Reference no: EM134025710

Aims

The module aims to develop a comprehensive understanding of fundamental concepts and techniques in financial accounting and management accounting, including the ethical issues at stake in providing a ‘true and fair view’ in public reporting so as to support and maintain good business practice and sustainable financial markets. It also provides students with the opportunity to use and apply financial and accounting concepts, constructs and frameworks in support of business problem appraisal and decision making.

Brief module description/summary

This module covers the nature and role of accounting and the processes used to record and present accounting information. Students will learn to prepare company financial statements, including statements of financial position, profit or loss, and other comprehensive income and cash flow statements for single entities. The module will enable students to evaluate, analyse and discuss financial performance. This module provides participants with a solid grounding in all aspects of management accounting, including the importance of cost behaviour and different cost accounting techniques such as marginal and absorption costing. Students will develop skills in analysis and interpretation of numbers for decision-making purposes.

Module learning outcomes

Upon successful completion of the module the students will be able to:

LO1: Understand the theoretical and conceptual underpinning and frameworks for financial accounting.

LO2: Understand and consider the issues in revenue recognition, expense recognition, accruals, prepayments, depreciation, inventory valuation, recognition of liabilities in the construction of core financial statements for sole traders and limited companies.

LO3: Understand and apply full costing methods and recognise the associated challenges managers face in costing.

LO4: Plan through cash budgeting, contribution costing and break-even analysis as well as understand the strategic nature, purpose and issues for managers.

Overview of learning and teaching activities on the module

A variety of teaching approaches is used, including lectures, seminars, case analysis, teamwork and extensive use of electronic resources for guided research.

TASK DESCRIPTION

AD Plc is currently evaluating two mutually exclusive long-term international investment opportunities within the automobile industry. Proposal D is to be located in Denmark, while Proposal G will be based in Germany.

You work for the company as a trainee accountant and have been tasked to examine the following information relating to the two investment decisions.

Four widely used evaluation methods have been applied to assess these proposals, and the corresponding results are provided below. The cost of capital is estimated at 9% and the payback required is 3 years.

Options Initial investment Accounting rate of return Payback period Net present value @ 9% Internal rate of return
Proposal D £1,150,000   14.4%   2.6 years   £141,400   11.9%
Proposal G £1,490,000   16.2%   3.2 years   £158,100   10.3%

In the past the company has been using payback as its main method of selecting such investments. Now the company is also keen to ensure such investments will maximise the value of the company and its shareholders' wealth.

The board of directors of AD plc is about to attend a meeting to consider which option to choose. The IRR measure was added after the original board papers were released. When asked to estimate the IRR before calculating it, the company's Finance Director confidently stated that it would be "well over 9% for both options."

TASK

Critically discuss the usefulness and limitations of the FOUR capital investment appraisal measures in the table above.

Identify 5 (five) other financial/non-financial factors that needs consideration before a decision is made, and provide a critical analysis of these factors for both proposals.

Using the analysis in above (a) and (b), make a recommendation with justification, as to which proposal should be chosen. Include in your answer, how the company should resolve the conflict where NPV and IRR suggest different project preferences.

Explain why the finance director was so confident that ‘IRR would be well more than 9%' for both options.