UGANDA CHRISTIAN UNIVERSITY

NAME: ACHOLA IRENE

COURSE UNIT: ACCOUNTING AND FINANCIAL MANAGEMENT

COURSE NAME:
MANAGEMENT

MASTER

IN

PUBLIC

LECTURER: ASSIMWE RICHARD

REGISTRATION NUMBER: RSIIM12/003

QUESTION: 1& 2

ADMINISTRATION

AND

QUESTION 1:
From the following trial balance of Mukisa extracted after one years trading. Prepare
a statement of comprehensive income for the year ended 31 stDecember 2010.
Inventory at 31st December 2010 was shs. 2,548,000.
Trial balance as at 31st December 2010
Particulars
Sales
Purchases
Salaries
Motor expenses
Rent
Insurance
General expenses
Premises
Motor vehicles
Debtors
Creditors
Bank
Cash
Drawings
Capital
Totals

Dr.

shs. 000

Cr.
Shs. 000
18,462

14,629
2,150
520
670
111
105
1,500
1,200
1,950
1,538
1,654
40
895
5,424
25,424

25,424

MUKISAS STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR

ENDED 31ST DECEMBER 2010

Item

shs 000

shs 000Total 000

Sales

18,462

Less: Cost of sales

Purchases

14,629

Less: Closing stock

(2,548)

12,081

Cost of sales

(12,081)

Gross profit

6,381

Less: Operating expenses

Salaries

2,150

Motor expenses

520

Rent

670

Insurance

111

General expenses

105

Premises

1,500

(5,056)

Net profit

1,325

MUKISAS STATEMENT
DECEMBER 2010
NoncurrentAssets
NBVshs 000

OF

FINANCIAL

Cost shs 000

Motor vehicles

POSITION

AS

AT

Acc Dept.000

1,200

1,200

Current Assets
Inventory

2,548

Debtors

1,950

Cash at Hand

40

Cash at Bank

1,654

Total Assets

7,392

Owners Equity and Liabilities

Owners Equity
Capital

5,424

Net profit

1,325

Less: Drawings

(895)

5,854

Liabilities
Noncurrent liabilities
Current liabilities
Creditors

1,538
7,392

31 ST

b)
I.

Current ratio
Current ratio =current assets/current liabilities
Current assets=6,192,000
Current liabilities=1,538,000
6192000/1538000
=4
Current ratio =4 or 4:1

II.

Acid test ratio

Acid test ratio= quick assets/current liabilities
Or current assets inventory/current liabilities
6192000-2548000/1538000
3644000/1538000
Acid test ratio =2:1

III.

Rate of inventory turn over

Inventory turnover =cost of goods sold/average inventory
Cost of goods sold=sales-gross profit
=18,462,000-6,381,000=12,081,000
Average inventory=opening+closing inventory/2
=1,500,000+2,548,000/2
=2,024,000
Rate of inventory turnover=12,081,000/2,024,000
=6

IV.

Inventory turnover period

Inventory turnover period=number of days in the period/inventory turn over
=365/6
=61days
fn on currents turn over
Current assets turnover=cost of goods sold =12081000
Average current assets=6192000=1.95

V.

VI.

Total assets turnover

Total assets turnover=sales/total assets

=18,462,000/7,392,000 =2

Question 2:Suppose a firm borrows shs. 20 million at 15% interest to be repaid in the
next 7 years.
Required
Draw up a loan amortization schedule to show how the loan would be repaid
Loan amount
Annual interest rate
Term of loan in years

20,000,000
15%
7

LOAN AMORTISATION SHEDDULE

Year

Beginning balance

Total payment

Principal

Interest

Cumulative Interest

3,000,000
2,728,918.91

Ending
balance
18192792.73
16114504.36

1
2

20,000,000
18,192,792

4,8O7,207.27
4,8O7,207.27

1,807,207.27
2,07,288.36

3
4
5
6
7

16,114,504.36
13,724,472.75
10,975,936.39
7,815,119.57
4,180,180.24

4,8O7,207.27
4,8O7,207.27
4,8O7,207.27
4,8O7,207.27
4,8O7,207.27

2,390,031.62
2,748,536.36
3,160,816.81
3,634,939.34
3,553,153.20

2,417,175.65
2,058,670.91
1,646,390.46
1,172,267.94
627,027.04

13724472.75
10975936.39
7815119.57
4180180.24
-

8146094.56
10204765.48
11851155.93
13,023,423.87
13,650,450.91

3,000,000
5728918.91

b) Assuming KLM Ltd wants to inject 400 million shillings in a business that is
expected to generate cash flows as below
YEARS
1
2
3
4
5
6

CASHFLOWS
200M
100M
150M
80M
60M
50M

It is also known that this business will require additional working capital of shs 20m
in third year and that this working capital will be 25m 4 th year and that the business
will be sold in the year of operation and generate 10 million
Required
Determine and give advantages and disadvantages of the following
6

I.

PAY BACK PERIOD

YEARS
1
2
3
4
5
6

CASHFLOWS
200M
100M
150M
80M
60M
50M

CUMULATIVE CASH FLOW

200M
300M
450M
530M
590M
640M

PAY BACK PERIOD =Year before recovery

+unrecovered cost at start of the year/cash flow during the year
(400M-300M)/150M=0.67
PAY BACK PERIOD WOULD BE 2.67 YEARS
OR 0.67*12 MONTHS=8MONTHS
PAY BACK PERIOD IS 2 YEARS AND 8MONTHS
ADVANTAGES OF USING PAYBACK PERIOD
It is easy to calculate and simple to understand, its superiority arises from the fact that
it uses cash flows
the pay back methods clearly indicates when someone is able to recover there initial
capital out lay and thus it helps in decision making as in what project to invest in in
relation to another
DISADVANTAGES OF THE PAY BACK
It completely ignores all cash flows after the payback period and this can be
misleading in capital budgeting evaluations
It also does not consider the total benefits accruing from the project and thus it can be
misleading
Another deficiency of thepayback period is the fact that it does not measure correctly
even the cash flows expected to be received within the payback period as it does not
differentiate between projects in terms of the timing and the magnitude of the cash
flows.it only considers only the recovery period as a whole.
Another flaw of the payback period is the fact that it does not take into consideration
the entire life of the project during which cash flows are generated .as a result,
7

projects with large cash flows in the latter part of their lives may be rejected in favour
of the less profitable projects which happen to generate a larger proportion of their
cash flows in the earlier years part of their lives

II.

NET PRESENT VALUE(NPV)

Initial capital out lay=400 M

NPV=Present value - Present value initial capital outlay

Years

Investment

0
1
2
3
4
5
6
6

400M

Working capital
(20)
(25)

Cash flow

200
100
150-20
80-25
60
50
10

Discounting factor
15%
1.000
0.870
0.756
0.658
0.572
0.497
0.432
0.376
NPV

Present value
400M
174
75.60
85.54
31.46
29.82
21.60
3.76
421.78
21.78

The project is viable because the NPV is greater than zero

The first, and probably the first advantage is that it explicitly recognises the time value
of money
It can be used to use to choice between mutually exclusive projects, the project with
the higher NPV would be ranked first and then the other follow in descending order
Secondly it also fulfils the second attribute of a sound method of appraisal in that it
considers the total benefits arising out of the proposal over its life time
This method is also important in achieving a financial management which is the
maximisation of the shareholders wealth.
DISDAVATGES
It is difficult to calculate as well as to understand and use in comparison to the pay
back period method, it involves the calculations of the required rate of return to
discount the cash flows
8

Another shortcoming of the net present value method is the fact that it is an absolute
measure .prima face between two projects, this method will favour the project which
has higher present value (NPV) but it is likely that that this particular project may also
involve a larger initial capital out lay
Finally the NPV method may also not give satisfactory results in the case of two
projects having different effective lives
III.

INTERNAL RATE OF RETURN (IRR)

Since NPV is positive at 15% there is need for us to look for higher discounting factor to get
a PV thats negative and in this case 20%
Years

Investment

0
1
2
3
4
5
6
6

400M

Working capital
(20)
(25)

Cash flow

200
100
150-20
80-25
60
50
10

Discounting factor
20%
1.000
0.833
0.694
0.579
0.482
0.402
0.335
0.335
NPV

Present value
400M
166.6
69.4
75.27
26.51
24.12
16.75
3.35
382
18

IRR = Lower rate + difference between Present Value of inflows at lower rate & higher
rate X+ difference between the 2 rates
Diff. between Present Value of inflows at lower rate & higher rate
IRR = 15% + (421.78 400) X 20%-15%
421.78-382
14% + 21.78 X 0.05
39.78
14% + 0.03
0.14+0.03
= (0.17)*100
IRR = 17%

ADVANTAGES OF IRR
It considers the time value for money by discounting the cash streams
IRR considers the time value for money and it takes into account the total cash
inflows and outflows
It is much easier to understand than other methods like NPV
Another merit of the IRR is that it does not use the concept of the required rate of
return/cost of capaital.it itself provides a rate of return which is indicative of the
profitability of the proposal
Also the advantage of the IRR is that it is consistent with the overall objective of
maximising shareholders wealth.
DISADVANTAGES OF IRR
It involves tedious calculations
It also produces multiple rates which can be confusing
Thirdly in evaluating mutually exclusive proposals, the project with the highest IRR
would be picked up to the exclusion of others .However in practise it may not turn out
to be the one which most profitable and consistent with the firms objectives

IV.

PROFITABILITY INDEX
PI=Present value cash inflows
Present value of cash outflows

PI = 421.78 = 1.05
400
PI=1.05
Since the profitability index is greater than 1 the project is viable

The greatest advantage with the profitability index it is easy to calculate and help in
determining if the project is viable for not

10

11

C)Why should students of MPAM study Accounting and Finance management

It is important because as managers

According to Prof. Bradley, "Financial management is the area of business manageent,
devoted to a judicious use of capital and a careful selection of sources of capital, in order to
enable a spending unit to move in the direction of reaching its goals." [Cited Gitman) 1986
It is important for MPAM students to study accounting and finance management because as
for future managers it provides a prudent or rational use of capital resources -proper
allocation
and
utilization
of
funds
in
the
organization
The knowledge of financial management in particular would provide the MPAM student with
the understanding of careful selection of the source of capital - Determining the debt equity
ratio and designing a proper capital structure for the corporate
It is important for the MPAM student to study accounting and finance because it would
provide the student with understanding of being able to achieve the organizational goals ensuring the achievement of business objectives viz. wealth or profit maximization.
It of importance of the an MPAM student to study financial management and accounting as it
provides the student with the knowledge of performing the regular finance functions
including financial planning including assessing the funds requirement, identifying and
sourcing funds, allocation of funds and income and controlling the use or utilization of funds
towards
achieving
the
primary
goal
of
profit/wealth
maximization.
Performing the non-recurring functions including, though not exclusively, the preparation of
financial plan at the time of promotion of the business enterprise, financial readjustment
during liquidity crisis, valuation of enterprise at the time of merger or reorganization and such
other episodic activities of great financial implications can only be done with the knowledge
of financial management and accounting
It is important for MPAM students to study accounting and financial management because
accounting provides avenues of collection of data and the presentation of the financial data of
the organization. It provides the consistency on the past, present and future operations of the
organization.The manager uses such information for financial decision making.
Financial management brings about the aspect of use of funds efficiently and wisely to
various uses in the organization.Financial management would help an MPAM student in the
decisions of investment, financing and dividend decisions.
Financial management can help the MPAM student in deciding in the kind of assets that
should be invested in by the organization and this usually called Investment decision; which
relates to the selection of assets in which funds will be invested in by the firm. These assets

12

fall into two categories the long-term which yield a return over a period of time in future and
short term assets or currents assets which are needed in the normal course of business and are
easily convertible into cashusually within a year. Hence financial management would help an
MPAM Student in determining what type of assets the organization needs at what point in
time
It is also important for the MPAM students to study financial management as they are able to
obtain the knowledge of financing the organization and this is usually referred to the
financing decision, where the manager is able to have the knowledge of determining the
financing- mix or capital structure or leverage of the organization. This refers to the
proportion of debt and the amount of equity capital. It also refers to the financing decision of
a firm thoserealties to the choice of the proportion of these resources to finance investment
requirements. A proper balance between debt and equity to ensure a trade-off between risk
and return to the share shareholders is important and this can be done with proper knowledge
in financial management
The third important issue under financial management is the dividend policy decision. The
understanding of financial management by the MPAM students is important as the mangers is
able to have the knowledge of determining the amounts of profits that should be given to the
shareholders and those that should be retained in the organization and thus the knowledge of
financial management is very key for the MPAM students
The knowledge of accounting and financial management provides MPAM students with the
knowledge of how to avoid insolvency and make the organization stay in business
Inconclusion it is important for MPAM students to study accounting and financial
management as this provides them with the knowledge of handling financial analysis,
planning, making investment and making financial decisions

13

References
1.Andrew Baston (1975) Elements of Accounts, East Africa
2.Frank Wood and Alan Sangster (2002) Business Accounting 7th Ed, Prentice Hall
3.Graham Mott (1989) Investment Appraisal, Great Britain
4. Bolten, SE Managerial Finance, Houghton Mifflin Co. Boston, 1976, p.426
5. Johnson, RW, Financial Management, Allyn and Bacon, Boston, 1977
6. Solomon E and JJ pringle, Introduction to Financial Management, Goodyear Publishing
Co. Santa Monica Calif, 1977

14