WK4 Seminar Solutions Concepts of Profit Capital and Value Q1 What is the purpose of measuring income?

A means of prediction dividend policy retention policy A basis for assessing tax subject to the disallowance of certain expenses e.g. entertainment, uniform provisions e.g. capital allowances to replace the depreciation charge Investors need to predict future cash flows Necessary for estimating dividend and retention policy Important for estimating future dividend income and capital growth he Income !tatement is the surrogate for future cash flows Q2 "xplain the nature of economic income. A personal #or entity$ concept %ased on &welloffness' or wealth ( wealth maintenance implied )sychological and philosophical predictions measure value *an be measured as consumption #+isher$ or consumption plus increase #or less decrease$ in saving #,ic-s$ .r as difference between capital measurements over time plus consumption Q3 he historical cost concept has withstood the test of time. !pecify the reasons for this success, together with any aspects of historical cost that you consider are detrimental. &"x/post' ransaction based emporal 0esidue is unallocated costs / &capital' 1onetary e2uity maintenance assumed 1ar-et/based valuation #albeit past$ on historic entry and exit values Q4 What is meant by present value? 3oes it ta-e account of inflation? )reference for money now over the same amount of money in the future %ecause if you receive the money now, you could earn interest save interest #by repaying loans$ ta-e up opportunities for other investments4purchases 3elayed receipt of money is less desirable because of lost opportunity Inflation 0is-

1oney discount rate

56rm Where rm i and rr rm

7 7 7 7 7 7 7

#56rr$ #56i$ money rate, inflation rate real rate #56rr$ #56i$ ( 5 #5.585.9:$/5 5:.:;

Q5

A company contemplates purchasing a machine that will generate an income of <=:,999 per year over each of the next five years. A scrap value of <=,999 is anticipated on disposal. ,ow much would you advise the company to pay for the asset? #3+ 59;$ 9 5 #p$ =:999 #p$ 5 #p$ 9 EB955 =:999 545.59 ==@=@ =:999 =:999 =:999 =:999 =:999 =:999 = > ? : =999 =:999 =@999 545.59A: 5B@B:

Investment Inflows cash flows dfactor )resent value Net present value )D Q6 Q7

545.59A= 545.59A> 545.59A? =9BB5 5C@C> 5@9@:

3iscuss the arguments for and against revaluing non/current assets and recogniFing the gain or loss. o an accountant, G net income is essentially a historical record of the past. o an economist, G net income is essentially a speculation about the future. "xamine the relative merits of these two approaches for financial reporting purposes.

Q8

"xamine and contrast the concepts of profit that you consider to be relevant toH #a$ an economist #b$ a speculator #c$ a business executive #d$ the managing director of a company #e$ a shareholder in a private company #f$ a shareholder in a large public company.