts of Generally Accepted Accounting Principles (GAAP). Financial accounting generates information that are used by the creditors who need to know the financial leverage of the company before extending any loans or financial assistance to the company. This information can be derived from the statement of financial position of the company or the balance sheet. Investors need to know if the company is liquid or not. Companies that are insolvent find it difficult to find investors as their profitability is not guaranteed. Information on the company’s profitability is obtained from the company’s income statement or cash flows (Atrill & Mclaney, 2013).
Cost accounting on the other hand provides information that facilitates decision making for both financial accounting and management accounting. Cost accounting measures and reports financial and also non financial information in a company that is associated with the costs of acquisition, production and consumption of an organization’s resources. Managers require information to make certain decisions. The costs of manufacturing a product and the expenses involved in sales and distribution are added together to determine the products total cost per unit to facilitate calculations of breakeven costs and the contribution margins. Managers need this kind of information to make decisions on the minimum number of units to produce in order to breakeven. This is a situation where all the fixed costs and other expenses have been covered but no profits have been realized. Its critical because without the production of the minimum units required for the company to honor its fixed expenses and other basic costs then the company will be insolvent and finally file for bankruptcy.
Cost Management
It’s an activity that is mostly carried out by the managers and it relates to cost control and planning. Managers have to constantly make decisions regarding the cost of materials, production processes and designs. The items to be included on annual budgets that target annual costs and expenses must be generated through information generated by cost accountants during cost management activities. Cost management ensures that costs are incurred with expectation of profits in future. Cost accounting provides the different combinations of expenses and the expected profits for different purposes and projects (Dayananda, Irons, Harrison, Herbohn and Rowland, 2002).
Cost management provides the system that managers require to record all the required information needed to make the right decisions. Cost management involves the production of such reports that are based on different formats and which have been prepared using different concepts such as absorption, marginal costing or activity based accounting. All these processes are applicable but certain concepts and procedures apply to different setups and conditions. Cost management determines the best method to be applied and also when to apply them.
Management Accounting
The main role of management accounting is to solve management’s problems, maintain the production scores and other costs while also directing the company to profitability. Scorekeeping maintains all the results that occur as a result of the actions of various managers and head of sections. These scores are also compared with the reaction of other companies in the same industry.
Value Chain
It’s the overall visualization of the entire business a series of activities that occur in a sequence of processes and activities that add value and usefulness to the services or products in the company and which are later sold. Management accountants are instrumental in providing decision support for each activity that is forms part of the value chain. The processes involved in value chain require careful analysis which can only be achieved through cost accounting to determine their profitability and other variable costs involved (Drucker, 1999).
Management accounting provides the various accounting reports for all the work in progress and finished goods. The various types of information that are required to maximize profits and minimize cost are generated by the cost accountants. The role of accounting in global business is critical as it provides a unified standard system for preparing financial statements in a way that is understandable by all accountants and auditors globally.
References
Atrill, P. & Mclaney, E. (2013) Accounting and Finance for Non-Specialists. 8th Ed. Harlow, UK: Pearson Publishing.
Dayananda, D., Irons, R., Harrison, S., Herbohn, J. and P. Rowland (2002) Capital Budgeting: Financial Appraisal of Investment Projects, Cambridge University Press. pp. 150.
Drucker P. F. (1999) Management Challenges of the 21st Century. New York: Harper Business.
Garrison, R., Noreen, W. & Brewer, P. (2009). Managerial Accounting, McGraw-Hill Irwin.
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