Budget Week 1

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<FASHION MARKETING> <Budget>

YANG YIJUN (JEFF)

Lecturer Introduction <YANG Yijun (Jeff) Master Degree from Shanghai International Studies University Advanced Diploma from TAFE Australia Specializing in Accounting & Finance Teaching in various Joint venture programs

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Module Objectives Objectives Objective 1: Understand the time value of money. Objective 2: Know the concepts of budgeting. Objective 3: Understand why organizations budget. Objective 4: Know the concept of flexible budgeting. Objective 5: Understand investment securities.

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Learning Outcomes LOs

Unit 11

1

2

Research & problem solving

Subject Knowledge

X

X

Unit 12

3

X

4

5

Technical skills

Design& Creativity

X

X

Unit 13

X

Unit 14

X

6

Communi Profession cation alism and Social skills

X X

X X

Unit 15 Unit 16

X

Unit 17

X

Unit 18

X

Unit 19

X

Unit 20

X X

X

X X

X X

X

X X

X 4

Assessment Criteria • Participation: 10% • Assignment: 40 % • Final exam: 50%

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Methods & Resources • <Briefly describe instructional methods used during the module> • • • • •

Lectures Pair discussion/Group cooperation Self-Study In-class exercises Exams

Software Tools

Resources

Powerpoint

Books Articles

Excel Word

Web Links 6

Questions?

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Unit <1>: <Time Value of Money>

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Roadmap & Objective

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Unit Number

Unit Name

Unit 11

Introduction to Finance

Objective Unit 11

Understand the time value of money. Calculate the simple interest and compound interest. Understand the present value and future value of a single amount. Apply the basic annuity. Understand the present value and future value of annuity.

Unit 12

Basics of budget

Objective Unit 12

Know the concepts of budgeting. Know the uses of budgets. Understand the benefits of budgets. Classify the types of budgets (fixed, variable, semivariable). Be able to plan and organize the budgeting process. Understand the procedures to prepare budgets.

Roadmap & Objective Unit Number

Unit Name

Unit 13

Central tendency

Objective Unit 13

Know the definition of cash budgets. Understand the accounts receivable collection budget. Apply cash receipts budget. Understand cash payments budgets Prepare the cash budgets for the company. Report GST on a cash / accrual basis.

Unit 14

Financial budgets

Objective Unit 14

Understand the budgeted income statement. Have an idea of accrual and cash accounting. Apply the budgeted Balance sheet. Prepare the budgeted income statement. Apply the budgeted statement of cash flows. Prepare the sales budget by product, period, and area.

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Roadmap & Objective Unit Number

Unit Name

Unit 17

Flexible budgets and performance reports

Objective Unit 17

Understand the concept of flexible budgeting. Be able to classify the costs. Process the flexible budgeting for service organizations. Apply flexible budgeting for trading operations. Apply flexible budgeting for Manufacturing operations. Understand the contribution concept and performance reporting.

Unit 18

Master budgets

Objective Unit 18

Understand why organizations budget and the processes they use to create budgets. Prepare a sales budget. Prepare a production budget. Prepare a direct materials budget. Prepare a manufacturing overhead budget. Prepare a selling and administrative expense budget.

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Roadmap & Objective

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Unit Number

Unit Name

Unit 19

investments

Objective Unit 19

Understand investment securities. Understand reporting categories for investments. Process investments held for an unspecified period of time. Process securities available for sale. Apply trading securities Be able to use equity method and cost method.

Unit 20

Evaluation Test

Objective Unit 20

Evaluation of the acquired theoretical knowledge. Evaluation of the acquired technical skill, proved with practical exercises.

Time Value of Money Interest is the rent paid for the use of money over time.

That’s right! A dollar today is more valuable than a dollar to be received in one year.

Simple Interest Interest amount = P × i × n Assume you invest $1,000 at 6% simple interest for 3 years. You would earn $180 interest. ($1,000 × .06 × 3 = $180) (or $60 each year for 3 years)

Compound Interest

Compound interest includes interest not only on the initial investment but also on the accumulated interest in previous periods.

Principal

Interest

Compound Interest Assume we will save $1,000 for three years and earn 6% interest compounded annually.

What is the balance in our account at the end of three years?

Compound Interest Original balance First year interest Balance, end of year 1

$ 1,000.00 60.00 $ 1,060.00

Balance, beginning of year 2 Second year interest Balance, end of year 2

$ 1,060.00 63.60 $ 1,123.60

Balance, beginning of year 3 Third year interest Balance, end of year 3

$ 1,123.60 67.42 $ 1,191.02

Future Value of a Single Amount The future value of a single amount is the amount of money that a dollar will grow to at some point in the future. Assume we will save $1,000 for three years and earn 6% interest compounded annually. $1,000.00 × 1.06 = $1,060.00 and $1,060.00 × 1.06 = $1,123.60 and $1,123.60 × 1.06 = $1,191.02

Future Value of a Single Amount

Writing in a more efficient way, we can say . . . . $1,000 × 1.06 × 1.06 × 1.06 = $1,191.02 or

$1,000 × [1.06]3 = $1,191.02

Future Value of a Single Amount 3

$1,000 × [1.06] = $1,191.02 We can generalize this as . . .

FV = PV (1 + Future Value

Present Value

n i)

Interest Rate

Number of Compounding Periods

Future Value of a Single Amount

Find the Future Value of $1 table in your textbook.

Find the factor for 6% and 3 periods.

Future Value of a Single Amount

Find the factor for 6% and 3 periods. Solve our problem like this. . . FV = $1,000 × 1.19102 FV = $1,191.02 FV $1

Present Value of a Single Amount Instead of asking what is the future value of a current amount, we might want to know what amount we must invest today to accumulate a known future amount. This is a present value question. Present value of a single amount is today’s equivalent to a particular amount in the future.

Present Value of a Single Amount

Remember our equation? FV = PV (1 + i)

n

We can solve for PV and get . . . .

PV =

FV n (1 + i)

Present Value of a Single Amount

Find the Present Value of $1 table in your textbook.

Hey, it looks familiar!

Present Value of a Single Amount Assume you plan to buy a new car in 5 years and you think it will cost $20,000 at that time. What amount must you invest today in order to accumulate $20,000 in 5 years, if you can earn 8% interest compounded annually?

Present Value of a Single Amount i = .08, n = 5 Present Value Factor = .68058 $20,000 × .68058 = $13,611.60 If you deposit $13,611.60 now, at 8% annual interest, you will have $20,000 at the end of 5 years.

Solving for Other Values

FV = PV (1 + Future Value

Present Value

n i)

Interest Rate

Number of Compounding Periods

There are four variables needed when determining the time value of money. If you know any three of these, the fourth can be determined.

Determining the Unknown Interest Rate

Suppose a friend wants to borrow $1,000 today and promises to repay you $1,092 two years from now. What is the annual interest rate you would be agreeing to? a. 3.5% b. 4.0% c. 4.5% d. 5.0%

Determining the Unknown Interest Rate

Suppose a friend wants to borrow $1,000 today and promises to repay you $1,092 two years from now. What is the annual interest rate you would be agreeing to? a. 3.5% b. 4.0% Present Value of $1 Table c. 4.5% d. 5.0% $1,000 = $1,092 × ?

$1,000 ÷ $1,092 = .91575 Search the PV of $1 table in row 2 (n=2) for this value.

Basic Annuities

An annuity is a series of equal periodic payments.

Ordinary Annuity

An annuity with payments at the end of the period is known as an ordinary annuity.

End

End

Annuity Due

An annuity with payments at the beginning of the period is known as an annuity due.

Beginning

Beginning

Beginning

Future Value of an Ordinary Annuity

To find the future value of an ordinary annuity, multiply the amount of a single payment or receipt by the future value of an ordinary annuity factor.

Future Value of an Ordinary Annuity We plan to invest $2,500 at the end of each of the next 10 years. We can earn 8%, compounded annually, on all invested funds. What will be the fund balance at the end of 10 years?

Am ount of annuity

$

2,500.00

Future value of ordinary annuity of $1 (i = 8%, n = 10) Future value

×

14.4866 $

36,216.50

Future Value of an Annuity Due To find the future value of an annuity due, multiply the amount of a single payment or receipt by the future value of an ordinary annuity factor.

Future Value of an Annuity Due Compute the future value of $10,000 invested at the beginning of each of the next four years with interest at 6% compounded annually.

Am ount of annuity

$ 10,000

FV of annuity due of $1 (i=6%, n=4) Future value

× 4.63710 $ 46,371

Present Value of an Ordinary Annuity

You wish to withdraw $10,000 at the end of each of the next 4 years from a bank account that pays 10% interest compounded annually. How much do you need to invest today to meet this goal?

Present Value of an Ordinary Annuity

Today

PV1 PV2 PV3 PV4

1

2

3

4

$10,000

$10,000

$10,000

$10,000

Present Value of an Ordinary Annuity

PV1 PV2 PV3 PV4 Total

Annuity $ 10,000 10,000 10,000 10,000

PV of $1 Factor 0.90909 0.82645 0.75131 0.68301 3.16986

Present Value $ 9,090.90 8,264.50 7,513.10 6,830.10 $ 31,698.60

If you invest $31,698.60 today you will be able to withdraw $10,000 at the end of each of the next four years.

Present Value of an Ordinary Annuity

PV1 PV2 PV3 PV4 Total

Annuity $ 10,000 10,000 10,000 10,000

PV of $1 Factor 0.90909 0.82645 0.75131 0.68301 3.16986

Present Value $ 9,090.90 8,264.50 7,513.10 6,830.10 $ 31,698.60

Can you find this value in the Present Value of Ordinary Annuity of $1 table? More Efficient Computation $10,000 × 3.16986 = $31,698.60

Present Value of an Ordinary Annuity How much must a person 65 years old invest today at 8% interest compounded annually to provide for an annuity of $20,000 at the end of each of the next 15 years? a. b. c. d.

$153,981 $171,190 $167,324 $174,680

Present Value of an Ordinary Annuity How much must a person 65 years old invest today at 8% interest compounded annually to provide for an annuity of $20,000 at the end of each of the next 15 years? a. b. c. d.

$153,981 $171,190 $167,324 $174,680

PV of Ordinary Annuity $1 Payment $ 20,000.00 PV Factor × 8.55948 Amount $171,189.60

Present Value of an Annuity Due Compute the present value of $10,000 received at the beginning of each of the next four years with interest at 6% compounded annually.

Am ount of annuity

$ 10,000

PV of annuity due of $1 (i=6%, n=4) Present value of annuity

× 3.67301 $ 36,730

Present Value of a Deferred Annuity

In a deferred annuity, the first cash flow is expected to occur more than one period after the date of the agreement.

Present Value of a Deferred Annuity On January 1, 2006, you are considering an investment that will pay $12,500 a year for 2 years beginning on December 31, 2008. If you require a 12% return on your investments, how much are you willing to pay for this investment?

Present Value? 1/1/06

1 2

12/31/06 1

Payment $ 12,500 12,500

12/31/07 2

$12,500

$12,500

12/31/08 3

12/31/09 4

PV of $1 i = 12% 0.71178 0.63552

$ $

12/31/10

PV 8,897 7,944 16,841

n 3 4

Present Value of a Deferred Annuity On January 1, 2006, you are considering an investment that will pay $12,500 a year for 2 years beginning on December 31, 2008. If you require a 12% return on your investments, how much are you willing to pay for this investment?

Present Value? 1/1/06

12/31/06 1

12/31/07 2

$12,500

$12,500

12/31/08 3

12/31/09 4

12/31/10

More Efficient Computation 1.

Calculate the PV of the annuity as of the beginning of the annuity period.

2.

Discount the single value amount calculated in (1) to its present value as of today.

Present Value of a Deferred Annuity On January 1, 2006, you are considering an investment that will pay $12,500 a year for 2 years beginning on December 31, 2008. If you require a 12% return on your investments, how much are you willing to pay for this investment?

Present Value? 1/1/06

Payment $ 12,500

12/31/06 1

PV of Ordinary Annuity of $1 n=2, i = 12% 1.69005

$

12/31/07 2

PV 21,126

$12,500

$12,500

12/31/08 3

12/31/09 4

Future Value $ 21,126

12/31/10

PV of $1 n=2, i = 12% 0.79719

$

PV 16,841

Solving for Unknown Values in Present Value Situations Assume that you borrow $700 from a friend and intend to repay the amount in four equal annual installments beginning one year from today. Your friend wishes to be reimbursed for the time value of money at an 8% annual rate. What is the required annual payment that must be made (the annuity amount) to repay the loan in four years?

Present Value $700 Today

End of Year 1

End of Year 2

End of Year 3

End of Year 4

Solving for Unknown Values in Present Value Situations Assume that you borrow $700 from a friend and intend to repay the amount in four equal annual installments beginning one year from today. Your friend wishes to be reimbursed for the time value of money at an 8% annual rate. What is the required annual payment that must be made (the annuity amount) to repay the loan in four years?

Present value

$ 700.00

PV of ordinary annuity of $1 (i=8%, n=4) Annuity am ount

÷ 3.31213 $ 211.34

Valuation of Long-term Bonds Calculate the Present Value of the Lump-sum Maturity Payment (Face Value)

Calculate the Present Value of the Annuity Payments (Interest)

Cash Flow Face value of the bond Interest (annuity) Price of bonds

On January 1, 2006, Fumatsu Electric issues 10% stated rate bonds with a face value of $1 million. The bonds mature in 5 years. The market rate of interest for similar issues was 12%. Interest is paid semiannually beginning on June 30, 2006. What is the price of the bonds?

Table PV of $1 n=10; i=6% PV of Ordinary Annuity of $1 n=10; i=6%

Table Value

Amount

0.5584 $ 1,000,000

7.3601

Present Value $

558,400

$

368,005 926,405

50,000

Takeaways • Understand the time value of money. • Calculate the simple interest and compound interest. • Apply the basic annuity.

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Bibliography • Budgeting second edition, Allan Banks, John Giliberti, McGraw-Hill Australia ISBN: 0074711717 • Cost Accounting: Foundations and Evolutions, 9th Edition Kinney and raiborn ISBN-10: 1111971722 |ISBN-13: 9781111971724 • Financial Accounting 7th Edition, Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, ISBN: 978-1118-97808-5

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