Question

BBI is considering changing the company’s accounting system. The new system is expected to save 9,000 accounting hours per year; an operating cost savings of $45 per hour. The annual cash expenditures of operating the new system are estimated to be $200,000. The new system would require an initial investment of $550,000. The estimated life of the system is 5 years with no salvage value. The tax rate is 35%, and BBI uses straight-line depreciation for tax purposes and the cost of capital is 14%.

a) Calculate the annual after-tax cash flows related to the new accounting system.

b) What changes in financial accounting occurred that are relevant to management accounting and financial reporting?

c) Provide three (3) areas that you should consider when assessing relevant and irrelevant cash flows for alternative long-term investments.

Thank you in advance

Answer 1

a) Calculate the annual after-tax cash flows related to the new accounting system.

Ans : 39,631.66 (-550,000+NPV(14%, 171,750,171,750,171,750,171,750,171,750)

	Particulars	Beginning of year	Year1	Year2	Year3	Year4	Year5
	Investment in New System	-550,000
	Total Saving from New system		405,000	405,000	405,000	405,000	405,000
Less	Operating cost of New system		(200,000)	(200,000)	(200,000)	(200,000)	(200,000)
Less	Deprecation		(110,000)	(110,000)	(110,000)	(110,000)	(110,000)
	Net P&L Impact before tax		95,000	95,000	95,000	95,000	95,000
	Tax @ 35%		(33,250)	(33,250)	(33,250)	(33,250)	(33,250)
	Net P&L Impact after tax		61,750	61,750	61,750	61,750	61,750
	Add back depreciation for cash flow		110,000	110,000	110,000	110,000	110,000
	Cash flow during the year	-550,000	171,750	171,750	171,750	171,750	171,750

b) What changes in financial accounting occurred that are relevant to management accounting and financial reporting

The objective of the both management accounting and financial reporting is different. The financial reporting aims to provide information to investor and user of financial statement in the set prescribed format like P&L, Balance sheet and Cash flow along with notes to account. While in case of management accouting it is aimed to provide information to management regarding performance of the business which aid in decision making to decision.

The financial accoutning system is the system which records the financial transaction within the organisation and the information recorded in financial accounting system is basic data for finacial reporting & management accounting. Hence it can be said that change in financial accounting system will have all direct impact on management accouting and financial reporting to ensure that their requirement are met.

c) Provide three (3) areas that you should consider when assessing relevant and irrelevant cash flows for alternative long-term investments

Ans :

Cah flow Relevant areas :

a. Operational cost saving which include reduction in manpower

b. Amount of investment in new system and additioanl cost operating cost if any

c. Consider the tax impact after tax and depreciation

Irrelevant Cash flow areas :

a. Improvement in reporting and efficincies

b. Better report availability to management aid in decision makng

c. Reduction in time for report prepaation