Balance Sheet As On 31 Jan 2021 - Complex Stuff Ltd. (Essay)

Current and Non-Current Assets

The company has used the conventional accounting method in which the accrual methods and the matching principle of accounting have been followed. While preparing the financial statements it has been considered that the equity and liabilities is equal to the value of the assets. All the items of the balance sheet are recorded as per the appropriate accounting standards and the accrued expenses and income are recorded in the assets and liability side of the balance sheet.

b) Requirement

 3. a) Requirement 

The FIFO method of inventory has been followed for which the gross profit of the company increases as when the FIFO method is used the value of the COGS decreased and for that reason the gross profit margin increases. 

4. 

The process of calculation of the minimum return that is essential to justify the reason to undertake a capital budgeting project is known as cost of capital. The term cost of capital is used in capital budgeting process to evaluate the potential return that is related with the cost of such invested amount and the risk associated with such investment that is made in a particular project. In general companies used a combination of equity and debt in order to finance the project. So the cost of capital is calculated as the weighted average cost of both the debt and equity. The concept of cost of capital in the capital budgeting process is important as from the evaluation of the cost of capital it can be possible to evaluate the amount of money required to be generated from the project so that the cost of undertaking such project can be compensated and beyond that margin the company will be able to generate profit from such projects. So the concept of corporate cost of raising capital is related actually means the cost that the corporates have to incur to raise fund that is essential for financing any project and based on the value of the cost of capital the companies evaluate the financial viability of any project that is whether such project can be accepted or rejected.

The concept of modified internal rate of return assumes that the positive cash flows of any project will be again used for investment purpose at the same cost of capital and that the initial cash outflows that are required for the project will be financed at the company’s financing cost. The MIRR gives a more accurate result of the cost and profitability of any project. MIRR is very useful in ranking of prices of different sizes as the MIRR gives the option to make changes in the predicted rate of reinvested growth from one stage to another stage of any project. The main advantage of the MIRR in investment appraisal process is that unlike the IRR method the MIRR does not provide multiple solution for the same project and instead of that MIRR provide single result for a single project. Another point for which MIRR is more effective in comparison to that IRR is that in case of IRR the reinvestment of positive cash flows is not practical in real projects but MIRR makes the reinvestment rate of positive cash flows with valid techniques that can be applied for the evaluation of the financial viability of the project.

There are several methods of investment appraisal some of these are payback method, net present value method, accounting rate of return and the internal rate of return methods, but among these methods most of the sophisticated managers use is the net present value method. As the net present value method gives the most appropriate result of the future cash generating capacity of the project and the growth prospect of the project so this method is widely used by most of the sophisticated managers.

The factors that are required to be considered from a strategic point if view for investment appraisal is the inflation rate. The inflation rate is very essential for appraising any project since it directly impacts the value of money over a specific period of time and to predict the future prospect of the project inflation rate should be considered while using any investment appraisal technique 

The projects that have alternative positive and negative cash flows in such cases there can be more than one IRR and that often leads to confusion and ambiguity in capital budgeting process and proper decision cannot be taken from such projects.

If the project has both positive and negative cash flows then in such cases it can be said that such project should have more than one IRR, but where the cash flows are only in positive or in negative figures then there will be only one IRR. so simply by analysing the cash flows of the project it can be possible to find out the number of IRR of the project.

The growth rate implies the amount in which the investment that is made in a specific project will increases in a given period of time. The growth rate provides the information related with the value of the investment and how such investment will grow or change in the future.

The major advantage of using the discounted cash flow method is that it considers the time value of money to evaluate the investment.

The major disadvantage of the discounted cash flow is that it does not consider excess amount of cash flows, generated by the project over the initial investment.