ACCOUNTING ANALYSIS

[Name of the Institute]Accounting Analysis

Introduction

The sales in units for the next eight years are given in the table. The cost of the production and the operating cost are considered to be an expense for the firm hence adding both these costs will be the expense for the firm and multiplying the sales with the product price would be the total revenue generated by the company. From the equation (Profit = Revenue - Expense), therefore the difference of the sales revenue and the total expense will be the net income or the profit for the business entity or the firm.

Discussion

Year

Sales unit

1

Product Price

2

Production Cost

3

Cost of Production

4

Operating Cost

5

Total Expense

5

(4+5)

Sales Revenue

6

(1*2)

Net Income

7

(6-5)

1

550000

0.55

0.12

66000

55000

121000

302500

181500

2

540000

0.55

0.12

64800

55000

119800

297000

177200

3

560000

0.55

0.12

67200

55000

122200

308000

185800

4

565000

0.55

0.12

67800

55000

122800

310750

187950

5

590000

0.55

0.12

70800

55000

125800

324500

198700

6

600000

0.8

0.12

72000

60000

132000

480000

348000

7

610000

0.8

0.12

73200

60000

133200

488000

354800

8

615559

0.8

0.12

73867.08

60000

133867.08

492447.2

358580.12

The tax rate for the company is 34 % which has direct impact on the profitability or the net income of the business.

Net Income

Tax Rate 34% or (34/100=0.34)

Net Income After tax

181500

34% (181500*0.34)=61710

181500-61710=119790

177200

34% (177200*0.34)=60248

177200-60248=116952

185800

34% (185800*0.34)=63172

185800-63172=122628

187950

34% (187950*0.34)=63903

187950-63903=124047

198700

34% (198700*0.34)=67558

198700-67558=131142

348000

34% (348000*0.34)=118320

348000-118320=229680

354800

34% (354800*0.34)=120632

354800-120632=234168

358580.12

34% (358580.12*0.34)=121913

358580.12-121913=236662.8792

Salvage Value=25000/8=3125

The formula for the depreciation expense is cost - salvage value/ estimated useful life.

Years

Depreciation= Cost-Salvage Value/Estimated Useful Life

Cash flows

(Net Income-Depreciation)

1

(121000-25000)/8= 12000

119790-12000=107790

2

(119800-25000)/7=14435.71

116952-14435=102516.2857

3

(122200-25000)/6= 48729.16

122628-48729=73898.83333

4

(122800-25000)/5= 22060

124047-22060=101987

5

(125800-25000)/4= 123456.25

131142-123456=7685.75

6

(132000-25000)/3= 41916.66

229680-41916=187763.3333

7

(133200-25000)/2= 65037

234168-65037=169130.5

8

(133867-25000_/1= 133867

23666.2-133867=102795.7992

The salvage calue is 25000, which will be depreciated each year, therefore 25000/8=3125.The remaining worth is calculated by the 25000-3125, salvage value-depreciated amount.at the end of the eighth year the salvage value will be 0 because of the life of the project.

The cash flow is calculated by the net income-depreciation amount, i.e for the first year netincome after tax is 119790-the salvage value, 12000, 119790-12000=49710.

The cash outlays for the next eight years are as follows

Cash Outlays

1

Cash Inflow

2

Net Cash Inflow

(2-1)

2100

107790

$105,690

2600

102516.2857

$99,916

3200

73898.83333

$70,699

3700

101987

$98,287

4100

7685.75

$3,586

4500

187763.3333

$183,263

44000

169130.5

$165,131

3500`

102795.7992

$99,296

Net Cash Inflow

825868 (adding all the netcash flows)

Since the initial investment is 1,500,000, and at the end of the third year 700000, amount is upgraded, while the net cash inflow is 8,25,868, which indicates that the investment is more than the cash generated or the cash inflow. Therefore the pay back period cannot be calculated because the amount is not recovered in any of the three years that is being invested.

PAY BACK PERIOD CALCULATION

Pay back period cannot be calculated as the investment is more and the casflow in the eight years is less, which indicates that the amount of the investment is more than the cash inflow therefore the payback period cannot be calculated because the investment is more and the amount is not recovered, in short the project is very risky, there is no gain at all.

Accounting Rate of Return

Accounting Rate of Return which is also called as the simple rate of return is the degree of accounting profit of a venture or the project to the average investment that is being made in the project. ARR is used in speculation examination. Or the appraisal in the investment.

Formula

Accounting rate of the return can be calculated using following formula

ARR= Average Accounting Profit/Initial Investment

From the formula the average accounting period is the arthematic mean of the net income that is being expected to be earned each and every year for ...