Financial Accounting Practice Questions And Solutions

Question 1

The CVP analysis consists of three elements and the same are cost, volume (the number of units) and the profits. It is carried out for making important and noteworthy information available towards the managers of the business in respect to the products and services offered by them. The same will only be available by the people having an internal hold in the business. The past performances are assessed and analysed to get the effective structure of present and future costs and performances. Hence, the model of CVP will be effective in achieving the ultimate success required by the company.

The accrual accounting that includes the immediate write off of the whole costs as expenses in terms of assets of long life. The spread of the cost must be done over the expected life that is done in the case of the straight line method and thus is one of the most useful methods of depreciation in undertaking the accrual system of accounting.

The depreciation process of an asset leads to a residual value that is left at the end of the period of the asset and the same is used for the determination of profits from the sale of asset. But, it is a non cash expense and it has no relation with the cash. So, we disagree with the given statement.

The NPV is higher and positive than the obtainable profits under the operation of the old machine, there must be replacement of the old machine with new one.

The non-financial factors that should be considered in making the final investment decision other than NPV are as follows:

• Improvement in the morale and relationships among the employees, customers and the suppliers.
• Development of the abilities of business like the strengthening of the skills and experiences in new fields and systems.
• Expecting and having a plan to deal with probable risks and threats towards the company and the competitive forces.

The technique of discounting that takes into account the time value of money is known as the NPV or Net Present Value. It considers the cash flows and values that differ over the period of time. Thus, the cash flow of the estimated nature will get transformed into the present value of cash flow. The same can be referred to as the difference among the total outflows and the inflows of cash (Grob 2013).

There are various advantages and disadvantages of using the NPV method and the same are as below:

Advantages

It is the method that considers the significance of the time value of money

The calculation of the NPV takes into account the cash inflows and the outflows over the total life of the project.

Question 2

The risks and the productivity related to the project are highly prioritized.  

The method maximizes the overall value and worth of the firm.

Disadvantages 

The method computation is complex in nature

The calculation of the discount rate that is appropriate is also complex

In cases of mutually exclusive projects, the NPV method is not appropriate one

There are inaccurate answers provided in case of projects having unequal lives

The company reporting positive cash flows even after the net losses may be due to the depreciation expenses as these reduce the total income of the company without having an involvement of cash. The explanation of the same can also involve the concept of accrued accounting. An organization must record and report the expenses on their incurrence and before the payment of invoices. Thus, as per the system, the income can be reduced without having any effect on the cash of the corporation.

The income statement and cash flow statement both represents the financial positions of the company but among the two, the income statement is more effective an accurate. The income statement considers the depreciation and net losses while in the cash flow statement is set off by the other profits and incomes. Thus, for getting an efficient and accurate position of the finances, the statement of income needs to be considered.

a) The summarization of the above are as under:

The ratio is a representation of the total days in which the receivable of the company are gained and thus, the effectiveness in the maintenance of the same is important. The efficiency of the same will represent the effectiveness of the collection of the receivables from the debtors at an effective manner and time. The lesser the ratio, the better will be the collection period and thus the ratio will be perfect.

As per the above table, the budgeted ratio is approx 30days but the same is tough as the industry average has always resulted to a higher ratio and thus the collection had been slow. Only, the year 2014 had witnessed the perfect ratio as it had been less than 30days.

The ratio is a representation of the total days in which the movement of the stock takes place. The lesser the ratio, the better will be the movement of the stock within the corporation and thus the ratio will be perfect.

As per the above table, the budgeted ratio not mentioned but the ratio must be approximately near to 30days to get a perfect ratio.

The ratio is a representation of the total days in which the company will pay off the payables of the creditors. The lesser the ratio, the better will be the credit worthiness of the company.

As per the above table, the budgeted ratio is approx 45 days and the company has an average of lower than 45 days that will make the company efficient (Higgins 2012).

b) Suggestions

• The credit sales limit must be settled and improved
• There must be a review in the terms of credit. The terms of payment must depend on the customers. The longer terms must be extended towards the customers those who sell early as they would provide more profits to the organization and the terms of payment must be reduced for those who pay bills at early stages
• There must be incentives to attract the customers but the same must be maintained by the profits earned by the company.
• The credit sales must be discontinued for those having poor payment history

• The demand in the inventory must be increased and in a strategic manner
• The purchase prices must be regularly reviewed among the suppliers
• The groups of inventory must be defined in an appropriate manner
• The clients must be encouraged to order the inventory before hand

• The selection process of the vendors and suppliers must be appropriate and effective
• The master data of the supplier must be set up accurately and efficiently
• The payment terms must be reviewed and revised in a continuous manner
• The contracts with suppliers must be reviewed
• The procurement and the invoicing procedures must also be efficient (Gibson 2012).

References

Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.

Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.

Gibson, C., 2012. Financial reporting and analysis. Nelson Education.

Gitman, L.J. and Zutter, C.J., 2012. Principles of managerial finance. Prentice Hall.

Grob, H.L., 2013. Capital budgeting with financial plans: an introduction. Springer-Verlag.

Healy, P.M. and Palepu, K.G., 2012. Business analysis valuation: Using financial statements. Cengage Learning.

Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Hofstede, G.H. ed., 2012. The game of budget control. Routledge.

Hope, J. and Fraser, R., 2013. the Budget. Budgetierung im Umbruch?, 1, p.71.

Yankovyi, O.G. and Yankovyi, V.O., 2015. Profitability management at enterprise by means of CVP-analysis. Upravlinnia bezzbytkovistiu na rivni pidpryiemstva za dopomohoiu CVP-analizu], Foreign trade: economics, finance, law. No. 1 (72), pp.12-25.

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