Finals Flashcards
are those accounts
that are used in a firm’s profit and loss
statement. These accounts are usually
positioned in the general ledger after the
accounts used to compile the balance sheet.
Income statement accounts
this represents revenue derived from the sale of merchandise.
Sales
this is the account an income that is drawn by providing various professional
services such as consulting, technical, or other services as part of a profession, trade or
business.
Service Income
the account title generally used by professionals for income
earned from the practice of their profession.
Professional Income
for income earned on buildings, space or other properties owned and
rented out by the business as the main line of its activity.
Rental Income
for income received by the business arising from an amount of
money borrowed by a customer and is usually covered by a promissory note.
Interest Income
for income earned by the business which is not the main line
of its activity.
Miscellaneous Income
cost to produce and sell the goods.
Cost of Sales or Cost of Goods Sold
is the total amount a business accumulates
(accrues) in interest on its loans. It’s the cost of borrowing funds, in short. Businesses
take out loans to add inventory, buy property or equipment or pay.
Interest Expense
the cost incurred by a business to utilize a property or location for an
office, retail space, factory, or storage space.
Rent Expense
for expenses incurred in repairing or servicing
the buildings, machineries, vehicles and equipment which are owned by the business.
Repairs and Maintenance Expense
the stationery, envelopes, clips, fasteners
and etc.. used in the office will bear the account title as “Office Supplies”. If use in
the store “Store Supplies” or another title may be used to describe the kind of
supplies used.
Stationary and Office Supplies Expense
for compensation given to employees of a business. It may be
specified as “Office Salaries” or , “Salesmen’s Salaries”.
Salaries Expense
an accounting entry that lists the amount of receivables your
company does not expect to collect.
Bad Debts Expense
is the amount that a company’s assets are depreciated for a
single period ( quarter or the year).
Depreciation Expense
Amounts paid for taxes and licenses related to your business
and other government dues.
Taxes and Licenses Expense
the amount that a company pays to get an insurance contract and any
additional premium payments.
Insurance Expense
is the cost incurred by using utilities such as electricity, water, waste
disposal, heating, and sewage.
Utilities Expense
account title for the employer’s share on SSS contribution.
SSS Contribution
account title for the employer’s share on Philhealth contribution.
Philhealth Contribution
the account title for the employer’s share on Pag-ibig contribution.
Pag-ibig Contribution
any amount paid as expense which is not significant enough to warrant a particular classification.
Miscellaneous Expense
Is the process of evaluating an economic
entity’s proposed long-range projects or courses for future activity
for the purpose of allocating limited resources to desirable
projects.
Capital Budgeting
Are tangible and generally illiquid property which
a business intends to use to generate revenue and expects its
usefulness to exceed one year. On a balance sheet, capital assets
are represented as property, plant, and equipment (PP&E).
Examples include land, buildings, and machinery.
Capital Assets
Any organization needs considerable investment to grow as the company has limited resources
to grow while taking the investment decision; it has to make a wise decision. Because the
wrong decision may blow up the sustainability of the business, it may profoundly impact the
purchase of an asset, rebuilding or replacing existing equipment.
2 – Huge Investments
For the growth & prosperity of any organization, a long term vision is necessary,
because a wrong decision may severely impact the survival of the firm, which may
influence the capital budgeting in the long run. Not only this, but it also impacts the
companies future cost and
growth. In the long run, capital spending has a significant impact on business profitabi
lity. If the expenditures occurred after preparing a budget appropriately, there are
certain chances of increasing the profitability of an organization.
1 – Long Term Effect on Profitability
Most of the time, the capital investment decision are irreversible in nature; it caters
to vast investment, and it is difficult to find the market for it. The only way to remains
with the company is to scrap the asset and bear the losses.
3 – Decision cannot be Undone
Capital budgeting requires more attention to the expenditure and do R&D for an
investment project if needed. A good project turns into bad if the expenses were not
done in a controlled manner and not monitored carefully, While this step is quite
crucial in the capital budgeting process.
4 – Expenditure Control
The initialization of the project is merely an idea, whether it is accepted or rejected,
depends upon the various level of authority and circumstances. The capital budgeting
process facilitates the transfer of information to appropriate decision-makers so they
can make a better decision in the growth of the organization.
5 – Information Flow
The long-term investment decisions are time-consuming as it takes several years for
accomplishment beyond the current period. Uncertainty defines the involvement of the
risk in it. Management loses his flexibility and liquidity of funds when making an
investment decision. It must be considered while accepting the proposal.
6 – Helps in Investment Decision
Motivate the organization to invest in long term investment to safeguard the interest
of the shareholder in the organization. If the organization invests in certain projects
in a planned manner, the shareholder will show their interest in the organization. It
will help them to maximize the growth of the organization. Any expansion of the
organization is further related to the growth, sales, and future profitability of the firm
and assets based on capital budgeting.
7 – Wealth Maximization
When we invest in certain project expects a certain return in the permanent
commitment of funds. More risk is involved because of the permanent commitment of
funds. Capital budgeting decision is surrounded by a great number of uncertainties
whether the investment is in present or in future. Longer the period of the project,
more the risk and uncertainty involved. The estimates about the cost, revenues, and
profits may vary depending upon the time.
8 – Risk and Uncertainty
The investment in long term proposals is quite tedious and involves a lot of complicacy
in nature. While the purchase of fixed assets is a continuous process, so the
management needs to understand the complicacy of connected projects.
9 – Complicacies of Investment Decisions
Initiation of any project offers new job opportunities, helps in economic growth, which
increases per capita income. These are the contribution made by the company during
the selection of a new project.
10 – National Importance
This category consist of expenditures necessary to replace worn-out or damaged
equipment used to produce profitable products. These projects are necessary if the
firm is to continue in its current businesses. The only issues here are (1) should we
continue to produce these products or services and (2) should we continue to use our
existing plant and equipment? Usually, the answers are “YES”, so maintenance
decisions are normally made without going through an elaborate decision process.
- Replacement: Maintenance of Business
This category includes expenditures to replace serviceable but obsolete equipment.
The purpose of these expenditures is to lower the costs of labor, materials, or other
items such as electricity. These decisions are somewhat more discretionary, so a more
detailed analysis is generally required to support the expenditure.
- Replacement: Cost Reduction
This category includes expenditures to increase the output of existing products, or to expand
outlets or distribution facilities in markets now being served. These decisions are more complex because they require explicit consideration of future demand in the firm’s product markets. Mistakes are more likely, that is why a more detailed analysis is required, and the final decision is made at a higher level within the firm.
- Expansion of Existing Products or Markets
This category includes expenditures necessary to produce a new product or to expand into
new geographic area, not currently being served. These projects involve strategic decisions that could change the fundamental nature of the business, and normally require the expenditure of large sums of money over long periods. Further, a very detailed analysis is
required, and final decisions on a new product or market decisions are generally made by the
board of directors as a part of the strategic plan. This could be done through mergers and
acquisitions, which are normally part of the firm’s strategic plan.
- Expansion Into New Products or Markets
This category includes expenditures necessary to comply with government orders,
labor agreements, or insurance policy terms. These expenditures are often called
mandatory investments, or non-revenue-producing projects. More often, management
left no choice but to invest in these expenditures, otherwise, they will cease to exist.
Decision-making could be done by middle or higher-level management depending on
the size or amount of investments required.
- Safety and Environmental Projects
This catch-all category includes office buildings, parking lots, executive aircraft, ad so
on. How they handled also depends on their size or amount involved.
- Others
primary objective of capital budgeting
to utilize funds of
the company within the limits of his authority so that over the long
run, the company receives at least as high a rate of return on its
investment as might be obtained.
secondary objective of capital budgeting
is the maximization of the present value
of resource investment to obtain as high a return as possible
without assuming undue risks.
is a process that determines the allocation of funds in order of
priority.
Capital budgeting
potential projects may come from the
different segments of the firm’s, and it will be included in the master budget plan for
the evaluation of the top management.
Identifications of Potential Projects
managers submit the proposals accompanied by
the estimates of the expected cost that the firm would incur for the project as well as
the expected revenues or cost savings that may be taken from the project. This would
also include the determination of the value of the asset at a specified terminal date
or the so-called scrap values.
Estimation of Cost and Benefits
to do this, management needs
information about the probability of distributions of cash flows, both inflows, and outflows.
Given the inherent risks of the projected cash flows and the general level of money costs in the
economy, management determines the appropriate discount rate, or cost o capital, at which
the project’s cash flows are to be discounted. This is similar to finding the required rate of
return on a stock, where the expected cash flows are put on a present value basis to obtain
an estimate of the asset’s value to the firm. This is equivalent to finding the present value of
expected future dividends. The present value of the expected cash inflows is compared with
the required outlay or cost of the project; if the investment or asset’s present value exceeds its
cost, the project should be accepted, otherwise, the project should be rejected.
Determine the Riskiness of the Projected Cash Flows
Once accepted, the proposed project is evaluated
in accordance with the organizational goal. A critical study is needed for the evaluation using
the different capital budgeting techniques.
Development of the Project Proposal
All approved budgets, are listed in the budget
plan, with a listing of simple expenditures, amount, and additional descriptive data
about the proposal.
Development of Capital Budget
the approved projects are periodically reviewed to determine if it is still in line with the company’s projection. Corrective measures or re-computation should be done if necessary.
Re-evaluation of Projects
FACTORS AFFECTING CAPITAL BUDGETING DECISIONS
- The number of cash outflows related to the investments.
- The expected cash flow returns (inflows) on the investments.
- The lowest acceptable rate of return the company must set before considering
analyzing capital investment or hurdle rate or the minimum desired rate of return.
