The following are examples of external users of accounting information

ACCOUNTING Merge Excel Pages Into Word

To complete this assignment, you will need to do the following:

Part I: Compiling Your Exemplar Project

Compile all of your completed course project assignment deliverables. Place them in the proper order, and save them in a single Microsoft Word document.
THIS NEEDS TO BE COMPLETED IN A PROFESSIONAL FORMAT ENSURING ALL INFORMATION IS BEING COPIED IN FULL ON THE PAGE. THIS NEEDS TO BE PRESENTED AS A HIGHEND REPORT FOR MANAGEMENT.

Deliverables Chart
Time Line
Week Assignment
01 Case Study - Financial Accounting: Excel file - Module 01 Page 1, Page 2 and Page 3
02 Case Study - Financial Statement Analysis: Excel file - Module 02 Page 1, Page 2 and Page 3
03 Case Study - Full Disclosure in Financial Reporting and Management Responsibility: Excel file - Module 03 Page 1 and Page 2
04 Case Study - Management Decision: Excel file - Module 04 Page 1 and Page 2
05 Case Study - Professional Business Ethics and Internal Control: Excel file - Module 05 Page 1, Page 2 and Page 3
06 Case Study - Presentation and Final Exam
Requirements
Your final deliverable is a Case Study presentation addressed to your instructor which outlines the financial situation of the company. In this proposal, you will comment on each of the business areas or challenges outlined in the timeline above (e.g. Financial Accounting, Financial Statement Analysis, and so on). The proposal should include adequate and credible research to support your decision about these areas or challenges. In addition, when outside sources are used, you must include APA-style in-text citations and a reference list. For more information on APA, visit the APA Guide: http://guides.rasmussen.edu/apa
Due Date
Your final project is due in Module 6. The Case Study project is the main project for this course and will be due along the way. The assignments and modules that are due are noted in bold in the timeline below. As you can see, your first assignment "Case Study - Financial Reporting" is due in Module 01.
Evaluation
Each assignment leading up to the final project is evaluated and graded independently. Your instructor will provide specific grading criteria for each step of the project prior to its due date.
Introduction
Case Study Introduction
Transferable Skills are a set of essential abilities that will position students for success as they develop and build their careers. College faculty and staff believe it is important that all Rasmussen graduates develop these skill sets, as having expertise in these areas will be beneficial throughout one's life. Employers have also identified these skills as being essential in well-rounded employees.
In this course, you will have the opportunity to learn and demonstrate each of these skills. These skills will be measured as a portion of our course project that has been designed to replicate an authentic workplace project. These skills are the following: Communication, Critical Thinking, Digital Fluency, Diversity and Teamwork, Ethics and Professional Responsibility, and Information Literacy.
How can I learn more about the Transferrable Skills? Rasmussen College faculty and staff have worked together to create a visual guide to each of the Transferable Skills. You are able to view the entire set of six guides at the following location: http://guides.rasmussen.edu/transferableskills
This Case Study is the major lesson material for this course and incorporates the use of transferable skills.
Case Study
Company Name: GolfPro Center
Introduction
Millions of people every day must make informed decisions about organizations. To make the decisions these people need information. Accountants measure the activities of an organization and communicate those measurements to others. Accounting information provided for internal users, such as managers, is referred to as managerial accounting; accounting information provided to external users is referred to as financial accounting. The two functions of financial accounting are to measure business activities of a company and then to communicate those measurements to external parties for decision-making purposes.
GolfPro Center
Let’s say you are ready to begin your new venture of working as the Accounting Manager for a new start-up golf center called GolfPro Center. The purpose of the golf center is to provide PGA-certified golf instruction and essentials to customers, such as junior players to develop their opportunity for top university programs. By using the base network of customers, the company intends to expand to sell nationwide as an integrated multi-channel retailer. The target market of junior league will be to individual golf pro shops, golf teams and eventually lead to selling through an online store. In additional to future new store openings, a significant part of the company's strategy is to continue to enhance the internet aspects of the direct to customer channel. The plan also entails the ongoing development of their own brand portfolio as they continue to grow.
Golf Industry
The golf retail industry is highly fragmented among mass merchants, off course specialty retailers, Internet merchants, warehouse type merchants and on course pro shops. The off course specialty golf retail industry has become extremely competitive as general sporting goods or their golf specialty retails have expanded their markets. The company will face competition as competitors enter the marketplace in the existing markets.
Company Information
Steve Smith is the owner and Chief Executive Officer of the company. He has appointed a close family member, Mike Smith as the Chief Financial Officer. You were recently hired by Mike Smith as the Accounting Manager. Your first main function is to set up the accounting department structure and financial statements. The corporate office is located in Chandler, Arizona. Let’s look at some initial activities of functions within the new company. The company opened business on December 1, 2016. You also started employment on this same date. You have been tasked with setting up the accounting department and internal control process. The financial statements, which you will prepare, will be the first set of financials for the company. You will also be tasked with setting up the financial notes and management's discussion and analysis portion of the financial statements. This will include company information, accounting policies, revenue recognition and inventory components. You will also encounter a few ethical situations along the way which will define your accounting educational activities.
Let’s talk about how the company developed the investment for opening the business. The company needed about $35,000 to get the business up and going. Since the company did not have that amount of money to start the business, they began looking for investors. With their money, investors buy ownership in the company and have the right to share in the organizations profits. Each share of ownership is typically referred to as a share of common stock. For GolfPro Center they sell 1,000 shares of common stock for $25 each, receiving cash of $25,000 from investors. The 1,000 shares include 300 sold to family for $7,500, giving them 30% (= 300/1,000) ownership in the company. The company also offered you 100 shares for $2,500, giving you 10% ownership. The remaining 600 shares include 300 to extended partners, 200 to a friend, and 100 to the owners childhood golf coach. The company now has $25,000 from investors.
To raise the remaining cash needed, the company will borrow $10,000 from a local bank, which is agreed to repay within three years. Thus, the bank is the creditor. Now, with the $35,000 of cash obtained from investors and creditors, the company buys equipment. This equipment costs $24,000, leaving $11,000 cash for future use. At this point, the company has the following resources that can be used for operations.
The investors and creditors has the claims to the company’s resources. Creditors have claims equal to the amount loaned to the company, $10,000. In other words, $10,000 of the company’s resources are promised to the local bank. Investors have claims to all remaining resources, $25,000.
You manage the resources of the company on behalf of the owners (stockholders, in this case), while the owner is also an investor this will help in aligning the interests with the other investors in the company. This is common in many start-up businesses.
Formally defined, a corporation is a company that is legally separate from its owners. The advantage of being legally separate is that the stockholders have limited liability. Limited liability prevents stockholders from being held personally responsible for the financial obligations of the corporation. Stockholders of GolfPro Center can lose their investment of $25,000 if the company fails, but they cannot lose any of their personal assets (such as homes, cars, computers, and furniture).
Other common business forms include sole proprietorships and partnerships. A sole proprietorship is a business owned by one person; a partnership is a business owned by two or more persons. If the owner had decided to start GolfPro Center without outside investors, he would have formed a sole proprietorship. However, because he did not have the necessary resources to start the business, being a sole proprietorship (or even one member of a partnership) was not a viable option. Thus, a disadvantage of selecting the sole proprietorship or partnership form of business is that owners must have sufficient personal funds to finance the business in addition to the ability to borrow money. Another disadvantage of being a sole proprietorship or partnership is that neither offers limited liability. Owners (and partners) are held personally responsible for the activities of the business.
Sole proprietorships and partnerships do offer the advantage of lower taxes compared to corporations. Sole proprietorships and partnerships are taxed at the owner’s personal income tax rate, which is typically lower than the corporate income tax rate. In addition, a corporation’s income is taxed twice (known as double taxation): (1) the company first pays corporate income taxes on income it earns and (2) stockholders then pay personal income taxes when the company distributes that income as dividends to them.
What information would GolfPro Center’s investors and creditors be interested in knowing to determine whether their investment in the company was a good decision? Ultimately, investors and creditors want to know about the company’s resources and their claims to those resources. Accounting uses some conventional names to describe such resources and claims.
GolfPro Center has a liability of $10,000 to the local bank. Other examples of liabilities would be amounts owed to suppliers, employees, utility companies, and the government (in the form of taxes). Liabilities are claims that must be paid by a specified date.
Investors, or owners, have claims to any resources of the company not owed to creditors. Therefore GolfPro Center, this amount is $25,000. We refer to owners’ claims to resources as stockholders’ equity, because stockholders are the owners.
The relationship among the three measurement categories is called the accounting equation. GolfPo Center has assets of $35,000 and liabilities of $10,000. The stockholder equity is $25,000.
Of course, all owners hope their claims to the company’s resources increase over time. This increase occurs when the company makes a profit. Stockholders claim all resources in excess of amounts owed to creditors; thus, profits of the company are claimed solely by stockholders.
You will calculate the company’s profits by comparing its revenues and expenses. Revenues are the amounts recorded when the company sells products or provides services to customers. For example, when you or one of your employees provides golf training to a customer, the company records revenue. However, as you’ve probably heard, “It takes money to make money.” To operate the academy, you’ll encounter many costs. For example, you’ll have costs related to salaries, rent, supplies, and utilities.
You’ll notice the use of the term net to describe a company’s profitability. In business, the term net is used often to describe the difference between two amounts. Here, we measure revenues net of (or minus) expenses, to calculate the net income or net loss. If we assume that by the end of the first month of operations GolfPro Center has total revenues of $7,200 and total expenses of $6,000, then we would say that the company has net income of $1,200 for the month. This amount of profit increases stockholders’ claims to resources but has no effect on creditors’ claims.
When the company has positive net income, it will either distribute those profits back to its stockholders or retain those profits to pay for future operations. For example, suppose you decide that because GolfPro Center has net income of $1,200, a cash payment of $200 should be returned to stockholders at the end of the month. These cash payments to stockholders are called dividends.
The other $1,000 of net income adds to stockholders’ equity of the company. Thus, when GolfPro Center has net income of $1,200, stockholders receive a total benefit of $1,200, equal to $200 of dividends received plus $1,000 increase in stockholders’ equity in the company they own.
Let's now proceed to the your new journey in accounting with GolfPro Center.
Module 01 Pg 1
Module 01: Financial Accounting
Preparing the Financial Statements
Your function as accounting manager is to prepare the financial statements for the first operating period of December 2016.
The December 31, 2016 adjusted trial balance for GolfPro Center is presented below. Using the Trial Balance, complete the following:
1. Prepare an income statement for the year ended December 31, 2016
2. Prepare a statement of stockholder's equity for the year ended December 31, 2016 assuming no common stock was issued during 2016.
3. Prepare a classified balance sheet as of December 31, 2016.
Keep in mind, the beginning balances are zero only because this is the first month of operations for GolfPro Center.
GolfPro Center
Trial Balance December 31, 2016
For the period ending December 31, 2016
Accounts Debit Credit
Cash $ 6,900
Accounts Receivable 2,700
Supplies 1,300
Prepaid Rent 5,500
Equipment 24,000
Accumulated Depreciation $ 400
Accounts Payable 2,300
Salaries Payable 300
Utilities Payable 900
Deferred Revenue 400
Interest Payable 100
Notes Payable 10,000
Common Stock 25,000
Retained Earnings 0
Dividends 200
Service Revenue 7,200
Rent Expense 500
Supplies Expense 1,000
Depreciation Expense 400
Salaries Expense 3,100
Utilities Expense 900
Interest Expense 100
Total $ 46,600 $ 46,600
1 GolfPro Center
Income Statement
For the period ended December 31, 2016
Revenues
Service Revenue 7200
Expenses
Rent Expense 500
Supplies Expense 1,000
Depreciation Expense 400
Salaries Expense 3,100
Utilities Expense 900
Interest Expense 100
6,000
Net Income $ 1,200 1200 answer: $1200
2 GolfPro Center
Statement of Stockholder's Equity
For the period ended December 31, 2016
Accounts Common Stock Retained Earnings Total Stockholders Equity
Beginning Balance (Dec 1) $ - 0
Issuance of common stock 25,000 25,000
Add: Net Income for the period 1,200
Less: Dividends (200) 1,000
Ending balance (Dec 31) 25,000 1,000 26,000
25,000 1,000 26000 26000
3 GolfPro Center
Balance Sheet
For the period ended December 31, 2016
Assets Liabilities
Current Assets: Current Liabilities:
Cash $ 6,900 Accounts Payable 2,300
Accounts Receivable 2,700 Salaries Payable 300
Supplies 1,300 Utilities Payable 900
Prepaid Rent 5,500 Deferred Revenue 400
Total Current Assets $ 16,400 Interest Payable 100
Total Current Liabilities $ 4,000
Long Term Assets: Long Term Liabilities:
Equipment 24,000 Notes Payable 10,000
Less: Accumulated Depreciation (400) Total Liabilities $ 10,000
Total Long term assets $ 23,600
Stockholder's Equity
Common Stock 25,000
Retained Earnings 1,000
Total Stockholders Equity $ 26,000
Total Assets $ 40,000 Total Liabilities & Stockholders Equity $ 40,000
40000 40000
Critical Thinking: Clarity and Precision
4 Communication with CFO: In the complexity of preparing the financial statements, the CFO tells you that he prefers the single step income statement because the multiple step format seems to overstate the income. Express in a short declarative manner, how would you respond to this question?
My response is that, the Multiple step format of financial statement does not overstate the income. That could only happen when a mistake is made in the accounts that are included in the multiple step format. If the correct values are used, then the income is not overstated. Moreover, the single step format is just obtained by combining several accounts that could appear as standalone items in the multiple step, into larger accounts. Overstating however does not depend on the type of statement used. It is majorly caused by overstatement of inflows and understatement of outflows.
Communication: Language Usage
5 Explain how financial accounting information is communicated through financial statements to internal and external users. Construct widely varied sentence types and advance grammatical concepts to explain insight.
Financial information is communicated in financial statements. Firms prepare financial statements to provide an overall picture of the financial health in the organization. There are several financial statements that are prepared by firms; statement of comprehensive income, balance sheet, cashflow statement and statement of changes in equity. In all these statements, several aspects of financial health are well indicated. The statements are available for internal and external users. The users can read the financial information they need and make decisions. Internal users are the primary users of the accounting information will include: Management: for analyzing the organization's performance and position and taking appropriate measures to improve the company results. Employees: for assessing company's profitability and its consequence on their future remuneration and job security. Owners: for analyzing the viability and profitability of their investment and determining any future course of action. External users as the secondary users would include: Creditors: for determining the credit worthiness of the organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks. Tax Authourities: for determining the credibility of the tax returns filed on behalf of the company. Investors: for analyzing the feasibility of investing in the company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to the company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities: for ensuring that the company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions. (http://accounting-simplified.com/financial/users-of-accounting-information.html)
Critical Thinking: Creativity and Innovation
6 Describe the role that financial accounting plays in the decision making process. In your response, use human and/or professional in field knowledge through the creation of the response.
Financial accounting plays an important role in decision making. The financial accounting information is needed by several users to make decisions. For instance, shareholders use the financial accounting information to assess the profitability of their investment. Directors can use the information to determine the progress of the firm, make salary escalation decisions, dividend decisions among other decisions. The external users also use information in financial statements to make decisions. For instance, the government uses the firm's financial statements to make conclusions about tax liability for the company. Investors also need to determine if investing in the company is worthy, by checking the financial statements. Lenders too use the financial information produced by financial accountants to make lending decisions.
Module 01 Pg 2
Module 01: Financial Accounting
Cash Flow Statement
The below information are transactions which analyze the cash effects on GolfPro Center.
Use the information provided to complete the Statement of Cash Flow.
External Transactions of GolfPro Center
Transaction External Transactions in December Type of Activity Is Cash Involved? Inflow or Outflow?
1 Sell shares of common stock for $25,000 to obtain funds necessary to start the business. Financing Yes Inflow
2 Borrow $10,000 from the local bank and sign a note promising to repay the full amount of the debt in three years. Financing Yes Inflow
3 Purchase equipment necessary for giving golf training, $24,000 cash Investing Yes Outflow
4 Pay one year of rent in advance, $6000 ($500 per month). Operating Yes Outflow
5 Purchase supplies on account, $2,300. Operating No ---
6 Provide golf training to customers for cash, $4300 Operating Yes Inflow
7 Provide golf training to customers on account $2000 Operating No ---
8 Receive cash in advance for 12 golf training sessions to be given in the future $600 Operating Yes Inflow
9 Pay salaries to employees $2800 Operating Yes Outflow
10 Pay cash dividends of $200 to shareholders. Financing Yes Outflow
1 GolfPro Center
Statement of Cash Flow
For the period ended December 31, 2016
Cash Flows from Operating Activities
Cash inflows:
From customers $ 4,900
Cash outflows:
For salaries (2,800)
For rent (6,000)
Net cash flows from operating activities (3,900)
Cash Flows from investing Activities
Purchase equipment (24,000)
Net Cash Flows from Investing Activities (24,000)
Cash Flows from Financing Activities
Issue common stock 25,000
Borrow from bank 10,000
Pay dividends (200)
Net cash flows from financing activities 34,800
Net increase in cash 6,900
Cash at the beginning of the period 0
Cash at the end of the period $ 6,900
Communication: Audience and Delivery
2 In the space provided below, explain to the CEO and CFO the main purpose of the statement of cash flow. In your response, utilize effective persuasive techniques to influence and engage the CFO and CEO.
The main purpose of the statement of cashflow is to provide a detailed summary of cash inflows and outflows for a specific period. It includes the sources of cash as well as the use of funds. The statement therefore indicates the change in cash and cash equivalents for the financial period, from the sum of cash flows from its three main items, financing, operating and investing activities.
Communication: Organization, Focus, and Supporting Examples
3 In the space provided below, explain to the CFO some of the activities reported on the statement of cash flows. In your response, coordinate your thoughts to synthesize and provide context regarding the concept of the statement of cash flows. Provide carefully integrated thoughts and examples to clarify the topic to the CFO.
There are three main activities that are included in the statement of cashflows. These are; operating activities, investing activities and financing activities. Operating activities are the activities that affect the determination of net income. They are mostly items in the income statement. Examples of operating activities include cash payment of expenses appearing in the income statement as well as cash receipt from customers. Non-cash items such as depreciation are not included as operating activities although they appear in statement of comprehensive income. Investing activities on the other hand are activities that affect the long-term assets accounts. They include acquisition and disposal of property, plant and equipment as well as giving and obtaining loans. Examples of investing activities include cash sales from sale of long term investment, cash receipt from sale of PPE, cash payment in purchase of PPE as well as cash receipt/payment for sale/purchase of long term investment. Financing activities are cash transactions that affect long term liabilities and shareholders' equity. Examples are; cash receipt from sale of bonds and stock and cash payment from payment of dividends, repurchase of stocks and retirement of bonds.
Communication: Organization, Focus, and Supporting Examples
4 In the space provided below, describe some of the investing activities on the GolfPro Center statement of cash flows. Use a variety of thoughts integrated to present the meaning of your evidence.
In the statement of cashflow for GolfPro, there is one investing activity; purchase of equipment for $24,000. This is a cash outflow ahose net effect is a reduction in the cash reserve for the year. An investment into equipment is assisting the company in growth to further their production to lead to an increase in revnue. The purchase of equipment is shown on the statement of cash flows for the period in which the purchase took place. The equipment will also be reported on the company's balance sheets at its cost minus its accumulated depreciation.
Communication: Content and Voice
5 Explain to the CEO and CFO the why the net income differs from the amount of cash flow from operating activities. In your response, explain the relationship between the net income and cash flows such as the investing and financing activities. Develop a response which incorporates a focus on uniting multi faceted mutually supportive arguments to create a distinct connection with the content and the audience.
The amount in the income statement differs from that in the cashflow from operating activities for one main reason; the income statement includes the non-cash items while the amount of cash flow from operating activities includes only the cash items. Items such as depreciation therefore are included in the statement of comprehensive income but do not form part of operating activities. The income statement also includes items of investing activities and financing activities such as dividends which do not form part of operating activities.
Module 01 Pg 3
Module 01: Financial Accounting
Closing Entry
In the space provided below, prepare the Closing Entry for GofPro Center.
Closing Entry for December 31, 2016
1 Journal Entry
Account Debit Credit
a Service Revenue 7,200
Retained Earnings 7,200
Comment: Close revenues to retained earnings.
b Retained Earnings 6,000
Rent Expense 500
Supplies Expense 1,000
Depreciation Expense 400
Salaries Expense 3,100
Utilities Expense 900
Interest Expense 100
Comment: Close expense to retained earnings.
c Retained Earnings 200
Dividends 200
Comment: Close dividends to retained earnings
Critical Thinking: Definitions, Terms, Concepts and Ideas
2 Communication with CEO and CFO: In the space provided below, in a clear and concise manner, explain to the CEO and CFO the main purpose of these closing entries.
The purpose of the closing entries is for the preparation of the financial statements. It starts with the trial balance. The closing figures are the figures that appear in the trial balance. From the trial balance, other financial statements are made. The closing figures give the closing balances for various accounts. These balances are used in respective financial statements.
Critical Thinking: Definitions, Terms, Concepts and Ideas
3 Communication with CEO and CFO: Comment on why adjusting entries are needed and what happens if certain adjusting entries are neglected.
The closing entries are needed for preparation of financial statements. They give a summary of different accounts during the accounting period. If certain entries are neglected, the financial statements would be wrong. For instance, the balance sheet would not balance. It is important therefore to include all the adjusting entries.
Digital Fluency: Internet Technology Usage
4 Go to the FASB website, http://www.fasb.org, to access the FASB Concepts Statements. After you have read the documents, use the search tool in your Internet browser to respond to the following items.
a) What is the objective of financial reporting?
b) What other means are there of communicating information besides financial statements?
c) Indicate the users and the information FASB is most directly concerned with in economic decision making.
A) The objective of financial reporting is to provide financial information about a company to internal and external users for decision making such as investors, lenders as well as other creditors. B) Apart from financial statements, financial information is also communicated through memos to internal and external users, notes to financial statements, supporting documents attached as well as appendices. C) Users- potential investors, creditors, business researchers, employees, trade unions, financial reporting agencies, legislators, tax agencies, economists, lawyers, brokers, advisors, financial analysts, customers, directors, managers, creditors, lenders, among others. Information- they are all concerned with the financial health of the organization to determine their interest, whether direct or indirect, in the company.
Module 02 Pg 1
Module 02: Financial Statement Analysis
Interpret financial data by computing ratios.
Using the GolfPro Center financial information prepared in Module 01, calculate the following ratios:
Liquidity, Leverage and Profitability Ratios
1 Liquidity & Efficiency Analysis Formula December 2016 Ratio
1 Current Ratio Current Assets/Current Liability 4.10
2 Total Asset Turnover Net Sales/Average Total Assets 0.03
3 Accounts Receivable Turnover Ratio Sales/Average Accounts Receivable 0.44
2 Leverage Analysis Formula December 2016 Ratio
4 Debt to Equity Ratio Total Liabilities/Total Stockholders' Equity 54%
5 Debt Ratio Total Liabilities/Total Assets 35%
5 Times Interest Earned Ratio Income before Interest/Interest Expense 5900%
3 Profitability Analysis Formula December 2016 Ratio
6 Gross Profit Margin Ratio Gross Profit/Net Revenue 100%
7 Profit Margin Ratio Net Income/Net Revenue 17%
8 Return on Total Assets Income/Average Assets 0.03
9 Return on Common Stockholders' Equity Income/Average Equity 0.05
Critical Thinking: Definitions, Terms, Concepts and Ideas
4 In the space provided below, prepare a professional business report to the CFO by describing the analytical use of each of the nine ratios. Discuss what the financial ratios present and identify two ratios that would be most valuable as a basis in a management decision for expanding sales. In your report, explain the relationship of the asset turnover to the return on assets.
The current ratio indicates the capability of the company to meet current obligations. Total asset turnover shows the effectiveness in the management of assets in generation of sales. Accounts receivable turnover shows the effetiveness in the management of accouts receivables/ debt collection. Debt to equity ratio is represents the capital structure of the firm. Debt ratio shows the proportion of assets that is financed by debt. Times interest earned ratio shows how the interest is covered by the Earnings Before interest and tax, therefore showing the capability to pay interest obligations. Gross margin ratio shows the proportion of sales revenue, that is reported in gross profit and therefore indicated the effetiveness in management of cost of sales. Profit margin ratio indicated the effectiveness in management of both cost of sales and expenses. Return on assets shows the effectiveness of the GolfPro in utilizing assets to make profit. return on common stockholders' equity indicated the effectiveness of the management in utilizing stockholders' equity to make profits.
Critical Thinking: Definitions, Terms, Concepts and Ideas
5 Explain the limitations of ratio analysis:
Many companies have more than 1 divisions and therefore generation of proper set of division ratios is a hard task. Moreover, inflation adversely affects the financial ratio from time to time and therefore comparison of financial ratios from time to time may have incorrect conclusions. Several accounting practices may be used which lead to distortion of inter-company comparison of financial ratios. sometimes, it is hard to determine if a ratio is good or bad, especially if there is no benchmark. lastly, the same company may have both bad and good financial rations making conclusion hard.
Critical Thinking: Definitions, Terms, Concepts and Ideas
6 Discuss what type of users will benefit from ratio analysis within the company and explain how they will benefit.
The ratio analysis is used mainly by the stakeholders and the managers. Managers use the ratios to estimate progress. They also use the ratios to make important decisions such as dividend payment, and expansion/ contraction decisions.
Module 02 Pg 2
Module 02: Financial Statement Analysis
Capital expenditure decision using NPV and IRR.
The CFO of GolfPro Center is considering purchasing an automated fairway weed control machine, but is uncertain as to whether it is a favorable expenditure decision. The CFO has asked you, the accounting manager, to evaluate the capital expenditure item and report the results. Since the cash flows don't occur in the same periods and because a dollar today is worth more than a dollar tomorrow, you will need to take into account the time value of money by using the net present value (NPV) approach and/or the internal rate of return (IRR) approach. The company estimated the equipment will last 5 years. Each year it will save the company $2000 in wasted spraying conditions. It will also reduce labor costs by $20,000 a year. It is estimated that the equipment will require $1,000 maintenance costs per year. The equipment costs $70,000 and it is expected to have a residual or salvage value of $5000 at the end of 5 years. Top management has determined the required rate of return is 12%. Should the company invest in the new equipment? Report results and decision determination to owner.
1 Net Present Value Approach
Time Period 0 1 2 3 4 5
Cash Flow
Purchase Price $ (70,000)
Labor Savings + 20,000 20,000 20,000 20,000 20,000
Paint Savings + 2,000 2,000 2,000 2,000 2,000
Maintenance (1,000) (1,000) (1,000) (1,000) (1,000)
Residual Value 5,000
Total Cash Flow $ (70,000) $ 21,000 $ 21,000 $ 21,000 $ 21,000 $ 26,000
PV Factor 1 0.8928571429 0.7971938776 0.7117802478 0.6355180784 0.5674268557
Total Cash Flow $ (70,000) $ 18,750 $ 16,741 $ 14,947 $ 13,346 $ 14,753
Required Rate of Return 0.12 Complete from text above
Manual Calculation
NPV $ 8,537 Listed in $$ NPV Using Excel (show formula): $8,538.43
IRR 17% Listed in % IRR Using Excel (show formula): 17%
IRR is 17% which is before PV factor.
Critical Thinking: Problem Solving
2 Problem Solving: What is the result consider the NPV? Should the project be undertaken?
The results of the NVP analysis shows that, the project has a positive NVP of $8,537. Since the NVP is positive, the purchase project should be undertaken.
Critical Thinking: Problem Solving
3 Problem Solving: What is the result considering both NPV and IRR? Should the project move forward? Creatively solve the problem by determining the best method for the situation.
according to the NVP and IRR, the results indicate that the project should be undertaken. The project has a positive NVP which is the decision rule for acceptance of the project. The IRR too, is less than the required rate of return. The decision rule for acceptance of projects is to accept a project if it has a IRR lesser than the required rate of return. Both tools therefore tend to same conclusions, accept the project. The best is however the NVP, because it shows a positive value from the project.
Critical Thinking: Clarity and Precision
4 Summarize the comparison of net present value and internal rate of return methods. In your response, be sure to use a complex idea expressed in a short, declarative response.
The Net present value determines if the overall project gives a positive value or negative, while the IRR shows the point where the net present value of the project changes from negative to positive.
Critical Thinking: Definitions, Terms, Concepts and Ideas
5 The CFO asks, how do the net present value and internal rate of return methods differ in their approach to evaluating this investment decision? How do you respond to this question?
The NVP differs from IRR in that, for NVP approach, a project should have a positive value to be accepted, while for IRR, a project should have a lower IRR than the required rate of return to be accepted. The higher the NVP, the better the project is, while the lower the IRR, the better the project is.
Critical Thinking: Definitions, Terms, Concepts and Ideas
6 The CFO asks, why is it important to take into account the time value of money when making capital budgeting decisions?
It is important to take in consideration the time value of money, because the value of a unit currency today, is not the same as a year to come, due to the interest rate. It is important to discount cash flows so that the value of a unit currency is the same for all the years.
Information Literacy: Evaluating Information
7 Research an Accounting Issue: Decide which would be a better option for the company: should the company acquire a lease option as opposed to purchase option? Research lease options versus purchase options for the company. In your response discuss how the lease option would be accounted for financially. Analyze and select which is a better decision for the company, the lease option or purchase option?
An accounting issue would be the replacement of a machinery in a company. If a company needs to replace an old machine, it may choose to lease it or buy it. The best option would be the buy option. This is because, in a purchase option, the asset belongs to the company, as opposed to a lease option where the property in the good is the property of the lesser. It is also possible to sell or trade with the assets in transactions, for instance, it can be used as a security for a loan.However, Leaseed assets cannot be used as loan security. Leased assets are reflected in modern financial position. Buy option is better for a company.
Module 02 Pg 3
Module 02: Financial Statement Analysis
Communication: Purpose and Meaning and Digital Fluency: Creation of Digital Files
Prepare an analysis report for the capital expenditure decision.
Once completed, publish the created file online for a board audience using open source repositories with sharing and viewing capabilities.
years cash Flow cumulative cash flow
0 -70,000 -70,000
1 18750 -51,250
2 16,741 -34,509
3 14,947 -19,562
4 13,346 -6,216
5 14,753 8,537
The capital expenditure decision making process involves the use of capital budgeting tools to determine if a project is worth undertaking.
In the above project, NVP and IRR tools were used to determine if the project should be undertaken. The NVP results showed that, the NVP
is positive. The decision rule for NVP is that, a project should be undertaken if it has a positive NVP. From the above analysis, the cumulative
discounted cashflows are calculated. The cumulative discounted cashflows are negative from year 0-4. however, it turns positive in the fifth year.
The point of intersection of the NVP curve with the X-axis shows the point where the NVP is zero, once the line crosses the X-axis to the area
above the X-axis, the NVP is positive and therefore the project should be accepted. as a result, according to NVP, the project should be undertaken.
Another tool that is used for the capital expendirure decision is the IRR. according to the IRR, a project should be undertaken if it has an IRR that is
lesser than the expected return. For the project, the IRR is lower than the expected return, and therefore, it should be undertaken.
A graph of NVP against year

0 1 2 3 4 5 -70000 -51250 -34509 -19562 -6216 8537