PTD9 Flashcards
Yeager Company is considering several alternative capital investments. In evaluating the investments, management of the company has used the payback and accounting rate of return methods. Prepare a memorandum to Linda Gordon, the chief financial officer, describing the limitations of these two methods for evaluating investments and suggesting other methods that might be more appropriate.
ou have requested that I provide an evaluation of the two methods that Yeager Company uses for capital budgeting: the payback and the accounting rate of return methods.
As you know, the payback method evaluates investments based on the length of time it takes to recapture the initial investment. The payback method has two major limitations. First, it ignores the overall profitability of the investment. Second, it does not take into account the time value of money. These are major limitations which can result in selecting investments that are not consistent with maximization of the company’s return on investment.
The accounting rate of return method evaluates investment alternatives based on their rate of accounting return. Like the payback method, the accounting rate of return method ignores the time value of money. As a result, it too can result in choosing investments that may not result in maximization of the company’s return on investment.
The most effective capital budgeting techniques are those that consider the time value of money. As an example, the net present value method evaluates investment alternatives based on the present values of the future cash flows of the investments. It considers both the total profitability of the investment and the time value of money. Another technique, the internal rate of return method, evaluates investment alternatives based on their time-adjusted rates of return. This technique also considers the total profitability of the investment and adjusts for the time value of money.
I would suggest that you consider replacing your current techniques for capital budgeting with a technique or techniques that are superior, such as the present value and the internal rate of return techniques. If you have any other questions about capital budgeting, please contact me.
Thank you,
Future CPA
Enterprise Resource Management System
Assume that you are a consultant providing services for Webster Corp. Webster is performing a significant project based implementation of a new enterprise resource system. The company is concerned about the difficulties in performing the project. Compose a memorandum to management describing the risks involved in executing a project that is cross-functional in nature.
You have requested that we provide information about the issues involved in executing a project to implement an enterprise resource management system. In particular, you are concerned that the cross-functional nature of the project will be difficult to manage.
You should understand that the cross-functional nature of this project creates additional risk of failure that must be controlled. The most important requirement for success of a cross-functional project is full support by top management. The team must have this support to get adequate cooperation from the various functional managers of the organization. This also means that the relationships between the project manager and various functional managers must be clearly defined to avoid conflict. Finally, senior management must support the project manager’s decisions, recognizing that these decisions must be made quickly and with limited information to ensure that the project remains on schedule. If senior management recognizes and resolves these issues, the risk of failure will be significantly reduced.
If you have any additional questions about the issues regarding completing the project, please contact me.
Thank you,
Future CPA
Chaos Corp. is a highly dynamic business in an economic environment that is characterized by frequent, rapid shocks and changes. The industry is highly innovative with fast-moving competitors, changing consumer expectations, evolving regulatory requirements, and rapid technological innovation. To date, upper management at Chaos Corp. has been unsuccessful in managing change within the business. They seek ways to improve their control environment and have hired your firm as consultants on this issue.
As a consultant for Chaos Corp., prepare a memo to management discussing the change control process and suggesting change management controls.
Effectively managing the system of control in a dynamic business environment is critical to achieving organizational goals and objectives. Creating well-designed processes to request, review, specify, plan for, approve, implement, and monitor system changes is central to this endeavor. Effective change control processes and policies, established by management, ensure that only authorized changes are implemented. Change control management is the responsibility of upper management and key executives. Personnel are responsible for carrying out the work already established and implemented by management; however, ultimate accountability for internal control, including change control, processes rests with upper management.
Control change management must also consider resulting costs and benefit. For example, modifying information systems to reflect important changes in business practices and to leverage advances in information technology to attain and retain competitive advantage can help ensure that system costs do not exceed realized benefits.
The COSO recommends a four-stage process for monitoring controls, including determining the effects of changes in controls. The first step in this process is to determine a foundation or basement for monitoring controls. In the present case, this would require an initial focal area where controls are understood and documented. The second step is to identify important changes in operations, controls, or risks related to the chosen area and to assess their likely effects. The third step assesses the revised effectiveness of controls in light of the identified changes. The final step is to revalidate and establish a new control baseline as a basis for future assessments of changes.
Effectively managing changes in a system of internal control includes, but is not limited to, the following: risk analysis, written change control procedures, change request forms, quality systems to map business requirements to control system changes, competent change implementation, testing, and review teams, appropriate segregation of duties, appropriate permission and authorization systems, and document retention and destruction policies and systems.
I look forward to discussing these issues soon.
Thank you,
[Your name]
Future CPA
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