PRESENTACIÓN EXCLUSIVAMENTE ELECTRÓNIC
TITULACIÓN/CATEGORÍA EN LA QUE SE CONTRATA GRUPO I:
= CF 25,000 25,000 + 150,000
——– = —–—– + —–—––––––––––
(1+r)n (1.2) (1.2)2
= £142,361
An extension of the tabulated workings might be helpful:
Year C1 K1t Kt –1 Ye W Ye+W C1 – (Ye+W)
Y0–Y1 X1 25,000 142,361 139,467 27,894 27,894 (2,894) Y1–Y2 X2 35,000 175,000 175,000 35,000 32,639 67,639 (32,639) Y2–Y3 X3 210,000 175,000 35,000 35,000 175,000 270,000 97,894 130,533 139,467 Workings: Y1–Y2 20X2 (2) 175,000 175,000 (1) Y2–Y3 20X3 175,000 (2) 35,000 35,000 + 175,000 (1) ––––– + ––––––––––––––– = £175,000 (1.2) (1.2)2 35,000 + 175,000 (2) –––––––––––––––– = £175,000 (1.2)
(iv) Economic income ex post
Assumptions:
(a) The difference of £40,000 between the actual cost of opening capital of £135,000 and its present value of £175,000 is to be treated as subjective goodwill.
(b) The discount factor is not subject to change. (c) Price levels are constant.
(d) Cash flows for years following 20X1 will be as predicted. (e) All flows occur at the year-end.
Workings: CF 35,000 35,000 35,000 + 175,000 W1 = –––– = –––––– + –––––– + –––––––––––––– (1+r)n (1.2) (1.2)2 (1.2)3 = £175,000 CF 35,000 35,000 + 175,000 W2 = ––––– = ––––– + –––––––––––––– (1+r)n (1.2) (1.2)2 = £175,000
A tabular extension of the workings might be helpful:
Year C1 Kn Kn – 1 Ye W Ye+W C1 – (Ye+W) Y0–Y1 35,000 175,000 W2 175,000 W1 35,000 35,000 Y1–Y2 35,000 175,000 W3 175,000 35,000 35,000 Y2–Y3 35,000 -- 175,000 35,000 35,000 175,000 ______ 280,000 105,000 _____ ______ 35,000 + 175,000 W3 = –––––––––––––– = £175,000 1.2
(b)
Evaluation of the income figures
(i)
Accounting income (£36,700)
As an indicator of performance
• Based on actual transactions in this respect it is objective.
• However, it also utilises subjective data (e.g. depreciation) which incorporates an ele- ment of estimation into the results for the year.
• If such subjective data are substantial as a proportion of total costs, then the resultant profit or loss would be of reduced reliability.
• Being based on historical cost it can be misleading as an indicator of real profit in times of changing price levels.
• It ignores unrealised capital gains/losses in pursuit of the going concern concept. • It could be said therefore that on the one hand the figure is incorrect; but • on the other it is realistic because there is no intention to realise the net assets.
• The balance sheet is not a valuation statement. Consequently, profit expressed as a return on capital employed may be incorrect as an indicator of performance.
As an aid in decision making
• It is historic and history may not be a guide to the future.
• Circumstances of trade, costs and setting prices may be subject to factors not encoun- tered by the results to date.
• However, historical trends over years may be of considerable assistance.
• It does not enable precise comparisons to be made with the return yield of other businesses as historical costs can mean differing values across trade and industry as inflation develops.
• In general, accounting income has a considerable degree of authenticity because • of its objective nature
• it is traditional and it is understood
• it can be of assistance as an indicator of performance and as an aid in decision mak- ing if it is used as a base figure capable of amendment in the light of:
• subjective content
• a changing price economy and anticipated future commercial trends regarding costs and sales.
(ii)
Realisable income (£26,200)
As an indicator of performance
• It avoids the subjective assessment of depreciation and in this sense its measured income can be said to be realistic, but it embraces unrealised capital gains and losses which can be said to be irrelevant when the intention to sell does not exist.
• If the going concern concept is paramount then as an indicator realisable-value-based profit is unrealistic.
• Realisable values are subjective. As an aid to decision making
• It can be said to equate asset values with opportunity cost which is relevant when consider- ing the going concern versus the cash realisation potential of disposal.
(iii) Economic income ex ante (£27,894)
As indicator of performance
• Very subjective figure in terms of future cash flows in respect of amount, timing and dis- count factor. These effects can make it impractical to implement as a system.
• However, it can accommodate inflation by taking account of changing price levels when forecasting the future cash flows
• As an indicator it is predictive and thus windfall gains can occur in this system when antici- pated cash flows are changed by new circumstances.
• It is a guide to prudent conduct as it represents maximum consumption for a defined period without eroding capital.
As an aid to decision making
• By attempting to value a business at different time points it takes account of a strict capital maintenance concept via a time value of money
• thus the possibility of profit distributions being excessive and consequently eroding the capital is restricted
• this is not so with historical cost.
• The adoption of a discounting factor enables cash flows to be adjusted to take account of risk.
• Whilst these two qualities are perhaps too subjective in terms of valuing the entire business entity they can be of considerable assistance when considering investment in the individual asset where choice amongst alternatives or the option of buying or renting exists.
(iv) Economic income ex post (£35,000)
As indicator of performance
• Accuracy is dependent upon the validity of the forecasting cash flows as with the ex ante system.
• However, unlike that model adjustments can be made to past as well as future capital values.
• Thus as an indicator of performance it has the potential to better the ex ante concept. • By adjusting past as well as future cash flows due to windfall elements it tends to have
characteristics akin to traditional accounting. The figure of £35,000 is close to the tradi- tional accounting figure of £36,200.
As an aid to decision making
• Expectations can change over time thereby affecting income and capital calculations. • Windfall gains and losses can influence the calculations and thus inhibit confidence in the
reliability of the measure. Will the profit be £35,000 next year?