Statement of Cash and Financial Analysis:
Discussion: Capital Budgeting and Financial Analysis
Review at least 2 academically reviewed articles on capital budgeting and 2 articles on financial analysis and complete the following:
- Write an annotated bibliography of each article.
- Based on the articles you reviewed, discuss what you learned
- In addition, discuss how a manager would use the concepts in the articles you reviewed in managerial decisions.
Instructions:
Completed the assignment by over 1000 words and references.
– Read and respond to at least 3 of your classmates’ posts. (Below posted my classmate discussions) Read a selection of your colleagues’ postings. Respond to at least 3 of your classmates’ posts. (Each response should be 150 words, It should include the stuff like supporting their discussion and
Study Materials Link:
TextBook: https://saylordotorg.github.io/text_managerial-accounting/index.html
Lesson Lecture:
- https://www.youtube.com/watch?v=TaND4xx28VM
- https://www.youtube.com/watch?v=kYKqmWJtPKs
- https://www.youtube.com/watch?v=x6dd0IHuC98
Assigned Reading/Study Materials
Use the following links to study Module 7 topics
Analysis of the Statement of Cash Flows:
https://saylordotorg.github.io/text_managerial-accounting/s16-how-is-the-statement-of-cash-f.html
Analysis of Financial Statements and Nonfinancial Data:
https://saylordotorg.github.io/text_managerial-accounting/s17-how-do-managers-use-financial-.html
3-Clasmate discussion
Discussion1:
PART A
De Motta, A., & Ortega, J. (2018). Incentives, Capital Budgeting, and Organizational Structure. Journal of Economics & Management Strategy, 22(4), 810-831. doi: 10.1111/jems.12033
According to this article, capital budgeting is a crucial element when it comes to shaping and establishing a stable organization structure (De Motta & Ortega, 2018). The article focuses on several vital organizational issues that should be looked at keenly if an organization wants to be successful and competitive in the long run. The authors highlight that for an organization to be successful when making investments, it must do a thorough analysis of a project. As much as diversification and expansion would greatly help the organization achieve its set goals and objective and also improve its profitability, it is paramount to evaluate the investments. Capital investments are known to require substantial capital and resources so that they can successfully be implemented. Additionally, the article highlights that an organization ought to ensure that they have enough capital resources before deciding to invest in many capital projects. Last but not least, the article stresses the importance of organizations comparing the costs incurred when implementing a project and the resulting benefits to know if the project is financially viable.
Hoffmann, S., Krumholz, N., & O’Brien, K. (2018). How Capital Budgeting Helped a Sick City: Thirty Years of Capital Improvement Planning in Cleveland. Public Budgeting & Finance, 20(1), 24-37. doi: 10.1111/0275-1100.00002
This article highlights how capital budgeting knowledge and expertise was applied by the government to save a city from economic crises (Hoffmann, Krumholz & O’Brien, 2018). According to the authors, business organizations and governments need to evaluate projects before implementing them thoroughly. Governments are known to invest in massive projects that require significant funds and resources since they are projects that can benefit many people. However, what is the due process to be followed to ensure that the government invests its money in the right projects? This article stipulates that it is vital for the government to evaluate capital projects before investing in its auditors and public finance officers. If the government invests in the wrong projects, it will lead to loss and waste of resources that could have been used to improve the economic situation of that country. Through capital budgeting knowledge, Cleveland was able to invest in financially viable projects that can give them maximum benefits, hence helping the town from sinking economically.
Maka, B., & Suresh, N. (2018). Review of Financial Performance analysis of Corporate Organizations. Asian Journal of Management, 9(1), 500. doi: 10.5958/2321-5763.2018.00078.1
This article highlights on the evaluation of financial analysis in organizations (Maka & Suresh, 2018). The article stipulates that different factors influence how financial analysis is done in organizations. The first factor is the management of itself and the independence of the finance department. An organization that has an independent and dedicated workforce in the finance department then are guaranteed to have the right and accurate financial information regarding the organization. Secondly, an organization that stresses transparency and accountability is known to conduct a sound financial analysis. This means that if the organization’s management does not interrupt or manipulate the people doing this process, they can have an accurate financial analysis of the organization. The third key issue that the article stresses is that business organizations need to have open and transparent about how they spend their finances if they want to have accurate analysis. The last factor that the article emphasizes is that of using financial records in the organization.
Zhminko, N., & Zhminko, A. (2017). The method of financial analysis of agricultural organizations in the Krasnodar region. Economy of Region, 5(6), 161-170. doi: 10.17059/2014-2-15
The above article looks at the financial analysis methods used by an agricultural organization to help farmers attain a robust and reliable way of managing their expenses or costs (Zhminko & Zhminko, 2017). Agricultural organizations are known to deal with a wide array of issues and activities; hence having reliable financial frameworks can help them keep them going in the long run. The different methods highlighted in this article include the use of financial ratios and records. Through financial ratios, the organization gets a chance to measure various aspects of the organization. These different aspects include the profitability of the organization, efficiency, debt level, stock turnover, among many others. Through this information, the organization knows about any financial loopholes and challenges hence come up with corrective measures to help the organization become successful. Additionally, through the use of financial records, the organization develops a culture of good record keeping. This helps an organization to have all the financial information they have to conduct an accurate financial analysis.
PART B
Among the key things that I learned from the above articles include the following. First is that organizations need to take the issue of capital budgeting seriously if they want to be successful in the long run.
I also learned that there are various capital budgeting techniques that an organization can use. Among these techniques include the internal rate of return, constraint analysis, breakeven analysis, accounting rate of return, among many others. Therefore, it is upon the organization to select the best technique that can work for them and implement it.
Secondly, I learned that financial analysis in an organization provides vital insights into the management and information used for decision making. Among the tools used by an organization for financial analysis include the financial ratios, profit and loss account, and the balance sheet.
PART C
Managers can use the knowledge and insights from the above articles in the following ways. First, through capital budgeting, the managers can identify the reliable sources of capital and adopt appropriate techniques to calculate the return on the investment made by the organization. Through this, the managers get to know if the capital invested will bring good returns or not.
Secondly, through financial analysis, managers can use various techniques to analyze the organization’s financial performance. In a similar vein, the managers get critical insights and information concerning the organization’s expenses and income. Through this information, they can make wise decisions on how to reduce expenses, make their income increase, and attain financial stability in the long run.
Classmate-2 Discussion:
Capital Budgeting and Financial Analysis
Part A
Maáji., M., & Barnett, C. (2019). Determinants of Capital Budgeting Practices and Risks Adjustment among Cambodian Companies. Archives of Business Research, 7(3). Doe: 10.14738/abr.73.6351
The above article focused on the determinant of capital budgeting techniques and risk adjustment. The research took place in Cambodian companies. The author used a sample survey from several companies among the Cambodian companies to achieve the paper objectives. Several appraisal results were picked to analyze the results. From these particular findings, the researcher revealed that Present Net Value (NPV), payback period, and accounting rate of return were mostly used as the determinant techniques for capital budgeting of the given companies. As far as risk adjustments were concerned, the paper showed that interest rate risk and business cycle risk were commonly used as the risk adjustment techniques among the Cambodian firms. This finding was significant to many companies since some of the organizations have failed to invest due to fear of the unknown. It is a relief too many since they can use the result to encourage them to invest. However, the scope of the study was minimal. Perhaps if the author could have collected samples from the various continent, it could be better.
Oki1, F., & Sivaruban, S. (2017). Capital Budgeting and Cost Evaluation Techniques: A Conceptual Analysis. International Journal of Science and Research (IJSR), 2-6. Doe: 10.21275/ART2019796
The above paper was meant to focus on advances in capital budgeting decisions and the impact an investment decision has when focusing on evaluation practices as risk and uncertainties. To aid the achievement of the research target, the author used quantitative methods such as questionnaires and appraisal reports of managers in specific companies. The finding showed that several reasons bring about the advances in decision making of capital budgeting. The author stresses that capital expenditure generally requires a large number of funds. Besides, the firm must ascertain an effective way to raise and repay the funds. Such reasons enable the bins to weigh the company’s strength and see whether they can invest or not. This thought is vital since the advance decision will avert the company from incurring unnecessary losses. However, the reason given was not sufficient, especially in a dynamic environment that business operates.
Bernal, D., & Saavedra García, M. (2018). Financial Analysis Management of Companies in a Region of Mexico: the Need of a Financial Ratios Annual Directory. Review of Economics & Finance, 1-7.
The article mentioned earlier was written to identify the financial ratio usage level in Culiacan n and Sinaloa companies in Mexico. Further, the research was meant to determine the relevance of explaining the annual directory to support the definition of the future of companies in Mexico. The finding was improved with both quantitative and qualitative methods of data collection. In particular, several questionnaires with 43 items and several case studies with detailed information concerning the financial ratio level of usage. The finding revealed that the level of financial ratio usage depends directly on the size of the firm. The methods of data collection were excellent. Besides, the scope was sufficient. However, financial ratio usage is not adequate to tell the status of the company in the future.
Ahmed, A. (2018). The impact of Financial Statement analysis on the Profitability assessment (the applied study of Kirkuk company for producing constructional materials). Studies and scientific researches. Economics edition, (28). Doe: 10.29358/sceco.v0i28.417
The above by Amanj Ahmed was aimed to determine the effects of the financial statement to evaluate the profitability of The Kirkuk Company. Kirkuk Company for producing constructional material was used as the area of study. To aid the results. The researcher used secondary data, which were collected from the company of interest. For quality results, four categories of financial ratios were used in testing the study hypothesis. Finally, the result showed that there is an insignificant relationship between profitability with asset regulation and utilization. If other determinants were used, such as the cost of production and variances, maybe, they could give positive results.
Part B
There are many things to learn as far as managerial decisions are concerned. Capital budgeting is a wise decision for any company, both upcoming and existing ones (Oki1, & Sivaruban, 2017). Before deciding on what plant or property to invest in, the managers should think of several considerations. One payback period of the investment should be determined to ensure the property would not cause any loss. NPV and Internal Rate of Return should also be considered. Financial analysis can be done with a level of usage of economic analysis. Besides, it has been noted that financial analysis has insignificance relationship with the asset used.
Part C
For the capital budgeting, managers should first all analysis the factors to consider when making capital budgeting decisions. For instance, they should check an element like the payback period the company will take to recover its money (Bernal & Saavedra Garcia, 2018). If this particular company is going to take a lot of time, then that investment will not be of any value. They also critically analyze how the project undertaken supposed to bring back to the company has invested. The net present worth should show how much profit the project is going to bring. Financial accounting is a reliable source of information when it comes to managerial decision making. Financial analysis provides the business owners with baselines of analysis and comparison between the financial health of the securities-issuing corporations and their reliability. Besides, economic analysis will help the creditor of the business get access to solvency and liquidity in case of a lockdown of the market. Such information will, in turn, help the manager to plan for the creditworthiness of the company.
Classmate3 Discussion—
Question 1
Capital Budgeting
Priya, C. (2019, March 18). Capital Budgeting. Retrieved from The Investors Book: https://theinvestorsbook.com/capital-budgeting.html
Capital budgeting refers to the process by which companies or organizations evaluate and rank their potential capital expenditures like purchasing of new office equipment, constructing buildings, and rebuilding or maintaining the existing equipment and also evaluating and ranking projects that cost a large amount of money. This article states that the capital budgeting process, with the aid of some measurement models, uses various calculations in the ranking and assessment of the capital expenditures and company projects (Priya, 2019).
Evaluating this article, Priya argues that capital budgeting process is characterized by some features like the use of huge funds, high degrees of risks, making of difficult decisions, long term effects, and irreversible decisions, among other features. The process involves the use of high-value expenditures, which makes it very crucial. Since the process involves the use of huge funds, it means that the decisions involved are risky. Priya also argues that due to the impact of the capital budgeting on the future of a company or organization, the decision-making process becomes difficult too. The process also involves some irreversible decisions or decisions that are extremely difficult to reverse because assets involved depreciate with time; hence reversing a decision means that the company may have to incur a loss (Priya, 2019).
Also, in this article, Priya states that the capital budgeting process is affected by some factors. Some of these factors include the capital structure, working capital, and availability of funds, among other factors. Capital structure determines the decisions of a company concerning capital budgeting because it is usually composed of funds from shareholders and borrowed funds. Working capital affects capital budgeting in that the capital required to execute daily business operations of a company affects its long term decisions. Also, carrying out capital budgeting requires the availability of funds (Priya, 2019).
Financial Analysis
Bragg, S. (2019, April 13). Financial Analysis. Retrieved from Accountingtools.com: https://www.accountingtools.com/articles/what-is-financial-analysis.html
Financial analysis refers to the process of examining the information concerning the finances of a company so as to make informed decisions. According to Bragg, the process involves the analysis of information like historical trends, cash flows, and risks. This article states that as a result of the analysis, a company or organization can make some decisions like reallocating resources to businesses or internal operations (Bragg, 2019).
Bragg argues that financial analysts use information like financial statements to make comparisons between similar companies, to derive ratios and create trend lines. Also, the analysis outcome can be used by external investors to determine whether or not to invest in a particular company and at what price per share. The external investors can make this decision by going through the financial statements to see if the company generates enough cash flow and is sufficiently liquid (Bragg, 2019).
This article also describes how the outcome of the analysis can be used by internal investors to make investment decisions. For instance, the investor can review projected cash flow to determine if a particular project will generate the required return on investment. The analysis outcome can also be used by the investor to determine whether to rent or lease an asset or purchase certain equipment (Bragg, 2019).
Question 2
From the above-reviewed articles, I have learned the following.
Before an organization purchase some equipment, construct new buildings or rebuild existing equipment, they first carry out capital budgeting in order to evaluate the importance and cost of those processes and also rank them. Ranking of the projects helps to ensure that those with higher priorities are attended first before the company spends its expenditure on other unnecessary projects (Priya, 2019).
From this article also, I have learned that capital budgeting is characterized by features like high degrees of risks, use of huge funds, making difficult decisions, and some long term effects. As a result, high levels of accuracy are required when carrying out capital budgeting. Therefore, financial analysts are involved to ensure accuracy (Priya, 2019).
From the financial analysis article, I have learned that before an organization or a company makes a decision like allocating resources, it carries out financial analysis so as to determine the historical trends, cash flows, and trends. The companies then use the outcome of the financial analysis to make informed decisions. The outcome of the financial analysis is also used by external and internal investors to determine whether to invest in a certain company or not, and if they are to invest, what price per share should they invest (Bragg, 2019).
Question 3
Since capital budgeting involves the use of a large number of funds, it helps managers to make the right investment decisions. Most firms have limited funds and resources; hence capital budgeting will help managers to ensure the sustainability of the firms (Borad, 2019).
Capital budgeting helps managers to make the right decision on the type of investment or purchase the company should make. A company may need various equipment at the same time, but funds may be limited; hence purchasing all the equipment may be impossible. Therefore, capital budgeting helps managers to make the right decision on which equipment to purchase first (Borad, 2019).
Financial analysis helps a manager to assess the efficiency of the operations of the company. As a result, the manager can determine whether the operations are not efficient; hence he/she can plan for training sessions to ensure that everyone in the company is up to date with technology so as to improve the efficiency of the operations (Toppr, 2018).
The financial analysis also helps managers to know the position of the firm in terms of cash flow. As a result, managers can make useful managerial decisions like whether to continue giving loans or not (Toppr, 2018).