Accounting Equation Chambers on Accounting

Question: Discuss about the Accounting Equation for Chambers on Accounting. Answer: Part A (I) Table showing calculation in case if new plant is employed: Calculation of Cash Flow Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Widgets Required 50000 50000 52000 55000 55000 Cost of Machine 930100 0 0 0 0 Sale of old machine 1500 Depreciation 310033 310033 310033 0 0 Cost of Widgets 1550000 1550000 1612000 1705000 1705000 Scrap value of new machine 12000 Cash Outflow -1500 2480100 1550000 1612000 1705000 1693000 Tax saving on depreciation 124013 124013 124013 0 0 Total cash outflow -1500 2356087 1425987 1487987 1705000 1693000 Present Value Factor (after tax discount rate) 1 0.893 0.797 0.712 0.635 0.567 Present Value of cash flows -1500 2103985 1136511 1059447 1082675 959931 Total net present value 6341049.3 Working Notes Calculation of Cost of Machine Amount in $ Cost 945000 Discount 37800 Freight Installation 22900 Total 930100 Calculation of Depreciation Amount in $ Total cost 930100 Scrap value 16853.933 Value to be written off 913246.07 Depreciation 304415.36 Calculation of Cost per unit Amount in $ Direct Material 8 Direct Labour 7.5 Variable Overhead 4.5 Fixed Overhead 11 Total Manufacturing cost 31 Table showing calculation in case the widgets are purchased: II nd Option Year Year 1 Year 2 Year 3 Year 4 Year 5 Widgets Required 50000 50000 52000 55000 55000 Purchasing cost 27 27 27 27 27 Total cash outflow 1350000 1350000 1404000 1485000 1485000 Cost of Widgets 1550000 1550000 1612000 1705000 1705000 Cash Outflow 1550027 1550027 1612027 1705027 1705027 Present Value Factor 0.893 0.797 0.712 0.635 0.567 Net Present Value 1384174.1 1235372 1147763 1082692 966750.309 Total Net Present Value 5816751.3 Saving in fixed overhead after deducting tax benefit 27000 Net cash outflow 5789751.3 (II) It can be concluded from above calculations that as net present value of cash outflow after tax in case if widgets are purchased is less. Hence this option is more appropriate for the company. Part B Comparative Balance Sheet Comparative Balance Sheet of Ariel Snowy Ltd. as at 30 June 2016 Amount in $ Notes Ariel Snowy ASSETS Financial Assets Cash and cash equivalents 1,60,000 4,40,000 Short Term Investment 16,000 3,80,000 Trade and other receivables 2,00,000 2,60,000 Inventory 11,20,000 6,00,000 Total financial assets 14,96,000 16,80,000 Non-Financial Assets Property, plant and equipment 24,00,000 25,60,000 Patent 12,000 90,000 Total non-financial assets 24,12,000 26,50,000 Total Assets 39,08,000 43,30,000 Equity Liabilities EQUITY Paid Up Capital 2600000 2600000 Retained Profit 2,68,000 3,60,000 Total Equity 28,68,000 29,60,000 LIABILITIES Non-Current Liabilities Bank Loan 6,80,000 6,60,000 Other - - Total 6,80,000 6,60,000 Current Liabilities Accounts Payable 3,60,000 6,20,000 Others - - Total 3,60,000 6,20,000 Total Liabilities 39,08,000 42,40,000 Table showing financial ratio of Ariel Ltd, Snowy Ltd. Financial Ratios Aerial Ltd. Snowy Ltd. Current 2.20 2.55 Acid Test 0.55 1.64 Debt to Asset 0.17 0.15 Receivable Turnover 11.00 11.54 Inventory Turnover 2.14 3.67 Profit Margin 0.16 0.21 Asset Turnover 1.00 0.88 Return on Assets 0.16 0.18 Return on Equity 0.22 0.27 Working note for calculating financial ratios: Working Note for calculation of financial ratios: Particular Aerial Snowy Current Ratio 1496000/680000 1680000/660000 (Total Current Assets /Total Current Liabilities) Acid Test Ratio (Total current assets - inventory / Total current liabilities) 1496000-1120000/680000 1680000-600000/660000 Debt to Asset Ratio 680000/3908000 660000/4240000 Total Non -current liabilities/ Total Assets Receivable Turnover Ratio 2200000/200000 3000000/260000 (Credit Sales/ Trade Receivable) Inventory Turnover Ratio 2400000/1120000 2200000/600000 (Cost of goods sold/ Inventory Profit Margin Ratio (Net Income / Sales) 620000/3904000 800000/3800000 Asset Turnover Ratio (Total sales / Total assets) 3904000/3908000 3800000/4240000 Return on Assets Ratio (Net Income / Total Assets) 620000/3908000 800000/4242000 Return on Equity Ratio 620000/2868000 800000/2960000 (Net Profit / Total Equity) Income Statement Particular Aerial Ltd. Snowy Ltd. Cash Sales 1704000 800000 Credit Sales 2200000 3000000 Sales 3904000 3800000 Cost of Goods Sold 2400000 2200000 Gross Profit 1504000 1600000 Interest Expense 120000 80000 Net Income 620000 800000 (c) The company with greater acid ratio will be deemed as the company is better liquidity position. According to above-stated statement of the financial ratios acid ratio of Snowy Ltd. is greater. Hence it has better liquidity position. (d) As debt asset ratio i.e. .15 of Snowy Ltd. which is better from Ariel Ltd.; it could be said that this company is using leverage effectively to increase the return of shareholder. (e) Additional information was useful in preparing an income statement. The data of income statement was used in preparing a statement of financial ratios. Hence it was useful in calculating ratios and taking a decision regarding the company as well. Part C Inventory budget Inventory budget (in units) April May June July August September Units in closing inventory 550 610 730 875 900 900 Sales of next month is closing inventory of current month. Company is planning to sell 550 in month of May so 550 will be closing inventory of April. Raw materials inventory budget Raw materials inventory budget (in units and amount) April May June July August September Raw material units (A) 550 610 730 875 900 900 Per unit cost (B) $45.00 $45.00 $45.00 $45.00 $45.00 $45.00 Raw material in amount (A*B) $24,750.00 $27,450.00 $32,850.00 $39,375.00 $40,500.00 $40,500.00 Trade creditors budget Trade creditors budget (in amount $) April May June July August September Op. Balance (A) 0 24750 27450 32850 39375 40500 Purchase (B) 24750 27450 32850 39375 40500 40500 Paid to creditors (C) 0 24750 27450 32850 39375 40500 Cl. Balance (A+B-C) 24750 27450 32850 39375 40500 40500 Trade debtors budget Trade debtors budget (in amount $) April May June July August September Op. Balance (A) 0 0 60500 67100 80300 96250 Sales (B) 0 60500 67100 80300 96250 99000 Received from debtors (C) 0 0 60500 67100 80300 96250 Cl. Balance (A+B-C) 0 60500 67100 80300 96250 99000 Working note Sales April May June July August September Unit (A) 0 550 610 730 875 900 Per unit sale (B) 0 $110 $110 $110 $110 $110 Amount (A*B) 0 $60500 $67100 $80300 $96250 $99000 Cash budget Cash budget (in amount $) Inflow Opening balance 36625 -27850 -37225 -48662.5 -53987.5 Share capital issued 350000 Amount received from debtors 0 60500 67100 80300 96250 Total inflow (A) 350000 36625 32650 29875 31637.5 42262.5 Amount paid to creditors 0 24750 27450 32850 39375 40500 Labor cost 12375 13725 16425 19687.5 20250 20250 Production overhead 15000 15000 15000 15000 15000 15000 Non production overhead 11000 11000 11000 11000 11000 11000 Fixed asset purchased 275000 Total outflow (B) 313375 64475 69875 78537.5 85625 86750 Net cash flow or Closing balance (A-B) 36625 -27850 -37225 -48662.5 -53987.5 -44487.5 Part D Floccinaucinihilipilification can be said as act or instance of judging something to be useless and trivial. It is a combination of four Latin words (flocci, nauci, nihili, pilifi) which means an action or habit of estimating as worthless (Butterfield, 2013). In accounting it is related to matter like dated facts which are determinable only on similar dates and balance sheet which represent past facts and guesses about the future (Chambers and Dean, 2013). In the case of dated periodicals accounts which are based on judgements but are also open to conceal speculation and misuse of property and favourable and unfavourable drifts in financial affairs (Raymond, Logic, Law, and Ethics, 2013). According to this concept the one of major condition of business survival which is solvency, but the same cannot be assured through balance sheet that how much quantity worth the money, he is able to pay. It has an effect of accounting as it affects the base on which accounting is being done (Rhodes and De Jager, 2014). References Butterfield, J.2013. Oxford AZ of English Usage. Oxford University Press. Chambers, R.J. and Dean, G.W.2013. Chambers on Accounting: Logic, Law and Ethics (Vol. 6). Routledge. Raymond J. Chambers. Logic, Law, and Ethics. (2013). [Online]. Available through https://books.google.com.au/books?id=Ei03tgPKEKcCpg=PP8lpg=PP8dq=Floccinaucinihilipilification+in+accountingsource=blots=7SEeed7xcSsig=4hlrAp251LDYlZuPol-0KYapdrIhl=ensa=Xved=0ahUKEwiU8ZeJs6DPAhVHpY8KHTGpDvQQ6AEINTAG#v=onepageq=Floccinaucinihilipilification%20in%20accountingf=false . [Accessed on 21st September 2016] Rhodes, P. and De Jager, A.2014. Narrative studies of recovery: a critical resource for clinicians. Clinical Psychologist. 18(3). Pp.99-107.