
Assets 
= Liabilities + Owner’s Equity 


Cash 
+ Supplies 
+ Equipment 
= Accounts Payable 
+ Capital 
1 
50000 
0 
0 
0 
50000 
2 
27000 
0 
27000 
0 
0 
Balance 
23000 
0 
27000 
0 
50000 
3 
2000 
2000 
0 
0 
0 
Balance 
21000 
2000 
27000 
0 
50000 
4 
11600 
0 
0 
0 
11600 
Balance 
32600 
2000 
27000 
0 
61600 
5 
900 
0 
0 
0 
900 
Balance 
31700 
2000 
27000 
0 
60700 
6 
1800 
0 
0 
0 
1800 
Balance 
29900 
2000 
27000 
0 
58900 
7 
3000 
3000 
0 
0 
0 
Balance 
26900 
5000 
27000 
0 
58900 
8 
1500 
0 
0 
0 
1500 
Balance 
25400 
5000 
27000 
0 
57400 
Assets 
= Liabilities + Owner’s Equity 


Cash 
+ Supplies 
+ Equipment 
= Accounts Payable 
+ Capital 
1 
12000 
0 
0 
0 
12000 
2 
220 
220 
0 
0 
0 
Balance 
11780 
220 
0 
0 
12000 
3 
1500 
3500 
0 
2000 
0 
Balance 
10280 
3720 
0 
2000 
12000 
4 
825 
0 
0 
0 
825 
Balance 
9455 
3720 
0 
2000 
11175 
5 
1850 
0 
0 
0 
1850 
Balance 
11305 
3720 
0 
2000 
13025 
6 
375 
0 
0 
0 
375 
Balance 
10930 
3720 
0 
2000 
12650 
7 
500 

0 
500 
0 
Balance 
10430 
3720 
0 
1500 
12650 
8 
0 
60 
0 
0 
60 
Balance 
10430 
3660 
0 
1500 
12590 
Lucky Dip Ice Cream Consulting 

Income Statement 

Year Ended December 31, 19x8 

Fees Incomes 

66,700 
Operating Expenses 


Wages Expense 
31,500 

Rent Expense 
7,200 

Supplies Expense 
700 

Miscellaneous Expense 
900 

Total Operating Expenses 

40,300 
Net Income 

26,400 
Lucky Dip Ice Cream Consulting 

Statement of Owner’s Equity 

Year Ended December 31, 19x8 

Capital, January 1, 19x8 

18,000 
Net Income for the Year 
26,400 

Less: Withdrawals 
20,000 

Increase in Capital 

6,400 
Capital, December 31, 19x8 

24,400 
Lucky Dip Ice Cream Consulting 

Balance Sheet 

December 31, 19x8 

ASSETS 


Current Assets 


Cash 
11,000 

Accounts Receivable 
13,000 

Supplies 
5,700 

Total Current Assets 

29,700 
LIABILITIES 


Accounts Payable 
2,500 

Notes Payable 
2,800 

Total Liabilities 

5,300 
OWNER’S EQUITY 


John Sweet, Capital 

24,400 
Total Liabilities and Owner’s Equity 

29,700 
Depreciation= 
Purchase price of the asset Salvage value 


Useful life of asset 






Depreciation as on December 31, 20X7 







Depreciation = 
150001000 




14 








= 
14000 




14 








= 
1000 



(a) 
As on December 31, 20X7 
Amount 

Cost of the printing press 
15000 

Less: Depreciation for the year 
1000 

Balance as on December 31, 20X7 
14000 



(b) 
As on December 31, 20X8 
Amount 

Cost of the printing press 
15000 

Less: Depreciation for the year 
2000 

Balance as on December 31, 20X8 
13000 
(a) 
Working Capital 







Working Capital 
= 
Current asset Current liabilities 


= 
233000176000 


= 
57000 




(b) 
Current Ratio 







Current Ratio 
= 
Current Asset 

Current liabilities 



= 
233000 



176000 


= 
1.32 




( c) 
Quick Ratio 







Quick Ratio 
= 
Current asset  Inventories  Prepaid expenses 

Current liabilities 



= 
2330001200001000 


176000 



= 
112000 



176000 


= 
0.64 
Account receivable turnover=
Net sales 


Average account receivables 





Particulars 
20X2 
20X1 

Net credit sales 
2600000 
3100000 

Average account receivables 
400000 
416000 

Account receivable turnover 
6.5 
7.45 

As per our calculations, we can conclude that the average collection period for the receivables in 2011 was 7.45 times and that in 2012 was 6.5 times. This indicates that the frequency of collection of debt has reduced form 7.45 times to 6.5 times.
We have the following formulas:
Payback Period 
= 
a+(b/c) 
Where, 


A 
= 
Last period with negative cash flow 
B 
= 
Cumulative cash flow for period a 
C 
= 
Cash flow for the period after a 
Accounting Rate of Return 
= 
Average Accounting Profit 
Average Investment 




Average Accounting Profit 
= 
Cash flowDepreciation 
Calculation of Payback period:
Calculation of Payback Period  Project A 




Year 
Cash Flows 
Cumulative Cash Flow 
0 
3,50,000 
3,50,000 
1 
1,00,000 
2,50,000 
2 
2,00,000 
50,000 
3 
1,00,000 
50,000 
4 
1,00,000 
1,50,000 
5 
1,40,000 
2,90,000 



Pay Back Period for Project A = 
2.50 




Calculation of Payback Period  Project B 




Year 
Cash Flows 
Cumulative Cash Flow 
0 
3,50,000 
3,50,000 
1 
40,000 
3,10,000 
2 
1,00,000 
2,10,000 
3 
2,10,000 
 
4 
2,60,000 
2,60,000 
5 
1,60,000 
4,20,000 



Pay Back Period for Project B = 
3.00 




Calculation of Payback Period  Project C 




Year 
Cash Flows 
Cumulative Cash Flow 
0 
3,50,000 
3,50,000 
1 
2,00,000 
1,50,000 
2 
1,50,000 
 
3 
2,40,000 
2,40,000 
4 
40,000 
2,80,000 
5 
 
2,80,000 



Pay Back Period for Project C = 
2.00 
Calculation of Accounting Rate of Return:
Calculation of Accounting Rate Return  Project A 






Average Cash Flow 
= 
6,40,000 
= 
1,28,000 
5 






Average Depreciation 
= 
70,000 







Average Accounting Profit 
= 
12800070000 
= 
58,000 





Average Investment 
= 
3,50,000 
= 
1,75,000 
2 











Accounting Rate of Return 
= 
58,000 
= 
33.14% 

1,75,000 






Calculation of Accounting Rate Return  Project B 






Average Cash Flow 
= 
7,70,000 
= 
1,54,000 
5 






Average Depreciation 
= 
70,000 







Average Accounting Profit 
= 
15400070000 
= 
84,000 





Average Investment 
= 
3,50,000 
= 
1,75,000 
2 











Accounting Rate of Return 
= 
84,000 
= 
48.00% 

1,75,000 






Calculation of Accounting Rate Return  Project C 






Average Cash Flow 
= 
6,30,000 
= 
1,26,000 
5 






Average Depreciation 
= 
70,000 







Average Accounting Profit 
= 
12600070000 
= 
56,000 





Average Investment 
= 
3,50,000 
= 
1,75,000 
2 











Accounting Rate of Return 
= 
56,000 
= 
32.00% 

1,75,000 
Calculation of Net Present Value:
Calculation of Net Present Value  Project A 





Year 
Cash Flows 
PV Factor @ 9% 
Present Value 
0 
3,50,000 
1 
3,50,000 
1 
1,00,000 
0.9174 
91,743 
2 
2,00,000 
0.8417 
1,68,336 
3 
1,00,000 
0.7722 
77,218 
4 
1,00,000 
0.7084 
70,843 
5 
1,40,000 
0.6499 
90,990 
Net Present Value 
1,49,130 





Calculation of Net Present Value  Project B 





Year 
Cash Flows 
PV Factor @ 9% 
Present Value 
0 
3,50,000 
1 
3,50,000 
1 
40,000 
0.9174 
36,697 
2 
1,00,000 
0.8417 
84,168 
3 
2,10,000 
0.7722 
1,62,159 
4 
2,60,000 
0.7084 
1,84,191 
5 
1,60,000 
0.6499 
1,03,989 
Net Present Value 
2,21,203 





Calculation of Net Present Value  Project C 





Year 
Cash Flows 
PV Factor @ 9% 
Present Value 
0 
3,50,000 
1 
3,50,000 
1 
2,00,000 
0.9174 
1,83,486 
2 
1,50,000 
0.8417 
1,26,252 
3 
2,40,000 
0.7722 
1,85,324 
4 
40,000 
0.7084 
28,337 
5 
 
0.6499 
 
Net Present Value 
1,73,399 
We summarise the above information as below:
For payback period we have:
Pay Back Period for Project A = 
2.50 
Pay Back Period for Project B = 
3.00 
Pay Back Period for Project C = 
2.00 
Payback period indicates the time period in which the investments made are recovered. Lower the period better it is for the investors. In the given case we see that project C has the lowest payback period of 2 years. Therefore, based on payback period project C should be accepted.
For accounting rate of return we have:
Accounting Rate of Return for project A = 
33.14% 
Accounting Rate of Return for project B = 
48% 
Accounting Rate of Return for project C = 
32% 
Accounting rate of return measures the percentage of average profits earned by a project during its life time. Since it measures return, higher the ratio better it is. In the given scenario we see that the ARR for project B is maximum, 48%. Therefore, as per accounting rate of return project B should be opted for.
For Net Present Value we have:
Net Present Value for project A = 
1,49,130 
Net Present Value for project B = 
2,21,203 
Net Present Value for project C = 
1,73,399 
Net present value is the tool which helps to measure the present value of the cash flows from a given project. The project with higher net present value is better. In the given case we see that net present value for project B is the highest with $221203. Therefore based on Net present value approach Project B should be opted for. (Collier, 2013)
Therefore, based on all the attributed and calculations above we can conclude that the investor should invest in project B, as it would provide higher returns than the other projects.
Calculation of expected cash receipts 





Particulars 
June 
July 
August 
Sales 
70,000 
1,00,000 
1,00,000 




Cash for sales of current month 
35,000 
50,000 
50,000 
Cash for sales of last month 
15,000 
17,500 
25,000 
Cash for sales of last second month 
16,250 
15,000 
17,500 
Total Cash Inflow 
66,250 
82,500 
92,500 
In the books of Maris Brothers Inc 

Cash Disbursement Schedule 





Particulars 
April 
May 
June 
Cash inflow form sales 
5,60,000 
6,10,000 
6,50,000 
Less: 



Cash paid for Purchases 
3,24,600 
3,56,400 
3,80,400 
Cash paid for Rent 
8,000 
8,000 
8,000 
Cash paid for Wages & Salaries 
45,200 
48,700 
51,500 
Cash paid for Taxes 
 
 
54,500 
Cash paid for Fixed Asset 
75,000 
 
 
Cash paid for interest 
 
 
30,000 
Cash paid for dividend 
12,500 
 
 
Net Cash flow for the month 
94,700 
1,96,900 
1,25,600 
Workings 







Calculation of Purchases 







Particulars 
February 
March 
April 
May 
June 
July 
August 
Sales 
5,00,000 
5,00,000 
5,60,000 
6,10,000 
6,50,000 
6,50,000 

Purchases 
3,00,000 
3,36,000 
3,66,000 
3,90,000 
3,90,000 
 









 Cash paid in the month of purchase 
30,000 
33,600 
36,600 
39,000 
39,000 
 

 Cash paid for 1 month after purchase 
 
1,50,000 
1,68,000 
1,83,000 
1,95,000 
1,95,000 
 
 Cash paid for 2 month after purchase 
 
 
1,20,000 
1,34,400 
1,46,400 
1,56,000 
1,56,000 
Total Cash paid for Purchases 
30,000 
1,83,600 
3,24,600 
3,56,400 
3,80,400 
3,51,000 
1,56,000 








Calculation of Wages & Salaries 







Particulars 
February 
March 
April 
May 
June 
July 
August 
Fixed Wages 
6,000 
6,000 
6,000 
6,000 
6,000 
6,000 
6,000 
Variable Wages (7% of sales of current month) 
35,000 
35,000 
39,200 
42,700 
45,500 
45,500 
 
Total Cash paid for Wages & Salaries 
41,000 
41,000 
45,200 
48,700 
51,500 
51,500 
6,000 
a.The above diagram shows the cash flow from the project over the project life.
b.We assume that the required rate of return for the given project is 10% and that the amount earned is reinvested in the business. Taking this information into consideration, we can see that the investor would require earning at least $2500 in the first year, $2750 in the second year and so on.
c. The above diagram shows the how the present value of the cash flows earned is to be discounted. The amount earned in year 3 is to be discounted with the factor for 3 years in order to arrive at the present value today.
The financial managers generally rely on present value approach in order to determine the viability of a project. The interest rate or the required rate of return keeps changing. Therefore, while calculating the future value, we need to determine the interest rates for all the years separately. This is a tedious job and often leads to wrong conclusions. In the present value approach, the calculations are made on the required rate of return which exists currently. This saves time and narrows the room for errors.
Let the amount be x 


We know, 


FV=PV * [(1+i)^n] 


Here, 


FV=PV * [(1+i)^n] 


FV= Future Value 


PV= Present Value 


i= Interest Rate 


n= time period for investment 





We are provided with the following information 


FV= 6000 


i= 0.12 


n= 6 years 





Putting this in the above formula we get, 





PV 
= 
FV 
[(1+i)^n] 




Therefore, 


PV 
= 
6000 
[(1+0.12)^6] 




PV 
= 
3,039.79 



Therefore, investment of $3039.79 will result in $6000 in 6 years with interest of 12% per annum. 
In the given case we need to find the present value of some amount which turns out to be $6000 after 6 years with 12% required rate of return. Therefore applying the present value formula helps to determine the same. If we invest $ 3,039.79 today, then we will receive $6000 at the end of 6 years with 12% interest.(Loughran, 2011)
We are to receive $ 6000 at the end of 6 years. If we discount it with the interest rate factor of 125 for 6 years we get the present value as $3,039.79
Given an opportunity cost of 12%, the investor would require to earn 12% in order to make up for the opportunity lost. Therefore, taking this in consideration the investor is required to invest $3,039.79 in order to receive $6000 after 6 years today.
In all the above cases we are required to find the present value of the future amount $6000, given an interest rate of 12% and 6 years. The requirements in each of the cases presented are same, only the situation is different. Therefore, an investor needs to invest $ 3,039.79 today in order to receive $6000 on completion of 6 years.
Collier, P. (2013). Accounting for managers. Milton: John Wiley & Sons.
Loughran, M. (2011). Financial accounting for dummies. Hoboken (NJ): Wiley.
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