Accounting for Management Decision - Assignment Example

ACCOUNTING FOR MANAGEMENT DECISION Name Course Instructor Institution Location Date Part A. (a).Proper implementation of budget in accordance to what was planned facilitates attainment of organization objectives by ensuring everything goes beyond mere plan crafting .More so, effective implementation of functions facilitates evaluation of the project in various strategies. Essentially, when there is proper achievement of objectives, it is reasonable to conclude that strategic formulation tasks were properly conducted. Furthermore, with appropriate implementation, it is possible to identify loopholes (mistakes and lapses during strategic formulation) and rectify them. Additionally, the implementation process encounters issues, it is possible to initiate corrective measures. Ideally, managerial competitiveness is crucial to the success of an organization. Interestingly, proper strategic implementation can be of great assistance in establishing the managerial efficiency of people entrusted with spearheading organization’s activities. Nevertheless, an organization that enables every stakeholder to know what he or she is suppose to do through budget implementation creates employee emotional connection with work. Failure to do it makes it hard for them to establish their role. They do not know reasons why they are doing tasks they are assigned to do in various teams and departments. As a result, enthusiasm and commitment reduces greatly, which can translate to failure and losses in the long-run. (b). In accounting, there is an indirect link between cash flow and its related financial measurements. Characteristically, profit measures a company’s ongoing sustainability while cash-flow measures the organization’s ability to pay bills when they are due. Profit is the amount of revenues that remains after all expenses incurred are deducted. On the other hand, cash flow is the closing balance after deducting cash paid out from the one that is received in a particular period. Investing in equipment can involve substantial cash-out but the equipment can only be expensed out using the concept of depreciation that is, writing off as an expense over its years of useful life. Depreciation of assets translates to a reduction in economic value. Ideally, depreciation is what is due to enhance sustainable operation. The Equipment returns are cash equivalents in accounting. Consequently depreciation is an equivalent of cash. If depreciation is not accounted for as an expense, there can be unrealistic positive ah-flows. In essence, payments in cash must be done to redeem productivity of the depreciated capital. Unless the company has ability to pay out to depreciation, the expectations about profits are wrong because it is essential for the organization to survive in business using the existing assets (c).The commonly used capital budgeting methods include payback period, Internal Rate of return, and Net present value. In principle, payback period entails determining the amount of time it will take for the investment to pay the capital invested back. To determine it, an investor divides the cost of the project with the expected cash flow. On the other hand, net present value entails calculation of the difference between the generated cash outflows and inflows while incorporating discounting to cater for possible future cash flow uncertainty. Lastly, the internal rate of return is the rate of discount that helps to determine the much an investor should expect to realize from a project that he or she is about to venture. Ideally, an investor is required to choose projects whose IRR is higher than the cost of the project. For example, if the cost of capital is 3%, an individual must choose projects whose IRR is greater than 3%.Given that it uses percentages, it is a straightforward metric in measuring success for independent projects but is tricky for projects that are mutually exclusive because such projects can have different IRRs and NPVs. I discard payback method because it does not suit complex investment projects. Therefore, I prefer NPV which measure the worth of earnings in current and future periods because it accounts for inflation. Ideally, NPVs that are positive are accepted while those that are negative are rejected. For mutually exclusive projects, those with highest NPV are accepted and vice versa. (d). Vertical analyses report each of the financial statements amounts as percentages of other items. For instance, when vertical analyses are used in balance sheets, they can imply that the entire amounts in the balance sheets are restated as percentages of total assets. In such scenario, if total assets are 400 while inventory is 100, then the vertical analyses represents the inventory as 25.The related amounts are referred to as common-size income statement and enable companies to compare their income statement with other firms or the industry’s average. On the other hand, horizontal analyses look at amounts of financial statements over the past years. For instance, the amount of cash reported in 2008. 2007, 2006 and 200 can be expressed as a percentage of the amount of cash reported in 2006.For example, if the amount of capital in 2008 is $120M while that of 2005 is $100M, the 2008 cash is 120% of the 2005 cash. Factors behind the changes can enhance action-taking in case an issue is detected. Ideally, the two types of analyses helps to portray changes that occur in the financial statements over years .They can also demonstrate the kind of growth that an organization has undergone over time to determine whether or not to invest in them. The growth rates, earnings per share in various quarters can be compared with those of competitors. If a in the base year a company’s net profit and retained earnings were 10 million and 50 million respectively and in the recurrent year the values are 20 and 52 million respectively, The differences are 10 and for million respectively. The net income growth is 100 percent while the value of retained earnings is 4% using horizontal analysis. (f).I agree with the business owner and disagree with the accountant because all cash owed by the subscribers has been paid in cash but payments have not been made. The ways in which business organizations record their revenue are unique and differ from one company to another. In principle, realization of revenue is enhanced when a company receives payment in cash or check. On the other hand, recognition of revenue cures when an organization records revenue without necessarily receiving it. The Happy kids magazine publisher business is small hence revenue cannot be recognized unless it has been received and expenses deducted from actual payment. In big companies, revenue is recognized after a transaction, as long as there is reason to believe that the owed money will be paid. Part B Return on equity reveals how much profit with the money invested by a shareholder. BHP Billiton RoE changed from 3.69 to-2.38% from 2015 to 2016, implying that the company is has changed from profit to loss making. On the other hand, return on assets or return on investment demonstrates a company’s profitability relative to the total assets it possesses in form of percentage. BHP Billiton Company’s RoI dropped from 2.09% to -1.27% that depicts a change in profits to losses for each asset invested. Thirdly, price-earnings ratio assesses a company’s. The price per earnings ratio dropped from75.35% to -15.03% showing a decline in share price in relation to its earnings for each share. during a given period. A company is better off when the margin is high, but BHP Billiton worsened. BHP’s operating profit margin rose from 19.44% to 20.17% which shows an improvement in the proportion of the corporation’ revenue left out after paying variable costs or improvement in operating efficiency and pricing strategy. Earnings per share comprise of a proportion of the profit of a company what each common stock is allocated. BHP Billiton’s earnings per share of reduced from 35.9 to 120, showing a decline in profitability. Asset turnover ratio entails the ratio of a company’s revenues or sales relative to its asset value. Billiton’s asset turnover ratio reduced from 2.35% to 6.35%, demonstrating that its efficiency of asset deployment has declined since 2015. Current ratio refers to the ratio of a company’s current assets relative to its current liabilities. From the table, the Current ration Of Billiton BHP increased from 127.36% to 143.55%, which is an indicator of improvement in obligation repayment capability. Acid test ratio or quick ratio helps to indicate whether a company’s short-term assets can cover its immediate liabilities. In BHP Billiton’s case, the acid test ratio rose from 93.96 to 115.91%, which is a sign of financial indicator. However, given that is lower than the current ratio, the assets depend on inventory significantly. What is more, dividend per share is the total of declared dividends that a company issues for each outstanding ordinary share. Dividends per share, in BHP Biliton, were 78 and had dropped from 124 in 2015 indicating a fall in asset value addition over the two years. They demonstrate that the company’s values of shares are declining. Dividend payout ratio demonstrates how much money a company is returning to stockholders relative to the amount held by the organization for growth (retained earnings). A high ratio is an indicator of a healthy and maturing venture. In BHP Billiton, the DPR dropped from 345% to - 65% which indicates losses in shares. Limitations: BHP Billiton shows a poor financial health hence worth investing. However, the figures can be influenced by inflation. In general, inflation can distort the balance sheet and affect the profits hence affect the judgment such as earnings per share, operating profit margin ROI and RoA and asset turnover ratio. BHP Dam Burst Two dams, Santarem and Fundao, collapsed in Brazil and the resulting debris engulfed the neighboring village, burrying dozens of people (Reuters 6th Nov. 2015).Samarco mine is owned by Vale and BHP Billiton Company mining companies that hold equal mining shares. The mud flowed six miles away from the dam and in 10 minutes, and covered eighty percent of the lower part of the village near the City of Mariana. Most of the victims were mine workers. According to Semarco mine’s CEO, a tremor in the vicinity could be responsible for the tragedy, allegations which were confirmed by the University of Sao Paulo Seismic. On November 6th, 2015, The Guardian reported that the mud displaced approximately 600 people and claimed lives of 28 people. On the other hand, between 15 and sixteen lives and 45 were missing according to ABC News in 8th Nov2015. Ideally, the water tore off roofs, swept cars away and leveled trees. The Guardian reported that the potential environmental lawsuits and cleanup bills against the companies could exceed the output cost. The issues are exacerbated by the fact that the catastrophe occurred when the prices of the iron the mine is lowest. Though the possibility of negligence is under question, the financial setback could be significantly high. More so, the prosecutor in charge of environmental crimes decided to cancel Samar co’s license. The mud contaminated rivers such as Rio Dolce which supplies water to the Espirito Santo city. However, the company promptly rejected allegations that toxic elements with health risks could be available in the mud. CSR of BH Billiton Company The strategies of BH Billiton in 2015 were creation of environments with limited injury and illness to workers and community, support of community programs and empowerment. The strategies could be attained through management of material risks and protection of assets and communities. In conjunction with Great Barrier Reef, BH Billiton set aside 7 million dollars to support critical marine research in Australia. The company also donated more than 35 million USD on environmental programs in 2015. Moreover, BHP Billiton Company spent 225 million USD in community volunteering programs(BHP Billiton 2015). Interestingly, 41 percent of the total expenditures were in South America. BHP also reported that 42 percent of what it spent in its expenses went to local suppliers as a strategy of supporting businesses. As a result of creation of safe working environment, in FY 2015, only 4.1 injuries resulted in million hours worked on average, which was, an improvement by 2 percent. Critical Analysis of BH Billiton CSR from the Report Based on the information provided in its CSR report, BHP Billiton Company demonstrates an understanding of the primary components of CSR. It depicts an urge to empower communities, participate in community programs, and ensuring environmental protection. Its expenditure demonstrates that it is committed to adhering to the CSR procedures and policies too. However, the organization has reported positive things that happened in 2015. It does not point out that its activities were tragic in the regions that it operates despite that people lost their lives, others were displaced and the mud that spilled from its broken dams is caused water shortage in the region. In such a scenario, one can easily doubt the transparency of the information given BHP Billiton in its 2015 report. References BHP Billiton, 2015,Taking the Long Sustainability View Report. Http: www.bhbilliton.com The Guardian,2015, Brazil Dam Burst: At least 15 Feared Dead after Disaster at BHP-owned Mine. https://www.theguardian.com/world/2015/nov/05/brazil-iron-mine-dam-bursts- floods-nearby-homes Read More