Essays on Principles of Finance Used in Decision-Making Process at Working Computers Assignment

Download full paperFile format: .doc, available for editing

The paper 'Principles of Finance Used in Decision-Making Process at Working Computers" is an outstanding example of a finance and accounting assignment.   Working Computers, Inc is a company that processes and produces different electronics in the UK. The company published its audited financial report annually as a legal requirement for all limited companies quoted in the Stock Exchange (Bailey and McIntyre, 2005). These books of accounts are made in accordance with the requirement of accounting principles and policies so that the users can easily understand them and examine them so that appropriate decision can be made on their investment strategies (Cagwin, 2002).

The finance managers make strategic decisions based on the financial information collected from the financial statements to demystify and clarify for non-financial stakeholders or executives the basics of financial analysis. Question 1 Cash Flow Statement Cash flow statement is a financial statement which indicates the movement of cash in and out of the business. This is a very important financial statement which is used in evaluating and analyzing the viability of the different projects in an organization. Cash flow Statement of Project 1 Year 2003 $000 2004 $000 2005 $(000) 2006 $ (000) 2007 $(000) 2008 $(000) 2009 $(000) Units 180 150 189 246 264 264 264 Unit price 495 495 495 495 495 495 495 revenues 89100 74250 93555 121770 121770 121770 121770 Cogs 60% 53460 44550 56133 73062 73062 73062 73062 Gross profit 35640 29700 37422 48708 48708 48708 48708 Expen 24% 21384 17820 22453.2 29224.8 29224.8 29224.8 29224.8 Net profit 14256 11880 146880 19483.3 19483.3 19483.3 19483.3 Debtors (6000) (6000) (6000) (6000) (6000) (6000) (6000) creditors 3000 3000 3000 3000 3000 3000 33000 inventory (2000) (2000) (2000) (2000) (2000) (2000) (2000) Dep - - - - - - (56000) Cash flow 7256 4880 7888 12483.3 12483.3 12483.3 68483.3 Cash Flow statement of project 2 Year 2003 2004 2005 2006 2007 2008 2009 Unit sales 180 150 102 57 48 48 48 Unit price 495 495 495 495 495 495 495 Revenues 89100 74250 50490 28215 23760 23760 23760 Cogs 54% 53460 44550 30294 16929 14256 14256 14256 profit 35640 29700 20196 11286 9504 9504 9504 Expense 26% 23166 19305 13127.4 7335.9 6177.6 6177.6 6177.6 Net profit 12474 10395 7068.6 3950.1 3326.4 3326.4 3326.4 Debtors (6000) (6000) (6000) (6000) (6000) (6000) (6000) Creditors 3000 3000 3000 3000 3000 3000 33000 Inventory (2000) (2000) (2000) (2000) (2000) (2000) (2000) Dep.             (56000) cash flow 5474 3395 68.6 (3049.9) (3673.6) (3673.6) 52326.4 Depreciation is added back since it is a non-cash element which does not involve the movement of cash in the business (Bailey and McIntyre, 2005).

The increase in account receivable and inventory are subtracted from this financial statement. This is because an increase in current assets makes cash to move out of the business to the debtors or suppliers. Current liabilities such as an increase in account payable increases the cash available in the company and they are added in the financial statement under operating activities. Question 1 Performance Appraisal The financial appraisal methods which can be used to analyze two or more competing investments are traditional or artificial methods (Teall, 2007).

Traditional methods include payback period and accounting rate of return. The artificial method includes net present value and internal rate of return. These two classes of appraisal techniques are able to provide decision criteria. a). Payback Period This is the expected number of years required to recover the investment cost (Bailey and McIntyre, 2005). The method uses the cash flows of the company not accounting profits which are affected by the accounting policies.

This method of an appraisal does not consider the time value of money and also partially use the cash flows of the project. The method also does not consider the cash flows of the payback period (Baines and Langfield, 2003). The shortest payback period is selected and rejects the project with a long payback period. Capital employed $ 18,000,000 Project 1 Year Cash Flow $000 Accumulative Cash flow $000 1 7256 7256 2 4880 12136 3 7888 20024 Payback period = 3 years Decision Criteria The project is viable since it has a shorter payback period which indicates that the investors are able to maximize their goal of profit and wealth maximization. Project 2 Year Cash Flow $000 Accumulative Cash Flow $000 1 5474 5474 2 3395 8869 3 68.6 8937.6 4 (3049.9) 5,887.7 5 (3673.6) 2,214.1 6 (3673.6) 1459.6 7 52326.4 50866.6 Payback period = 7 years Decision Criteria This project is not viable as it has a very long payback period.

It is not a good project to be invested in since it is not able to produce enough cash flow to pay back the capital employed within a short time. b). Net Present Value This method of project appraisal involves the discounting of all the company cash flows at a given discounting rate called the cost of capital, opportunity cost or required rate of return (Mick and John, 2003).

It is then followed by deducting the initial cash outlay from the total present value to reach the net present value. It is possible to rank different projects in relation to their performance level hence useful for decision making on the best project to be invested in (Bailey and McIntyre, 2005). The method of evaluation also has some disadvantages such as its ability to conflict with the internal rate of return in terms of ranking and it also assumes that the discounting rate is constant throughout the year which is not the case (Baines and Langfield, 2003).

This is because the risk and uncertainty of the firm changes over time and therefore the cost of capital also changes over time.

Works Cited

Anthony, R. & Govindarajan, V. (2007). Management Control Systems, 12th Edition, R. D. Irwin. Vol.4 #2, pp. 396-410.

Bailey, C. and McIntyre, E. (2005). Some Evidence on the Nature of Relearning Curves, in: The

Accounting Review, Volume 67, 1992, pp. 368-378.

Baines, A and Langfield, K. (2003). Antecedents to Management Accounting Change: A

Structural Equation Approach, in: Accounting, Organizations and Society, Volume 28,

pp. 675-698

Cagwin, D, (2002). The Association between Activity-Based Costing and Im-provement in Financial Performance, in: Management Accounting Research, Volume 13, pp 56

Colin, D. (2007). Differences between management accounting and financial accounting, Management and Cost Accounting, p. 7, ISBN 9781844805662

Dyson, R. (2007). Accounting for Non-Accounting Students.Financial Times/Prentice Hall. ISBN: 9780273709220

Hilton, R. & Sainty, G. (2001). Cost Management:Strategies for Business Decisions, 1st Canadian Edition, McGraw-Hill.Vol 2 pp456.

Horngren, A. & Datar, M. (2009). Cost Accounting: A Managerial Emphasis, 13th Edition, Prentice Hall.Vol 12 pp 23.

Mick, B. and John, C. (2003). Managing Financial Resources .A Butterworth-Heinemann; 2003,

3rd edition ISBN: 0750657553.

Teall, H. (2007). Cost Accounting: AManagerial Emphasis, 4th Canadian Edition, Prentice Hall.Vol 11 pp 345- 456.

Download full paperFile format: .doc, available for editing
Contact Us