FAR601 Financial Accounting And Reporting For Opportunity Cost

Answer:

Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Assets	= Liabilities + Owner’s Equity
	Cash Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	+ Supplies	+ Equipment	= Accounts Payable	+ Capital
-1	50000	0	0	0	50000
-2	-27000	0	27000	0	0
Balance	23000	0	27000	0	50000
-3	-2000	2000	0	0	0
Balance	21000	2000	27000	0	50000
-4	11600	0	0	0	11600
Balance	32600	2000	27000	0	61600
-5	-900	0	0	0	-900
Balance	31700	2000	27000	0	60700
-6	-1800	0	0	0	-1800
Balance	29900	2000	27000	0	58900
-7	-3000	3000	0	0	0
Balance	26900	5000	27000	0	58900
-8	-1500	0	0	0	-1500
Balance	25400	5000	27000	0	57400

	Assets	= Liabilities + Owner’s Equity
	Cash	+ Supplies	+ Equipment	= Accounts Payable	+ Capital
-1	12000	0	0	0	12000
-2	-220	220	0	0	0
Balance	11780	220	0	0	12000
-3	-1500	3500	0	2000	0
Balance	10280	3720	0	2000	12000
-4	-825	0	0	0	-825
Balance	9455	3720	0	2000	11175
-5	1850	0	0	0	1850
Balance	11305	3720	0	2000	13025
-6	-375	0	0	0	-375
Balance	10930	3720	0	2000	12650
-7	-500		0	-500	0
Balance	10430	3720	0	1500	12650
-8	0	-60	0	0	-60
Balance	10430	3660	0	1500	12590

Lucky Dip Ice Cream Consulting
Income Statement
Year Ended December 31, 19×8
Fees Incomes		66,700
Operating Expenses
Wages Expense	31,500
Rent Expense	7,200
Supplies Expense	700
Miscellaneous Expense	900
Total Operating Expenses		40,300
Net Income		26,400

Lucky Dip Ice Cream Consulting
Statement of Owner’s Equity
Year Ended December 31, 19×8
Capital, January 1, 19×8		18,000
Net Income for the Year	26,400
Less: Withdrawals	20,000
Increase in Capital		6,400
Capital, December 31, 19×8		24,400

Lucky Dip Ice Cream Consulting
Balance Sheet
December 31, 19×8
ASSETS
Current Assets
Cash	11,000
Accounts Receivable	13,000
Supplies	5,700
Total Current Assets		29,700
LIABILITIES
Accounts Payable	2,500
Notes Payable	2,800
Total Liabilities		5,300
OWNER’S EQUITY
John Sweet, Capital		24,400
Total Liabilities and Owner’s Equity		29,700

Depreciation=	Purchase price of the asset- Salvage value
	Useful life of asset

Depreciation as on December 31, 20X7

Depreciation =	15000-1000
	14

=	14000
	14

=	1000

(a)	As on December 31, 20X7	Amount
	Cost of the printing press	15000
	Less: Depreciation for the year	1000
	Balance as on December 31, 20X7	14000

(b)	As on December 31, 20X8	Amount
	Cost of the printing press	15000
	Less: Depreciation for the year	2000
	Balance as on December 31, 20X8	13000

(a)	Working Capital

	Working Capital	=	Current asset- Current liabilities
		=	233000-176000
		=	57000

(b)	Current Ratio

	Current Ratio	=	Current Asset
	Current liabilities
		=	233000
			176000
		=	1.32

( c)	Quick Ratio

	Quick Ratio	=	Current asset – Inventories – Prepaid expenses
	Current liabilities
		=	233000-120000-1000
		176000
		=	112000
			176000
		=	0.64

Account receivable turnover=

	Net sales
	Average account receivables

Particulars	20X2	20X1
Net credit sales	2600000	3100000
Average account receivables	400000	416000
Account receivable turnover	6.5	7.45

As per our calculations, we can conclude that the average collection period for the receivables in 2011 was 7.45 times and that in 2012 was 6.5 times. This indicates that the frequency of collection of debt has reduced form 7.45 times to 6.5 times.

We have the following formulas:

Payback Period	=	a+(b/c)
Where,
A	=	Last period with negative cash flow
B	=	Cumulative cash flow for period a
C	=	Cash flow for the period after a

Accounting Rate of Return	=	Average Accounting Profit
Average Investment

Average Accounting Profit	=	Cash flow-Depreciation

Calculation of Payback period:

Calculation of Payback Period – Project A

Year	Cash Flows	Cumulative Cash Flow
0	-3,50,000	-3,50,000
1	1,00,000	-2,50,000
2	2,00,000	-50,000
3	1,00,000	50,000
4	1,00,000	1,50,000
5	1,40,000	2,90,000

Pay Back Period for Project A =	2.50

Calculation of Payback Period – Project B

Year	Cash Flows	Cumulative Cash Flow
0	-3,50,000	-3,50,000
1	40,000	-3,10,000
2	1,00,000	-2,10,000
3	2,10,000	–
4	2,60,000	2,60,000
5	1,60,000	4,20,000

Pay Back Period for Project B =	3.00

Calculation of Payback Period – Project C

Year	Cash Flows	Cumulative Cash Flow
0	-3,50,000	-3,50,000
1	2,00,000	-1,50,000
2	1,50,000	–
3	2,40,000	2,40,000
4	40,000	2,80,000
5	–	2,80,000

Pay Back Period for Project C =	2.00

Calculation of Accounting Rate of Return:

Calculation of Accounting Rate Return – Project A

Average Cash Flow	=	6,40,000	=	1,28,000
5

Average Depreciation	=	70,000

Average Accounting Profit	=	128000-70000	=	58,000

Average Investment	=	3,50,000	=	1,75,000
2


Accounting Rate of Return	=	58,000	=	33.14%
	1,75,000

Calculation of Accounting Rate Return – Project B

Average Cash Flow	=	7,70,000	=	1,54,000
5

Average Depreciation	=	70,000

Average Accounting Profit	=	154000-70000	=	84,000

Average Investment	=	3,50,000	=	1,75,000
2


Accounting Rate of Return	=	84,000	=	48.00%
	1,75,000

Calculation of Accounting Rate Return – Project C

Average Cash Flow	=	6,30,000	=	1,26,000
5

Average Depreciation	=	70,000

Average Accounting Profit	=	126000-70000	=	56,000

Average Investment	=	3,50,000	=	1,75,000
2


Accounting Rate of Return	=	56,000	=	32.00%
	1,75,000

Calculation of Net Present Value:

Calculation of Net Present Value – Project A

Year	Cash Flows	PV Factor @ 9%	Present Value
0	-3,50,000	1	-3,50,000
1	1,00,000	0.9174	91,743
2	2,00,000	0.8417	1,68,336
3	1,00,000	0.7722	77,218
4	1,00,000	0.7084	70,843
5	1,40,000	0.6499	90,990
Net Present Value	1,49,130

Calculation of Net Present Value – Project B

Year	Cash Flows	PV Factor @ 9%	Present Value
0	-3,50,000	1	-3,50,000
1	40,000	0.9174	36,697
2	1,00,000	0.8417	84,168
3	2,10,000	0.7722	1,62,159
4	2,60,000	0.7084	1,84,191
5	1,60,000	0.6499	1,03,989
Net Present Value	2,21,203

Calculation of Net Present Value – Project C

Year	Cash Flows	PV Factor @ 9%	Present Value
0	-3,50,000	1	-3,50,000
1	2,00,000	0.9174	1,83,486
2	1,50,000	0.8417	1,26,252
3	2,40,000	0.7722	1,85,324
4	40,000	0.7084	28,337
5	–	0.6499	–
Net Present Value	1,73,399

We summarise the above information as below:

For pay-back period we have:

Pay Back Period for Project A =	2.50
Pay Back Period for Project B =	3.00
Pay Back Period for Project C =	2.00

Pay-back period indicates the time period in which the investments made are recovered. Lower the period better it is for the investors. In the given case we see that project C has the lowest pay-back period of 2 years. Therefore, based on pay-back period project C should be accepted.

For accounting rate of return we have:

Accounting Rate of Return for project A =	33.14%
Accounting Rate of Return for project B =	48%
Accounting Rate of Return for project C =	32%

Accounting rate of return measures the percentage of average profits earned by a project during its life time. Since it measures return, higher the ratio better it is. In the given scenario we see that the ARR for project B is maximum, 48%. Therefore, as per accounting rate of return project B should be opted for.

For Net Present Value we have:

Net Present Value for project A =	1,49,130
Net Present Value for project B =	2,21,203
Net Present Value for project C =	1,73,399

Net present value is the tool which helps to measure the present value of the cash flows from a given project. The project with higher net present value is better. In the given case we see that net present value for project B is the highest with $221203. Therefore based on Net present value approach Project B should be opted for. (Collier, 2013)

Therefore, based on all the attributed and calculations above we can conclude that the investor should invest in project B, as it would provide higher returns than the other projects.

Calculation of expected cash receipts

Particulars	June	July	August
Sales	70,000	1,00,000	1,00,000

Cash for sales of current month	35,000	50,000	50,000
Cash for sales of last month	15,000	17,500	25,000
Cash for sales of last second month	16,250	15,000	17,500
Total Cash Inflow	66,250	82,500	92,500

In the books of Maris Brothers Inc
Cash Disbursement Schedule

Particulars	April	May	June
Cash inflow form sales	5,60,000	6,10,000	6,50,000
Less:
Cash paid for Purchases	3,24,600	3,56,400	3,80,400
Cash paid for Rent	8,000	8,000	8,000
Cash paid for Wages & Salaries	45,200	48,700	51,500
Cash paid for Taxes	–	–	54,500
Cash paid for Fixed Asset	75,000	–	–
Cash paid for interest	–	–	30,000
Cash paid for dividend	12,500	–	–
Net Cash flow for the month	94,700	1,96,900	1,25,600

Workings
Calculation of Purchases
Particulars	February	March	April	May	June	July	August
Sales	5,00,000	5,00,000	5,60,000	6,10,000	6,50,000	6,50,000
Purchases	3,00,000	3,36,000	3,66,000	3,90,000	3,90,000	–

– Cash paid in the month of purchase	30,000	33,600	36,600	39,000	39,000	–
– Cash paid for 1 month after purchase	–	1,50,000	1,68,000	1,83,000	1,95,000	1,95,000	–
– Cash paid for 2 month after purchase	–	–	1,20,000	1,34,400	1,46,400	1,56,000	1,56,000
Total Cash paid for Purchases	30,000	1,83,600	3,24,600	3,56,400	3,80,400	3,51,000	1,56,000

Calculation of Wages & Salaries
Particulars	February	March	April	May	June	July	August
Fixed Wages	6,000	6,000	6,000	6,000	6,000	6,000	6,000
Variable Wages (7% of sales of current month)	35,000	35,000	39,200	42,700	45,500	45,500	–
Total Cash paid for Wages & Salaries	41,000	41,000	45,200	48,700	51,500	51,500	6,000

a.The above diagram shows the cash flow from the project over the project life.

b.We assume that the required rate of return for the given project is 10% and that the amount earned is reinvested in the business. Taking this information into consideration, we can see that the investor would require earning at least $2500 in the first year, $2750 in the second year and so on.

c. The above diagram shows the how the present value of the cash flows earned is to be discounted. The amount earned in year 3 is to be discounted with the factor for 3 years in order to arrive at the present value today.

The financial managers generally rely on present value approach in order to determine the viability of a project. The interest rate or the required rate of return keeps changing. Therefore, while calculating the future value, we need to determine the interest rates for all the years separately. This is a tedious job and often leads to wrong conclusions. In the present value approach, the calculations are made on the required rate of return which exists currently. This saves time and narrows the room for errors.

Let the amount be x
We know,
FV=PV * [(1+i)^n]
Here,
FV=PV * [(1+i)^n]
FV= Future Value
PV= Present Value
i= Interest Rate
n= time period for investment

We are provided with the following information
FV= 6000
i= 0.12
n= 6 years

Putting this in the above formula we get,

PV	=	FV
[(1+i)^n]

Therefore,
PV	=	6000
[(1+0.12)^6]

PV	=	3,039.79

Therefore, investment of $3039.79 will result in $6000 in 6 years with interest of 12% per annum.

In the given case we need to find the present value of some amount which turns out to be $6000 after 6 years with 12% required rate of return. Therefore applying the present value formula helps to determine the same. If we invest $ 3,039.79 today, then we will receive $6000 at the end of 6 years with 12% interest.(Loughran, 2011)

We are to receive $ 6000 at the end of 6 years. If we discount it with the interest rate factor of 125 for 6 years we get the present value as $3,039.79

Given an opportunity cost of 12%, the investor would require to earn 12% in order to make up for the opportunity lost. Therefore, taking this in consideration the investor is required to invest $3,039.79 in order to receive $6000 after 6 years today.

In all the above cases we are required to find the present value of the future amount $6000, given an interest rate of 12% and 6 years. The requirements in each of the cases presented are same, only the situation is different. Therefore, an investor needs to invest $ 3,039.79 today in order to receive $6000 on completion of 6 years.

References

Collier, P. (2013). Accounting for managers. Milton: John Wiley & Sons.

Loughran, M. (2011). Financial accounting for dummies. Hoboken (NJ): Wiley.

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