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Transcript of © NCC Education Limited V1.0 Finance and Accounting Unit 2: Getting Started Instructor: Johnson Hsu...
© NCC Education LimitedV1.0
Finance and Accounting
Unit 2: Getting Started
Instructor: Johnson Hsu
Mobile: 0939386611
Getting Started Unit 2 - 2.2
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Unit 2 – Purpose and Coverage
• The purpose of this unit is to think about issues to be considered when setting up a new organisation or business.
• The unit covers planning, sources of funds, acquiring premises an equipment, evaluating proposed purchases and accounting information systems.
Getting Started Unit 2 - 2.3
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The First Steps
• The first step is to decide what you hope to achieve – the aims and objectives of your activities.
• These may include making a profit.
• For a non-profit organisation aims and objectives might include a public service or alleviation of suffering.
Getting Started Unit 2 - 2.4
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10 Powerful Goal Setting Steps Break it down
Unit 2: Getting Started Unit 2: Getting Started
Unit 2: Getting Started Unit 2: Getting Started
Unit 2: Getting Started
BREAK IT DOWN
Getting Started Unit 2 - 2.5
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10 Powerful Goal Setting Steps TRACK YOUR PROGRESSTRACK YOUR PROGRESS
Getting Started Unit 2 - 2.6
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10 Powerful Goal Setting Steps COMMIT TO THE PROCESSCOMMIT TO THE PROCESS
Getting Started Unit 2 - 2.7
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10 Powerful Goal Setting Steps BUILD A SUPPORT SYSTEMBUILD A SUPPORT SYSTEM
Getting Started Unit 2 - 2.8
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10 Powerful Goal Setting Steps STAY FLEXIBLESTAY FLEXIBLE
Getting Started Unit 2 - 2.9
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10 Powerful Goal Setting Steps KEEP YOUR EYE ON THE PRIZEKEEP YOUR EYE ON THE PRIZE
Getting Started Unit 2 - 2.10
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10 Powerful Goal Setting Steps ACCEPT IMPERFECTIONACCEPT IMPERFECTION
Getting Started Unit 2 - 2.11
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10 Powerful Goal Setting Steps DON'T STOP MOVINGDON'T STOP MOVING
Getting Started Unit 2 - 2.12
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10 Powerful Goal Setting Steps THINK POSITIVELYTHINK POSITIVELY
Getting Started Unit 2 - 2.13
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10 Powerful Goal Setting Steps CELEBRATE YOUR SUCCESSESCELEBRATE YOUR SUCCESSES
Getting Started Unit 2 - 2.14
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Introd - 14
Mission - the basic purpose toward which activities are directed.
Mission - the basic purpose toward which activities are directed.
Missions, Goals, and StrategiesMissions, Goals, and Strategies
Getting Started Unit 2 - 2.15
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Introd - 15
Goal - a definable measurable target or
objective based on the organization’s
mission.
Goal - a definable measurable target or
objective based on the organization’s
mission.
Missions, Goals, and StrategiesMissions, Goals, and Strategies
Getting Started Unit 2 - 2.16
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Introd - 16
Strategy - a course of action that will assist in achieving one or
more goals.
Strategy - a course of action that will assist in achieving one or
more goals.
Missions, Goals, and StrategiesMissions, Goals, and Strategies
Getting Started Unit 2 - 2.17
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Introd - 17
Cost leadership
Product or service
differentiation
Focus on market
niche
Porter’s Strategic PositionsPorter’s Strategic Positions
Getting Started Unit 2 - 2.18
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Introd - 18
MANAGEMENT DECISION - MAKINGCYCLE
Planning
Organizing
Action
Control
Establishment of goals
Developing means toachieve goalsReview of results
Revision of plans
Getting Started Unit 2 - 2.19
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Aims and Objectives
• The first priority is to research your ‘idea’ to see if it is viable.
• You then devise a set of aims and objectives around the most beneficial options. These are the purpose of your new activity.
Getting Started Unit 2 - 2.20
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Terminology: Strategy
• “A course of action, including the specification of resources required to achieve a specific objective.” (CIMA 2000: p.50)
• Essentially, how you intend to achieve your objectives.
Getting Started Unit 2 - 2.21
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Introd - 21
Seat customer and offer menu Take customer order Bring order to kitchen Bring food to customer Replenish beverages Determine and bring bill to customer Collect money and give change Clear table
An Activity (A Unit of Work)An Activity (A Unit of Work)
Waiter or Waitress Activity
Getting Started Unit 2 - 2.22
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Planning
• Long-term strategic planning – the ‘big picture’ of the activity i.e. Where we are going and how we are going to get there.
• Short-term operational planning – the detailed view of resources required.
• Note: resources might include money, people, technology, particular skills or expertise.
Getting Started Unit 2 - 2.23
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Goal achievable In order for your goals to be achievable, they must meet certain
criteria. They must be:
Conceivable: you must be able to put your goals into words;
Achievable: you must have the attributes, energy and time to accomplish them;
Believable: you must believe you can reach them;
Achievable Within a Certain Time Frame: you must be able to state how long it will take you to reach each goal;
Clearly Defined: you must know exactly what it is you want to achieve;
Flexible: you must be willing to make modifications as necessary;
Getting Started Unit 2 - 2.24
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What Type of Organisation?
• In the previous unit we considered a variety of organisational types including sole traders, partnerships and companies.
• The type of organisation influences many aspects of activities, controls and records to be kept.
Getting Started Unit 2 - 2.25
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What Initial Funds do you Need?
• Premises
• Equipment
• Stock to sell
• Transport
• Staff recruitment
• Wages
• Water and power
• General expenses
Getting Started Unit 2 - 2.26
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Where Might you Find the Money?
Sources of finance:• Own resources
• Loans
• Investors
• Grants
Getting Started Unit 2 - 2.27
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Sources of Finance
• Savings
• Family support
• Sponsorship
• Friends
• Potential business partners
• Retained profits
• Creditors
• Issue shares
• Bank loans
• Other informal loans
• Venture capital
• Grants
• Leasing and hire purchase
• Factoring
Getting Started Unit 2 - 2.28
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Control Over Expenditure - 1
Any expenditure should be planned carefully. The objective is to ensure:
• No unnecessary expenditure
• Benefit exceeds cost
• A good balance between cost and quality
Getting Started Unit 2 - 2.29
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Control Over Expenditure - 2
• It may be sufficient to apply common sense to minor expenditure following the general principles in the previous slide.
• More comprehensive procedures and practises are necessary for larger and longer term items. These might include purchase of premises, vehicles, machinery etc. These items are known as fixed assets.
Getting Started Unit 2 - 2.30
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Terminology: Fixed Asset
• “Any asset, ... , acquired for retention ... For the purpose of providing a service to the business, and not held for resale in the normal course of trading.” (CIMA 2000: p.95)
Getting Started Unit 2 - 2.31
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What are Fixed Assets? DEFINITION Capitalized fixed assets (Property, Plant and Equipment) include 3 types of assets used in
operations of the University and that have a normal life expectancy of more than two years:
Permanent–land, improvements to land, easements, buildings, building improvements, infrastructure, and structures
Moveable Equipment (Asset barcodes applied & inventoried) – Office equipment and furniture, Data processing equipment, Educational, research and scientific equipment, Motor vehicles- licensed, Other equipment -unlicensed vehicles, machinery, landscaping,
dining hall, maintenance and other equipment
Other tangible or intangible assets- Software, copyrights, etc.
Getting Started Unit 2 - 2.32
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Capital Investment Appraisal
• In making purchases for the longer term, the organisation is making a financial investment for its future.
• In this context we are considering investment for the purposes of the future of the business, not simply investing money in another business to earn interest.
Getting Started Unit 2 - 2.33
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Capital Investment Appraisal: Appraisal process and methods
Objectives:
Describe the nature of capital investment appraisal
Apply the main investment appraisal techniques
Recognise the limitations of investment
appraisal technique
Getting Started Unit 2 - 2.34
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Terminology: Investment
• An investment is making a financial sacrifice for the possibility of a future benefit.
Getting Started Unit 2 - 2.35
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Types of capital investment
Replacement of obsolete assets
Cost reduction e.g. IT system
Expansion e.g new building & equipment
Strategic proposal: improve delivery service, staff training.
Diversification for risk reduction
Getting Started Unit 2 - 2.36
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Need for Investment Appraisal
Large amount of resources are involved and wrong decisions could be costly
Difficult and expensive to reverse
Investment decisions can have a direct impact on the ability of the organisation to meet its objectives
Getting Started Unit 2 - 2.37
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Investment Appraisal Process Stages:
identify objectives. What is it? Within the corporate objectives?
Identify alternatives. Use CAD, CAM or use external service.
Collect and analyse data. Examine the technical and economic feasibility of the project, cash flows etc.
Getting Started Unit 2 - 2.38
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Investment Appraisal Process
Stages:
decide which one to undertake
authorisation and implementation
review and monitor: learn from its experience and try to improve future decision - making.
Getting Started Unit 2 - 2.39
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Appraisal Methods
Payback method
Accounting Rate of Return (ARR).
Net Present Value
Internal Rate of Return
Getting Started Unit 2 - 2.40
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Why do Businesses Invest?
• To improve efficiency
• As a defence against competition
• To increase profit
• For the business to grow
Getting Started Unit 2 - 2.41
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Why do we Evaluate Investment Projects?
• Internal competition for available funds
• To minimise risk
• To maximise net benefit
Getting Started Unit 2 - 2.42
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What Factors Could We Use to Evaluate an Investment Opportunity?
• Expenditure
• Income
• Timing
• Duration of activity
Getting Started Unit 2 - 2.43
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The Principle
• We are looking to compare total income and total costs over the working lifetime of an asset to see if it makes a positive contribution to the business/organisation.
• As we shall be looking into the future, we need to make assumptions and forecasts.
Getting Started Unit 2 - 2.44
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An Evaluation Formula
Total income
minus
Initial costs
minus
Running costs
Plus or minus
Termination costs or benefits
=
Total net benefit
Getting Started Unit 2 - 2.45
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OR
Initial costs
Plus/minus profit/loss year 1
Plus/minus profit/loss year 2
Plus/minus profit/loss year 3
Etc
Plus/minus termination costs
= Net benefit
Getting Started Unit 2 - 2.46
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An Example
• A new delivery vehicle is expected to improve sales by £50,000 per year but cost £30,000 per year to operate. The vehicle is expected to cost £21,000 to purchase, have a working lifetime of 5 years, and then have a resale value of £7,000.
• The net benefit of the vehicle is therefore
• 5 (£50,000 - £30,000) - £21,000 + £7,000
• = £100,000 - £21,000 + £7,000 = £86,000.
Getting Started Unit 2 - 2.47
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The Effect of Time
• An important point to note is that money loses value over time.
• Thus, money to be received now has a higher value to us than the same sum due to be received in several years time.
• We can deal with this in our calculations by applying a technique known as discounted cash flow (DCF).
Getting Started Unit 2 - 2.48
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Discounted Cash Flow Valuation
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Getting Started Unit 2 - 2.49
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Key Concepts and Skills
Be able to compute the future value of multiple cash flows
Be able to compute the present value of multiple cash flows
Be able to compute loan payments
Be able to find the interest rate on a loan
Understand how interest rates are quoted
Understand how loans are amortized or paid off
6F-49
Getting Started Unit 2 - 2.50
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Discount Rates
• Discount rates are calculated by a mathematical formula based in the estimated or forecast discount rate for a given number of years ahead.
• i.e. The discount factor at 10% for a sum to be received or paid out 5 years hence is 0.62.
• Therefore, a sum of £1,000 to be paid, multiplied by 0.62 shows the value in present-day terms to be £620.
Getting Started Unit 2 - 2.51
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Discounts Factors at 10%
Now 1 year 2 years 3 years 4 years 5 years
Cash amount
£1 £1 £1 £1 £1 £1
Discount factor
1.00 0.91 0.83 0.75 0.68 0.62
Current value
£1 £0.91 £0.83 £0.75 £0.68 £0.62
Getting Started Unit 2 - 2.52
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Discount Table
Getting Started Unit 2 - 2.53
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Multiple Cash Flows – Present Value Find the PV of each cash flows and add them• Year 1 CF: 200 / (1.12)1 = 178.57
• Year 2 CF: 400 / (1.12)2 = 318.88
Year 3 CF: 600 / (1.12)3 = 427.07• Year 4 CF: 800 / (1.12)4 = 508.41
• Total PV = 178.57 + 318.88 + 427.07 + 508.41 = 1,432.93
6F-53
Getting Started Unit 2 - 2.54
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Timeline
0 1 2 3 4
200 400 600 800178.57
318.88
427.07
508.41
1,432.93
6F-54
Getting Started Unit 2 - 2.55
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Net Present Value
• The result of DCF calculations is the net present value (NPV) of the activity:
• “The difference between the sum of the projected discounted cash inflows and outflows attributable to a capital investment or other long-term project.” (CIMA 2000: p.115)
Getting Started Unit 2 - 2.56
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NPV Illustrated Assume you have the following information on Project
X:
Initial outlay -$1,100 Required return = 10%
Annual cash revenues and expenses are as follows:
Year Revenues Expenses
1 $1,000 $500 2 2,000 1,000
Draw a time line and compute the NPV of project X.
Getting Started Unit 2 - 2.57
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NPV Illustrated (concluded)0 1 2
Initial outlay($1,100)
Revenues $1,000Expenses 500
Cash flow $500
Revenues $2,000Expenses 1,000
Cash flow $1,000
– $1,100.00
+454.55
+826.45
+$181.00
1$500 x 1.10
1$1,000 x 1.10
2
NPV
Getting Started Unit 2 - 2.58
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Underpinnings of the NPV Rule Why does the NPV rule work? And what does “work” mean? Look Why does the NPV rule work? And what does “work” mean? Look
at it this way:at it this way:
A “firm” is created when securityholders supply the funds to A “firm” is created when securityholders supply the funds to acquire assets that will be used to produce and sell a good or a acquire assets that will be used to produce and sell a good or a service;service;
The market value of the firm is based on the present value of the The market value of the firm is based on the present value of the cash flows it is expected to generate;cash flows it is expected to generate;
Additional investments are “good” if the present value of the Additional investments are “good” if the present value of the incremental expected cash flows exceeds their cost;incremental expected cash flows exceeds their cost;
Thus, “good” projects are those which increase firm value - or, put Thus, “good” projects are those which increase firm value - or, put another way, good projects are those projects that have positive another way, good projects are those projects that have positive NPVs!NPVs!
Moral of the story: Invest only in projects with positive NPVs. Moral of the story: Invest only in projects with positive NPVs.
Getting Started Unit 2 - 2.59
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Discounted Cash Flow Technique
• Allows for the changing value of money over time
• Enables the calculation of a ‘net present value’ (NPV) over the life of the investment.−A negative NPV represents loss of value,−The highest NPV among options is the one to
go for.
Getting Started Unit 2 - 2.60
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Our Previous Example
• A new delivery vehicle is expected to improve sales by £50,000 per year but cost £30,000 per year to operate. The vehicle is expected to cost £21,000 to purchase, have a working lifetime of 5 years, and then have a resale value of £7,000. A discount rate of 10% is assumed.
• The net benefit of the vehicle is therefore
• £20,000 (0.91) + £20,000 (0.83) + £20,000 (0.75) + £20,000 (0.68) + £20,000 (0.62) - £21,000 (1.00) + £7,000 (0.62)
• = £18,200 + £16,600 + £15,000 + £13,600 + £12,400 - £21,000 + £4,340
• = £59,140. [Compared to our non-discounted calculation of £86,000 net benefit]
Getting Started Unit 2 - 2.61
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Key Factors to Remember
• You are attempting to look into the future
• Estimates may be inaccurate
• Assumptions may be invalid
• You must consider uncertainty and risk
• Remember there may be value and/or costs at the end of asset working life
Getting Started Unit 2 - 2.62
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Accounting Information Systems
• You will need to create an accounting system to provide information to support the organisation/business.
• This will need to be specific to the needs of that organisation/business and therefore unique.
• Management accounting will be considered later in the module. However, there are some obvious general requirements for financial accounting – what are they?
• We shall discuss this in seminar.
Getting Started Unit 2 - 2.63
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Reference
• CIMA. (2000). Management accounting official terminology. London: Chartered Institute of Management Accountants.
Getting Started - Unit 2 - 2.64
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Unit 2
Any Questions?