• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Management Accounting. A number of factors will influence the outcome of an investment appraisal exercise including inflation, finance and taxation. While there can be no excuse for ignoring the effects of inflation in an investment appraisal the other tw

Extracts from this document...


Table of Contents 1.0 Introduction 1 1.1 Question 2 1 1.2 Question 6 2 2.0 Contents 3 3.0 Question 2 3 3.1 Question 2 (a) 3 3.2 Question 2 (b) 5 4.0 Question 6: 7 4.1 Impact of Inflation on an investment appraisal 7 4.2 Impact of Taxation on an investment appraisal 10 5.0 Conclusion 13 5.1 Question 2 13 5.2 Question 6 13 6.0 References 15 6.1 Question 2 15 6.2 Question 6 15 7.0 Appendices 17 1.0 Introduction 2.0 Question 2: "Responsibility Accounting collects and reports planned and actual accounting information about the inputs and outputs of responsibility centers". Responsibility Accounting is based on information pertaining to inputs and outputs. The resources utilized in an organization which are essentially physical in nature and refer to quantities of materials consumed, hours of labor and so on, are termed as inputs. These heterogeneous physical resources are converted into a common denominator called the monetary measure, for the purpose of managerial control. When they are expressed in monetary terms, they are termed as "costs". In a similar way, when outputs are measured in monetary terms, they are termed as "revenues". More precisely, responsibility accounting is based on cost and revenue data or financial information. Responsibility Accounting must be so designed as to suit the existing structure of the organization. Responsibility should be coupled with authority. A person is obliged to perform his duties only when he is conferred with adequate powers to do so. A sound organization structure, with clear-cut assignment of authorities and responsibilities should exist for the successful functioning of the responsibility accounting system. When the organization is not in order, it will miserably fail to work. Responsibility accounting system mainly depends on the assigned responsibilities and authorities such that the performance of each manager is evaluated in terms of such factors. 1.2 Question 6 Financial decision making is important for a company with the purpose to maximizing the company's wealth for the shareholders. ...read more.


An investor should consider both inflation and taxation effects on their capital budgeting decision. Inflation can be defined as the decline in the general purchasing power of the monetary unit. For instance, if the inflation rate is 3% annually, then in theory a RM1 pack of sweets will cost RM1.03 in a year. After inflation, your ringgit cannot buy the same goods it could be forehand. In recent years, most developed countries have tried to maintain an inflation rate of 2-3%. In countries such as Argentina and Brazil, triple-digit annual inflation rates which is, average prices more than doubling each year have been an usual thing and have drastically affected investment decisions. If significant inflation is expected over a project life, it should be specifically and regularly examined in a capital-budgeting model. One significant key to appropriate consideration of inflation in investment appraisal is consistent treatment of the minimum desired rate of return and the predicted cash inflows and outflows. Such consistency can be reached by counting an element in for inflation in both minimum desired rates of return and in the cash flow predictions. There is always a tendency to assume erroneously that, when, both net revenues and the project cost rise proportionately, that inflation would not have much impact. These lines of arguments seem to be convincing, and it is correct for two reasons, which are as follows: first, the rate that is used for discounting cash flows is generally expressed in nominal terms. Many companies base their minimum desired rate of return on market interest rates which also known as nominal rates that comprise the inflation element. For instance, consider three possible components of a 12% nominal rate: (a) Company-risk element- the "risk" premium that is demanded for taking larger risks. 4% (b) Risk-free element- the "pure" rate of interest that is paid on long term federal bonds. 5% (a) + (b) ...read more.


Of the three types of responsibility centers, an investment centre type of responsibility centre which is only an extension of a profit centre can be considered to yield better results. Among the various approaches of performance measurement in investment centre analysis, residual income is evidently superior, though ROI is more popularly used in business circles. 5.2 Question 6 Inflation causes considerable problems in investment appraisal and should be incorporated in both the general and specific financial analysis of a project. It is accepted that inflation can be dealt with either by inflating the cash flows in line with the expected rate of inflation and discounting at the nominal interest rate, or by calculating the cash flows in present day dollars and discounting at the real rate of interest. Both methods will reveal an identical net present value for the same project, but in the internal rate of return will be expressed in nominal terms, while in the latter case it will be expressed in real terms. The inclusion of taxation and finance under inflationary conditions leads to problems with the appraisal .The tax reliefs granted on capital investments via depreciation are generally not received immediately up to the expenditure but are spread over a number of years. This delay not only reduces their present value, as explained earlier, but also expenses them to the effects of inflation. When it is remembered that the effect of inflation is to reduce the purchasing power of a dollar then it can be seen that delaying the receipt of the tax reliefs will not only reduce their present value, but will also lead to a reduction in the bundle of goods that can be bought with the tax relief received in any given year. The further into the future the relief is received, the smaller the bundle of goods that may be bought with the relief in that year because of the increase in the nominal or money price of the goods due to inflation. Thus inflation directly reduces the present value of the tax reliefs on capital investment. 6. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. Contemporary issues in management accounting - Target costing,Life cycle costing andQuality ...

    Also the taxa considerations form quite a siognificant part of such costs. ? Residual values:- these involve the benefit in terms of residual value but also some costs may be associated with the disposal of a particular asset. ? Non-menetary costs or benefits:- these are usually hard to quantify but may form a significant portion of the decision.

  2. The Importance of Communication in Accounting. Todays accountant, especially within the managerial accounting realm, ...

    Group writing assignments can also help imitate "real life" scenarios and improve written communication skills, develop interpersonal communication and build teamwork skills. These sorts of exercises are particularly effective in audit courses as professors can form groups and assign tasks such as preparing audit memos, budgets and reports that outline

  1. This report will incorporate an analysis of Blackmores LTD including, the level of leverage ...

    Therefore, as dividend changes occur after long-run sustainable levels of earnings, the stability of the payout ratio occurring in 2005 can be explained. The higher payout ratios during 2001 and 2004 can reflect that management of BKL having confidence that there is no possibility that the dividends will be reversed.

  2. Accounting Final Project - analysis of three companies in the UK telecommunication sector.

    This part of study tries to explore the competitive advantage by each of the three companies and how they have used the advantage to dominate the market (Gibson,2010 p.118-120). Vodafone: As mentioned earlier Vodafone is one of the most global companies in the telecommunication industry with presence in almost all the continents of the world.

  1. Microsoft Audit Planning - 8 Steps

    ? Legal and compliance personnel ? Internal audit personnel This is to prevent any form of mismanagement of funds from employees and also to prevent the preparers of the financial statements from cooking the books of the agency. Assessing the likelihood and significance of each potential fraud risk is a

  2. Audit Planning. The first section will discuss the key issues relating to audit ...

    The demand market needs to be correctly studied, as an unstudied market could lead the company to failure. 1. Appropriated suppliers in order to meet objectives of organic food. Liquidity issues; 1. GB Food Ltd has suffered from a dramatic 65 % decrease in cash at the bank.

  1. Capital budgeting: advantages and limitations

    as capital budgeting definition, capital budgeting process, methods of capital budgeting and sources of funds. This is also an overview of literature and past research work in related areas which provide a setting for this current research. 2.1 Capital Budgeting Defined Capital budgeting could be defined as a process in

  2. Analysis Project, I have to decide to make a financial and business comparison ...

    a key indicator for the investors and could enhance the confidence and built a long term relationship. This has already set a platform for Justin King to announce its expansion plans. E - DIVIDEND INFORMATION Typically mature, profitable companies pay dividends.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work