Professional Documents
Culture Documents
Balance Sheet
-
Asset
Liability
Equity
Income Statement
-
Income
Expenses
Cashflow Statement
-
Ordinary Shares
o Opening Balance
o Changes during the year
o Closing balance
Retained earnings
o Opening Balance
o Changes during the year
o Closing balance
Definition of accounting
Classification and recording of monetary transactions
Presentation and interpretation of the results
Monetary projection of future activities
Accounting statements are used as a bridge between business and internal &
external stakeholders
Qualitative characteristics of financial information
Look into the Balance Sheet to find out what is the current position of the
company.
Assets = Liability + Equity
If investing in company which is having high gearing, the returns should be high
enough to invest (because we are taking high risk as the probability to go bust
very high)
For the short term, cash is important to run business. Whereas in the long term,
it is more on profitability. When looking at the profitability, it should be based on
the trend.
When looking into the income statement, financial performance can be found
DEPS (Diluted Earnings Per Share) If the people who owns options comes in
what is the earnings per share and will affect the investment decisions.
Definition of Finance
Funds
-
Internal Fund
o Retained Earnings since this is the amount pertains to
shareholders, expected return should also be met in using the
funds.
External Fund
o Long Term
Ordinary Shares cost involved is to meet expected return
otherwise the shareholder will pull out the money and
invest somewhere.
Preferential Shares
Term Loan
Leasing
Sales & Buy back for assets
Bonds
Debentures
Etc.
o Short Term
Supplier Credit Terms
Factoring invoices
NPV
IRR
Payback
Agency Theory
Where the owner and the person who manages the company are different
Shareholder is the principal of the company
Boards of directors are engaged by shareholders to make decisions on their
behalf.
Agency problem will arise due to conflict of interest
The problem can be solved by means of auditors, shares issuance, performance
related bonus, etc. which incurs cost to the company.
Employees are interested in the company accounts for income, stability, carrier
advancements
Chapter 2
Value of money changes over time based on
Consumption preferences
Risk preferences
Investment preference
Annuity is used to know how much to be deposited each period so that the future
value is achieved after a particular period.
22-Oct-2011
Annuity Consistently deposit a particular amount over a period of time
Compounding Deposit one time and wait for the end of the period
29-oct-2011
Budget is a formal written statement of managements plans for a specified
future period, express in financial term
Budgeting forward looking, how to achieve the target,
Company Performance to know the current performance and what is the target
for performance
Negotiation negotiation with management on targets, negotiate with external
party such as suppliers, bankers, negotiate with staffs to set the targets,
negotiate with customers (expectation of the market), between departments
how to interact with each other to achieve the common goal of the company.
Importance of Budgeting
-
Budget System
Long term planning process
Short terms (annual budgeting process)
1.
2.
3.
4.
5.
Identify objectives
Identify potential courses of action (i.e. strategies)
Evaluate alternative strategic options
Select alternative courses of action
Refer textbook
Disadvantages
Build in budget slack (which will be waste of resources as
each will commit to less than what is achievable)
Too many opinions and will create confusion and will not be
able to achieve the goal
Time consuming and requires more effort
Rolling Budget
o When one period expires (month, qtr, etc) one more period added
so that it is always for next 1 year
o Advantages
Up to date forecasting
Immediate response to incorporate controls in the budget
Always have clear direction
Will have updated and relevant information in future
o Disadvantages
Time consuming
Moving targets (changing targets) which may create
confusion on organisational goal
Could be contradicting with the long term target
Top down budget
o Advantages
Aligns with the strategic goals of the company
Time saving (as it involves resources to participate in budget
preparation)
o Disadvantages
Domino effect (gives the impression that the company is
dominated by managers)
The target may be set targets which may be unachievable
which in turn demotivates the staff
No commitment from staff
Loss of human capital because of demotivation
Survival of company falls in the small group of people
Zero based budget (priority budget)
o Prioritize resources according to the target and not based on the
past achievement
o Advantages
More focussed on achieving the target
Will help innovations (new ideas on achieve the goals more
efficiently and effectively)
Gives more freedom to budget to achieve the goals
o Disadvantages
Will lead to trial and error
Time consuming to support the budget facts
The accuracy of the budget is in question as the previous
data is not referred
Gives way to manipulate the personal goals since past data is
not used
Incremental budget
o Refer to previous year and increase the target by referring to last
year
o
Advantages
Accurate (based on past year)
Realistic (based on past year)
Time saving
Easy to achieve as the budget is already implemented last
year and it is well known what should be done to achieve the
target
o Disadvantages
May not increase the performance
Not taken into the consideration of current market situations
If budget slack was implemented earlier, this system will
increase the wastage
Long term goals is not taken care in the budget and will not
meet them over the years.
Consultative budgeting
o Combination of both top down and bottom up budgeting system.
Staffs are given opportunity to provide the ideas and this may or
may not be taken into consideration when designing the budget by
top management.
o Advantages
Has certain level of participation
Time saving
o Disadvantages
Demotivation if none of the ideas implemented and staffs
will be reluctant to achieve the target
No responsibility and accountability since is more towards
top-down as the budget is prepared by top management.
o
Sales Budget
Cost of sales budget
o Material budget
o Manpower / labor budget
o Overhead budget
Selling and Administration budget (selling refers to marketing, human
resources, etc.)
Income statement budget
Cash budget
o Capital expenditure
Budgeted Balance Sheet
Quarter
Sales Quantity
Selling Price per
unit (RM)
Sales (in Rs.) (RM)
ABC S/B
Sales Budget for Year 2012
Qtr1
Qtr2
Qtr3
Qtr4
3000
3500
4000
4500
50
50
50
50
150,000.
00
175,000.
00
200,000.
00
225,000.
00
62,000.
00
72,000.
00
82,000.
00
92,000.
00
ABC S/B
Direct Labour Budget for Year 2012
Quarter
Qtr1
Qtr2
Qtr3
Qtr4
Budgeted Sales Unit
3000
3500
4000
4500
Rate per unit (RM)
20.00
20.00
20.00
20.00
60,000.00
70,000.0
0
80,000.0
0
90,000.0
0
Quarter
ABC S/B
Cost of Sales Budget for Year 2012
Qtr1
Qtr2
Qtr3
Qtr4
Budgeted Material
Purchased (RM)
62,000.00
72,000.0
0
82,000.0
0
92,000.0
0
60,000.00
70,000.0
0
80,000.0
0
90,000.0
0
122,000.00
142,000.
00
162,000.
00
182,000.
00
Yes identify the area of issue and to respond to the issue, to avoid same
mistake to be made in future,
No cannot be prevented, the factors could be that the budget could be
outdated, effective control depends on who implements the control and has
human factor. It needs timely and effective response.
2.1
Imposed Uses human resources that is management
Participatory extensive human resources required
2.2
Yes needs to be committed for employees to achieve the common goal of the
company, if the employee have the perception that the budget is used to control,
then it will have negative impact.
No in case of top down, it is not necessary to have the correct perception and
only required to implement it.
2.3
Yes It requires communication in both imposed and participatory
No too much communication can create confusion
05-11-2011
Fixed & Flexibile Budget
Example: Below are the product cost for 10,000 units of product
Cee
Direct Materials
Direct Labour
Variable Overhead
Fixed Overhead (RM 150,000)
Selling Expenses
Administrative Expenses (RM 50,000)
Distribution Expense
Total
RM (Per Unit)
60
30
25
15
15
5
10
160
Required:
Prepare a fixed budget and flexible budget (6000,7000 & 8000 units) based on
the above information.
Fixed Budget @ 10,000
units
Units
Cost / Unit
Units
Total Cost
Direct Materials
60
10000 600,000.00
Direct Labour
30
10000 300,000.00
Variable Overhead
25
10000 250,000.00
150,000
1 150,000.00
15
10000 150,000.00
Fixed Overhead
Selling Expenses
Administrative Expenses
50,000
Distribution Expenses
10
1 50,000.00
10000 100,000.00
Total
1,600,000.00
Flexibile Budget
Units
Cee
Cost / Unit
6000
7000
8000
Total
Total
Cost
Total Cost
Cost
Direct Materials
360,000.0
60 0
Direct Labour
180,000.0
30 0
420,000.00
480,000.0
0
210,000.00
240,000.0
0
Variable Overhead
150,000.0
25 0
175,000.00
200,000.0
0
150,000.0
0
150,000.00
150,000.0
0
105,000.00
120,000.0
0
50,000.00
50,000.00
50,000.00
10 60,000.00
70,000.00
80,000.00
1,180,000.00
1,320,000
.00
Fixed Overhead
Selling Expenses
15 90,000.00
Administrative Expenses
Distribution Expenses
1,040,000
.00
Total
Cash Budget
Amount
Xxx
Xxx
XXX
XXXXXXXXX
Xxx
Xxx
Xxx
Tax payments
Dividend payment
Purchases of fixed assets
Total
Net cash inflow
Add: Opening Balance b/f
Closing Balance
Xxx
Xxx
Xxx
Xxxxxx
A-B
Xxx
C-D
Additional Question 1:
Cash Budget for 3 Months Ending June 30th
April
May
June
Cash Receipts
512,000.0
280,000.0
Collection from Sales from Cust
0 336,000.00
0
Sales
84,000.00
70,000.00 78,000.00
Sales of Fixed Asset
22,000.00
0.00
0.00
618,000. 406,000.0 358,000.
Total Receipts
00
0
00
Cash Payments
396,000.0
0
27,300.00
140,000.0
Salary & Wages
0
Overhead Expenses
62,000.00
Dividend Payment
0.00
Taxation
625,300.
Total Payments
00
Payment to Suppliers
Purchases
252,000.00
18,525.00
119,000.00
60,000.00
55,000.00
5,500.00
510,025.0
0
Opening Balance
110,000.0
0
-7,300.00
102,700.00
104,025.00
Closing Balance
102,700.
00
-1,325.00
171,000.0
0
21,450.00
124,000.0
0
69,000.00
0.00
385,450.
00
-1,325.00
27,450.00
28,775.0
0
Question 2
Question 3
Flexi
bile
Budg
Units
9000
10000
11000
12000
et
Expe
nse
Type
Cost /
1000
0
Units
Vari
able
%
Variabl
e Cost
(per
Unit)
Total
Cost
Total
Cost
Group
1
45000
100% -
4.50
40,500
.00
45,000. 49,500
00
.00
54,000.
00
Group
2
30000
7,500.
75% 00
2.25
27,750
.00
30,000. 32,250
00
.00
34,500.
00
Group
3
27000
13,500
50% .00
1.35
25,650
.00
27,000. 28,350
00
.00
29,700.
00
Group
4
18000
13,500
25% .00
0.45
17,550
.00
18,000. 18,450
00
.00
18,900.
00
Group
5
18000
0
180,00
0% 0.00
180,00
0.00
180,00
0.00
180,00
0.00
180,00
0.00
291,4
50.00
300,0
00.00
308,5
50.00
317,1
00.00
Fixed
Cost
Total
Total
Cost
Total
Cost
Budgetary slack
Advantages
o This will be in line with the share holders expectations
Disadvantages
o Doesnt take time value of money
o Profit can be manipulated which is involved in calculation and hence
may not be accurate
Payback
The number of years it takes the cash inflows from a capital investment project
to equal the cash outflows
Advantages
Disadvantages
Real funds flows can be seen in cash but not in accounting profit
Interest charges become payable as soon as money is made available,
for example from a lender to a borrower not when an agreement is
made or contract is signed.
ARR = average accounting profit over the project / initial investment x 100%
Activity 4.4
ARR = 25%
Example:
Company has 2 investment opportunities which the information is as follows
Initial Outlay
Profit for year
Profit for year
Profit for year
Profit for year
1
2
3
4
A
100,000
15,000
10,000
10,000
15,000
B
150,000
20,000
20,000
25,000
25,000
ARR =
tselvem@hotmail.com
How to find the discount rate for the company it is based on the cost of capital
Cost of capital -> internal & external
Internal -> Retained Earnings
External Equity & Borrowing
Equity -> Ordinary Shares, Preference Shares
Borrowing -> Short Term & Long Term
The cost for Short Term & Long Term is the interest that needs to be paid
The cost for shares is the expected return from the share holder
The cost for retained earnings is also the expected return from shareholders
because the amount pertains to the shareholders.
Discounted cashflow uses time value of many. It is using Net Present Value (NPV)
or (IRR) and also it uses projected net cash flow using appropriate discount rate
or cost of capital.
Net Present Value todays value of the difference between cash inflows and
outflows projected at future dates, attributable to capital investments or longterm projects.
the IRR calculates the exact rate of return that a project is expected to
achieve, which is the discount rate used that results in a zero net present value
of the difference between cash inflows and outflows.
Calculation of IRR
IRR = a% + [(A / (A-B)) x (b%-a%)]
Where
a% = discounting rate that give Positive NPV
b% = discounting rate that give Negative NPV
A = NPV discounted at a%
B = NPV discounted at b%
10000
18%
5
0.437109216
4371.092162
b)
Future Value @ end of No.
of years
Discounting Rate
No. of Years
Discount Factor
Net Present Value
5000
15%
8
0.326901774
1634.508869
c)
Future Value @ end of No.
of years
Discounting Rate
No. of Years
Discount Factor
Net Present Value
6000
10%
4
0.683013455
4098.080732
d)
Future Value @ end of No.
of years
Discounting Rate
No. of Years
Discount Factor
Net Present Value
3500
13%
18
0.110812312
387.843093
e)
Future Value @ end of No.
of years
Discounting Rate
No. of Years
Discount Factor
Net Present Value
8500
8%
13
0.367697925
3125.43236
Question 2
Discount
Rate
10%
Cashflo
w
Year
Discounting Factor
Present Value
2000 0.9091
1,818.18
5000 0.8264
4,132.23
7000 0.7513
5,259.20
10000 0.6830
6,830.13
8000 0.6209
4,967.37
6000 0.5645
3,386.84
Present Value
26,393.97
Discounting Factor
Present Value
Question 3
Initial
Overlay
Discount
Rate
19000
12%
Cashflo
w
Year
1
2000 0.8929
1,785.71
5000 0.7972
3,985.97
7000 0.7118
4,982.46
10000 0.6355
6,355.18
8000 0.5674
4,539.41
6000 0.5066
3,039.79
Present Value
5,688.53
Question 4
Project 1
Initial
Overlay
Discount
Rate
15000
10%
Payback Period
(years)
3 years
Cashfl
ow
Year
Discounting
Factor
Present
Value
Cumulative
Cashflow
4000 0.9091
3,636.36
11000
5000 0.8264
4,132.23
6000
6000 0.7513
4,507.89
7000 0.6830
15000 1.0000
4,781.09
15,000.0
0
12,942.4
2
Present
Value
Project 2
Initial
Overlay
Discount
Rate
16000
Payback Period
10%
Cashfl
Discounting
ow
Factor
Year
Present
Value
Cumulative
Cashflow
2000 0.9091
1,818.18
14000
2000 0.8264
1,652.89
12000
7000 0.7513
5,259.20
5000
7000 0.6830
-2000
16000 1.0000
4,781.09
16,000.0
0
Present
Value
Project 3
Initial
Overlay
Discount
Rate
18,488.6
3
17000
10%
Cashfl
Discounting
ow
Factor
Year
3 years
8.5714 mont
29 hs
Payback Period
Present
Value
Cumulative
Cashflow
3000 0.9091
2,727.27
14000
3500 0.8264
2,892.56
10500
5000 0.7513
3,756.57
5500
8500 0.6830
5,805.61
-3000
3 years
7.0588 mont
24 hs
17000 1.0000
Present
Value
Question 5
Project X
Initial
Overlay
Discount
Rate
Year
18,817.9
8
Payback Period
(years)
50000
9%
Cashflo Discounting
w
Factor
Present
Value
3 years
mont
6 hs
Cumulative
Cashflow
10000 0.9174
9,174.31
40000
25000 0.8417
21,042.00
15000
25000 0.7722
19,304.59
-10000
20000 0.7084
50000 1.0000
14,168.50
50,000.00
Present Value
Project Y
Initial
Overlay
Discount
Rate
13,689.40
50000
Payback Period
9%
Cashflo Discounting
w
Factor
Year
Present
Value
2 years
mont
0 hs
Cumulative
Cashflow
25000 0.9174
22,935.78
25000
25000 0.8417
21,042.00
15000 0.7722
11,582.75
-15000
500 0.7084
-15500
50000 1.0000
354.21
50,000.00
Present Value
Project Z
17,000.0
0
5,914.74
Initial
Overlay
Discount
Rate
50000
Payback Period
9%
Cashflo Discounting
w
Factor
Year
Present
Value
2 years
mont
9 hs
Cumulative
Cashflow
15000 0.9174
13,761.47
35000
20000 0.8417
16,833.60
15000
20000 0.7722
15,443.67
-5000
20000 0.7084
14,168.50
-25000
5000 0.6499
-30000
50000 1.0000
3,249.66
50,000.00
Present Value
13,456.90
Questio
n6
Project
X
Initial
Overlay
Discoun
t Rate
Year
1600000
13%
Profit
Payback
Period
(years)
-60000
Depreciati
on
Cashfl
ow
Discounting
Factor
4 years
11.2 months
Cumulativ
Present
e
Value
Cashflow
200000
14000
0 0.8850
123,893.
81
1460000
219,281.
07
1180000
80000
200000
28000
0 0.7831
160000
200000
36000
0 0.6931
249,498.
06
820000
200000
200000
40000
0 0.6133
245,327.
49
420000
5
6
250000
250000
200000
200000
45000
0 0.5428
45000
244,241.
97
-30000
-480000
0 0.4803
216,143.
34
250000
200000
45000
0 0.4251
191,277.
29
250000
200000
45000
0 0.3762
169,271.
94
1,600,00
0.00
Initial
0 Overlay
16000
00 1.0000
Net
Present
Value
ARR
IRR
a%
b%
A
B
IRR
10.78
13%
15%
58934.96
215
66579.08
557
14%
Discounted Payback
Compute using Present Value instead of Cash Flow
58,934.9
6
-930000
-1380000
Profitability ratios
Return on ordinary shareholders funds (ordinary shares + reserves) = Net Assets
(Net profit after taxation and preference dividend (if any) / (Ordinary share
capital + Reserves)) * 100
Return on capital employed (capital employed = funds raised and used by the
company) -> used to identify companys efficiency to use the funds raised and
get the returns as performance
(Net profit before interest and taxation / (share capital + reserves + long-term
loans)) * 100
Return on Asset -> how efficiently assets were used to generate income
(Net income / Average total assets) x 100
Efficiency ratios
Average inventories turnover period -> how fast the company can sell stock to
customers
(Average inventories held / cost of sales) x 365
Where average inventories held = (opening inventory + closing inventory) / 2
Average settlement period for receivables -> how fast the company is able to
collect from the customers
(Trade receivables / credit sales) x 365
Average settlement period for payables-> how fast the company is able to pay to
its suppliers
(Trade payables / credit purchases) x 365
Liquidity Ratios
Whether the company has sufficient liquidity to satisfy short term liabilities
Current Ratio = Current Assets / Current Liabilities
Acid test ratio (Quick Ratio) = (Current assets (excluding inventories)) / Current
Liabilities
Gearing Ratios
can be used to find the capital structure
Gearing Ratio = (Long-term (non-current) liabilities) / (Share capital + Reserves
+ Long-term (non-current) liabilities)
Interest cover ratio = Profit before interest and taxation / interest payable
Investment Ratios
Dividend payout ratio = (Dividends announced for the year / earnings for the
year available for dividends) x 100
Dividend Yield ratio = ((Dividend per share / (1-tax%))/Market value per share) x
100
Earnings per share (EPS) = Earnings available to ordinary shares / No. of ordinary
shares in issue
Price/Earnings ration (P/E) = Market value per share / Earnings per share