Importance of Accounting Regulations and Investment Analysis Question And Answers

Question 1 Why is a regulatory framework essential for accounting practices?

a) Requirement for a regulatory framework for accounting

Consistency and Comparability

Standardized guidelines and norms provided by regulatory framework guarantee uniformity in reporting financial information amongst various organizations. Meaningful comparability between financial records of various businesses, sectors, and periods is made possible by this uniformity.

Transparency

Accounting regulations improve openness by mandating that businesses provide appropriate data in their financial accounts. Stakeholders like creditors, investors, and the general public may make better-informed judgments regarding the success of an organization and financial health because of this openness.

Reliability and Credibility

The application of trustworthy and reputable accounting techniques is encouraged by a regulatory structure. Financial statements are more likely to correctly reflect a company's economic reality when guidelines for the identification, measurement order and disclosure of monetary transactions are established.

Investor Confidence

Financial data is what investors use to guide their judgments and a strong regulatory framework lowers the possibility of misinformation or manipulations and gives investors peace of mind by guaranteeing that the company's earnings statements are prepared under reliable and consistent standards of accounting.

Facilitation of Auditing

Standards for auditing are based on accounting guidelines. Auditors evaluate the fairness and correctness of financial accounts using accepted principles of accounting. The auditing process is made easier by a well-defined regulatory framework, which guarantees that auditors can efficiently examine and confirm financial data.

Protection of Stakeholders

The general public, employees, creditors, and stockholders are only a few of the stakeholders whose interests that the regulatory structure is intended to safeguard. Management lowers the possibility of financial mismanagement, false reporting, and consumer exploitation by enforcing norms and regulations.

b) Influence of International Financial Reporting

Global Standardization

The movement towards international standardization of accounting practices is one of the main effects of IFRS. Companies in several nations can use IFRS to adopt a standard set of accounting rules (La Torre et al. 2018). This facilitates the understanding and comparison of the financial achievements of businesses operating in several countries by assisting analysts, investors, and other consumers by promoting uniformity and comparison in financial reporting.

Enhanced Transparency and Disclosure

The significance of disclosure and openness in the reporting of financial information is emphasized by IFRS. As cited by Caputo et al. (2021), businesses must give exhaustive details about their performance, hazards, and financial situation. As a result, disclosure procedures have improved, providing stakeholders with a more thorough and nuanced understanding of an organization's financial situation and activities.

Fair Value Measurement

For some assets and liabilities, IFRS emphasizes fair value measurement more. Users of financial statements now have access to a greater amount of current and pertinent information thanks to the transition from historical cost to fair value accounting, particularly in industries where the fair value of assets and liabilities is easily found.

Increased Flexibility

Since IFRS is thought to be more principle-based than governed by rules, financial reporting is thought to be more flexible. This ability to adapt promotes a more realistic portrayal of a company's financial status and performance by allowing businesses to customize their financial statements to reflect the economic content of transactions.

Question 2: How do PBP, ARR, and NPV influence investment decision-making?

a) Calculation of PBP, ARR and NPV

Table 1: Calculation of Payback Period

Table 2: Calculation of Accounting Rate of Return

Table 3: Calculation of Net Present Value

b) Recommendations for project investments

The payback periods of the three enterprises are very close, with Project B having the lowest payback period at 2.22 years. A shorter payback period generally wins out since it indicates how long it will take to recoup the initial expenditure. With an annual percentage rate of 1.51, Project B has the lowest accounting profit (ARR) when weighed against Projects A and C. ARR is a business metric expressed as a percentage of Convert plc. After taking into account the cost of capital, Project B has the strongest net present value (NPV), at 39.0%, indicating that it is anticipated to yield the maximum value in the current term.

A positive net present value (NPV) suggests a potentially lucrative investment. NPV is a commonly used indicator for making decisions regarding investments (Leyman et al. 2019). Based on the computations, it seems that Project B is the best alternative for investment. Despite having a lower ARR than Projects A and C, it has the shortest return on investment (positive NPV of 39.0%) and accounts for capital costs and time compared to money in its NPV. Thus, out of the three possibilities of Convert plc, Project B appears to give the highest financial exchange thus it should be pursued based on the estimations and indications.

c) Approaches to Investment Appraisal

PBP

Although the techniques employed in section (a) offer helpful details, a more thorough evaluation of the investment might profit from taking into account other data and enhancements to overcome the weaknesses of the selected techniques. Including a comprehensive perspective that takes into account market dynamics, risk assessment, and advantageous coherence improves making decisions and leads to better-informed decisions about investments (Kashyap, 2019). The PBP is straightforward, simple to calculate, and prioritizes recouping the initial expenditure. Disregard cash flows that occur after the payback period, and the payback period's arbitrary choice could not be in line with the company's intended risk or return characteristic.

Improvement

Develop a baseline for the longest payback term that is acceptable given the company's risk tolerance and think about utilizing a discounted payback period that takes the time worth of money into accounting.

ARR

The Accounting Rate of Return concentrates on accounting profits and is easy to calculate. Additional Information might be used to improve the approaches. Focuses on accounting profits, could not correctly reflect cash flows, and disregards the time value of currency.

Improvement

For a more realistic depiction of economic worth, use cash flows rather than profit from accounting. Think about utilizing an updated ARR that accounts for the time value of funds as well as adjusts for the investment's evolving risk profile over time.

NPV

NPV gives a precise picture of how the project will affect shareholder wealth and takes into account all cash flows throughout the project. Assumes unfeasibly, cash flows will be reinvested at the expense of capital (Bagherinejad and Zare, 2019). NPV needs the cost of capital to be estimated, which may be an arbitrary method that is susceptible to variations in the rate of discounting.

Improvements

NPV uses sensitivity analysis to evaluate how changes in the rate of discounting affect net present value (NPV) and take into consideration a variety of discount rates to account for cost of capital uncertainties. Real options analysis is used by NPV to consider managerial flexibility while planning for possible investment choices.

Question 3 What is the impact of breakeven analysis on business strategies?

a) Calculation of BEP and MOS

Table 4: Proposal 1

Table 5: Proposal 2

In Proposal 1 MOS Rise: The Margin of Safety has risen from 6.25% to 12.10% as a result of the increased commission rate and the launch of the advertising campaign. Higher Breakeven Point: As a result of higher fixed expenditures, the updated Breakeven Point rose to 23,206 units.

In Plan 2 MOS Lowering: The Margin of Safety has declined from the initial 6.25% to 10.94% as a result of the selling price reduction and a little rise in variable expenses of Corinth Ltd. Higher The break-even point: As a result of the modifications made for the variable cost and selling price, the adjusted break-even point rose to 28,500 units.

b) Evaluation of two proposals

The breakeven point and margin of safety have been impacted by the changes made in both plans, thus choosing between the two would need carefully weighing the overall goals and risk tolerance of the business (Bathurst et al. 2020). The company's risk tolerance, competitive positioning objectives, and strategic objectives will determine which of the two proposals to choose. Proposal 2 seeks to increase market share through competitive pricing, but Proposal 1 is more concerned with preserving profit margins and maybe fostering loyalty to Corinth Ltd. The choice has to be in line with the target market's characteristics as well as the company's long-term goals.

Question 4 Why is effective management of the cash conversion cycle important?

a) Cash conversion Cycle

A financial indicator called the Cash Conversion Cycle (CCC) calculates how long it takes a business to turn the amount it spends on resources like inventories and other assets into cash flows from sales (Wang, 2019). Subsequently is an indicator of how well a business manages its financial resources. There are three essential components to the Cash Conversion Cycle.

Inventory Days

The duration of time the business needs to sell its inventory and a shortened inventory cycle lowers the possibility of outdated inventory and suggests effective management. However, if it's extremely belligerent, it could signal stockouts.

Accounts Receivable Days

The typical time it takes the business to get paid for credit sales and the shorter duration of accounts receivable suggest timely collections, which enhances cash flow. Subsequently may, however, imply strict lending conditions that can have an impact on sales.

Accounts Payable Days

Typically takes a business to pay its vendors and an extended cycle of accounts payable enables the business to retain funds longer. However, if it is overextended, it could damage ties with suppliers.

use my discount

The CCC offers valuable information about how well a business manages its working capital and turns investments into cash. Although a shorter CCC is usually preferable, the ideal cycle relies on the business strategy of the organization as well as industry standards.

b) Importance of effective management of trade receivable

Importance of Effective Management of Trade Receivables

The firm will have a predictable and consistent cash flow if trade receivables are managed well. Enough cash is kept on hand to cover operating demands in part because consumers pay on time. Efficient management of trade receivables is essential for maximizing working capital (Qoribudin and Sukartaatmadja, 2018). Additionally, it assists in striking a balance between the requirement to give consumers credit and the need for cash flow to support operations.

Measures to Manage Trade Receivables

Deliver a precise and established credit regulation that outlines credit limits, conditions of payment, and standards for determining a customer's creditworthiness. Before granting credit to a consumer, thoroughly examine their credit history (Mugova and Kwenda, 2020). Examine the industry's reputation, payment history, and financial soundness.

Techniques for Debt Collection

Progressively more severe letters informing clients of past-due payments and these letters, which act as a formal notice of the overdue obligation, usually become more urgent. Collaborate with clients to arrange installment plans or debt settlements (Bellotti et al. 2021). Retaining the client relationship may be achieved by coming up with win-win solutions

Reference list

Bagherinejad, J. and Zare, F., 2019. A Bi-Objective Model for Multi-Mode Resource Constrained Scheduling Problem to Optimize the Net Present Value of Costs and Makespan. Industrial Engineering & Management Systems, 18(3), pp.340-348.

Bathurst, R.J., Miyata, Y. and Allen, T.M., 2020. Deterministic and probabilistic assessment of margins of safety for internal stability of as-built PET strap reinforced soil walls. Geotextiles and Geomembranes, 48(6), pp.780-792.

Bellotti, A., Brigo, D., Gambetti, P. and Vrins, F., 2021. Forecasting recovery rates on non-performing loans with machine learning. International Journal of Forecasting, 37(1), pp.428-444.

Caputo, F., Pizzi, S., Ligorio, L. and Leopizzi, R., 2021. Enhancing environmental information transparency through corporate social responsibility reporting regulation. Business Strategy and the Environment, 30(8), pp.3470-3484.

Kashyap, R., 2019. For Whom the Bell (Curve) Tolls: A to F, Trade Your Grade Based on the Net Present Value of Friendships with Financial Incentives. The Journal of Private Equity, 22(3), pp.64-81.

La Torre, M., Sabelfeld, S., Blomkvist, M., Tarquinio, L. and Dumay, J., 2018. Harmonising non-financial reporting regulation in Europe: Practical forces and projections for future research. Meditari Accountancy Research, 26(4), pp.598-621.

Leyman, P., Van Driessche, N., Vanhoucke, M. and De Causmaecker, P., 2019. The impact of solution representations on heuristic net present value optimization in discrete time/cost trade-off project scheduling with multiple cash flow and payment models. Computers & Operations Research, 103, pp.184-197.

Mugova, S. and Kwenda, F., 2020. Trade credit policy: revisiting targeting of trade payables and receivables in brics listed firms. Eurasian Journal of Economics and Finance, 8(3), pp.183-192.

Qoribudin, M. and Sukartaatmadja, I., 2018. Analysis of The Effects of Trade Receivable Policies, Funding Policies and Investment Policies on Company Profitability. In International Conference On Accounting And Management Science 2018 (pp. 259-268).

Wang, B., 2019. The cash conversion cycle spread. Journal of financial economics, 133(2), pp.472-497.