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Summary Accounting in a Business Context

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ACCOUNTING IN A BUSINESS CONTEXT – Aiden Berry & Robin Jarvis 5th Edition Slides – G.C. Vergeer Chapter 1 – Introduction to Accounting Accouting:    is generally about quantitative information the information is likely tob e financial it should be useful for making decisions

Key financial statements:    the statement of financial position or balance sheet the income statement or profit and loss account the cash flow statement

Chapter 20 – Investment Decisions

Compare the estimated ARR of a proposed project with the target ARR: If the estimate exceeds the target  accept the project If it is lower  reject the project

Payback = the period which it takes the cash inflows from an investment project to equal the cash outflows. Present value = the cash equivalent now of a sum of money receivable or payable at the stated future date, discounted at a specified rate of return. ( ( ( ) ) ( ( A = lower rate of return with positive NPV B = higher rate of return with negative NPV P = amount of the positive NPV N = amount of the negative NPV ( ) ) )

Chapter 17 – Accounting for Decision Making: When there are no resource constrains Sunk costs/Past costs can easily be identified in that they will have been paid for or they are owed under legally binding contracts. The firm is committed to paying for them in the future. Differential (incremental) costs are the differences in costs and benefits between alternative opportunities available to the organization. It follows that when a number of opportunities are being considered, costs and benefits that are common to these alternative opportunities will be irrelevant to the decision. Opportunity cost of a resource = the maximum benefit which could be obtained from that resource if it were used for some alternative purposes. Relevant costs and benefits = those that relate to the future and are additional costs and revenues that will be incurred or result from a decision. Costs that are relevant to a decision may also be:   cost of replacing a resource that was originally purchased for some other purpose the opportunity cost of using a resource that could be used for some alternative purpose

Chapter 18 – Accounting for Decision Making: Resource constraints and decisions which are mutually exclusive Decision making with constraints objective  when there are resource constraints, the objective that should be applied is to establish the optimum output within the constraints to maximize contribution and therefore profits. The optimum output with one constraint: 1. Determine the contribution of all opportunities and eliminate those that yield a negative contribution 2. Establish the contribution per unit of the constraint for all opportunities that yield a positive contribution A make or buy decision involves the problem of an organization choosing between making a product or carrying out a service using its own resources, and paying another external organization to make or carry out a service for them. Chapter 9 – Financing and Business Structures The finance used and the period of that finance should be matched to the period for which it is required and the purpose for which it is to be used. Trade credit = a form of short-term finance. It has few costs and security is not required. Factoring provides short-term finance. Costs include an interest charge and a debt management charge. The finance is secured on the receivables. Bank overdrafts provide finance only when it is needed. Costs include interest and often a set-up charge. In general, some form of security will be required. Loans are generally for a fixed purpose and a fixed period. They have set repayment dates, and costs include interest and set-up fees. They are normally secured on assets. Hire purchase is for a fixed period. Costs are in the form of interest charges. Ownership of the asset remains with the provider of the finance until all instalments are paid

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