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Unformatted text preview: Problem 1 – Discussion Questions Dealing with a Variety of Issues; Master Budgets, Net Present Value and Depreciation, Flexible Budgets (20 total points, 4 points each): a. In the preparation and implementation of the master budget, what is the cornerstone or universal starting point in the development of the master budget? What is the inherent irony of this process? In the preparation and implementation of the master budget, the cornerstone or universal starting point in its development is the sales budget. The inherent irony of this process is simple. A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time. b. Net present value (NPV) (also called DCF-discounted cash flow) analysis is based on an analysis of a project’s cash flows adjusted for time value of money and the company’s cost of capital or discount rate, to see if the project should be accepted or rejected. You also know that depreciation is a non-cash expense. If NPV is based on cash flows and if depreciation is a non-cash expense, then why do we care about depreciation methods (whether straight-line, accelerated, or MACRS) when dealing with NPV issues? If NPV is based on cash flows and if depreciation is a non-cash expense, then we care about depreciation methods (whether straight-line, accelerated, or MACRS) when dealing with NPV issues because of the nature of depreciation. Depreciation is a notional charge which a company applies in their profit and loss account to recognize the fact that an asset is wearing out over time and needs to be replaced. Typically the depreciation charge reflects the relative useful life of an asset. If a company simply wrote off the asset in the first year it was acquired they would not be recognizing the fact that it would have some use to them over the remaining life of the asset (i.e. that the depreciable asset can make them revenue and incur expenses that would have an effect on profit and loss). c. In the budget process, you learned that we start with the master (overall) budget or forecast. What role does the flexible budget play in the budgeting process? Why should we have flexible budgets at all? Isn’t the master (overall) budget enough?...
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This note was uploaded on 03/01/2012 for the course ACCOUTNING 550 taught by Professor Abner during the Spring '11 term at DeVry Houston.
- Spring '11