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Depreciation Methods and Life Cycle Costing

Question:

Discuss about the Depreciation Methods and Life Cycle Costing.

Answer:

Introduction:

The present report specifies the business plan of the cafe; which is a franchise of an international coffeehouse chain Aroma Cafe. A business plan can be said as documented set of business goals, financial forecast and other defined objectives which have been aimed to attain over a specified time (Farrell, (2016). All the details relating to cafe such as legal aspects; available financing options, the importance of accounting, needed plant and machinery and other factors have been described in detail. An effort is made to include all the details and factors which play a pivotal role while forming a business.

Aroma Cafe is an international coffee house which provides and deals services and products like coffee, tea and pastries. Presently it has 13 cafes in Buenos Aires; now the same will be opened in Eltham. As no other same cafe exists in this area, the advantage of same will be taken as goodwill of the brand already exist in the market. Thus, no extraordinary promotion expenses will be required. The same products will be provided with additional choices and flavours so that more customers can be attracted. Retail services will be provided to the customers, and wholesale service of the product will be available for party orders and other festive. The products will be manufactured at the cafe only, and efficient efforts would be made to provide fresh products to the customers. 

The cafe will be a limited liability company. The legal form of an organisation is an important decision as the structure relating to resources and assets is according to that only (Steingold, (2015). Each form evolves a separate approach for dealing with profits and losses. The corporation is having a unique feature that their profits are not directly absorbed by the owners instead they affect the shareholders indirectly and reflect profit and loss through the price of shares. The reason behind choosing limited liability as the legal structure is accessing the advantage of both corporation and partnership form of business. According to Demski, (2013), in the case of LLC profit and losses can be transferred to owners without taxation of the business itself and at the same time, they are shielded from personal liability. Another benefit which is available by having LLC as a legal form of business is that no one can seize personal assets in case of any judgement of law proceeded against your business. It can be said that it a rock-solid protection for personal assets that can be attained in business (Farrell, (2016). Thus procuring all these advantages is the main reason behind selecting LLC as a legal form of the cafe.

It is a small venture, but as the same is established on a large scale, it will require adequate funds for running it successfully. The specified sources are available for financing:

Short Term Finance sources

  • Trade credit: It is the most common resource used for financing. The basic necessity of maintaining the same appropriately is normal accounting practices and nothing more (Steingold, (2015). The cafe can access same from the dealers with whom it works on daily basis. Even before signing the contract the terms relating to credit available can be discussed previously so that no dispute arises later. The option is availed after average creditors’ value (anticipated figures) available each year and then average settlement period can be computed for four years.
  • Accrued wages and taxes: Accrued wages and pay-as-you-go (withholding instalments) are some of the examples which are used as spontaneous sources of finance (Steingold, (2015). A part of the salary of employees can be retained as security, and the same is paid back when they leave the job or a particular period.
  • Bank overdraft: This facility is generally attached to cheque account and loan is withdrawn only in the case when a cheque written on the account exceeds the positive balances.
  • Factoring: It provides right to the lender for collecting the cash owning on invoices at a discount from the agency. Further, the same agency collects the money back from entity’s customer (Radu, (2013).

Long term resources

  • Loan from financial institutions: The cafe can look for financial institutions as intermediate finance and can access loans such as a fixed rate business loan, interest only loan, instalment loan, lease finance and other options as per its required accordance.
  • Equity Finance: This option can also be applied by the cafe for the purpose of collecting funds (, Beasley & White, 2015). It is because; this method is usually used when owners wish to expand their business or sell ownership rights to other investors. The same is performed through selling ordinary shares or preference shares. Ordinary shares have no maturity date and payment attached to same like dividends are decided by directors out of profit. Preference shares are a hybrid form of capital and generally have fixed rate of return in the form of dividends (Peirson, Brown, Easton & Howard, (2014).

Role of Accounting

Accounting can be said as a process of ascertaining, evaluating and communication the economic information relating to the organisation. As per the study of Govendir & Wells (2014), the same is applied to the management for the purpose of making a variety of decisions. Business transaction can be effectively measured with the accounting and assist in taking an efficient decision (Govendir & Wells, 2014). In the present case, the cafe will require knowing details needed by both external and internal users of the organisation. The same objective will be accomplished with the assistance of effective accounting as all necessary information required by entity’s owner as well as management and by shareholders, employees government authorities. Accounting plays a vital role while taking financial as well as a managerial decision, as the economic information required for such decision reflects through financial statements (Farrell, 2016).

In present case accounting information will assist management as well as employees in ascertaining main analysis like the products which are not profitable; whether defined goals and objectives have been achieved or not; evaluating the areas which required to strengthen and assessing many other factors. As per the views of Demski (2013), the relationship between sales volume, cost, prices and profit is assessed by accounting information, and changes are made accordingly for achieving the defined goal. The provisions which will require to be followed by the cafe comprise Corporations Act 2001; accounting principles, ethics, standard and IFRS (as the cafe relates to an international brand). Application of specified rules and provisions assures that adequate disclosures have been provided appropriately to users like shareholders through financial statements (Collier, 2015).

The main equipment which will be required in the cafe is Espresso and Coffee Equipment s the customers have a main demand of coffee in Australia. As cakes and pastries will be cooked in the cafe only so microwave oven would be required for the same.  Comfortable Furniture would be required so that people feel relaxed and comfortable in spending out their time in the cafe. According to Bodie, (2013) the straight-line depreciation will be applied on this machinery as these have a long term life .Application of  SLM method of depreciation no higher depreciation will be charge in initiating years. Thus it will also support in presenting profit appropriately (Liapis  & Kantianis, 2015) .

Unearned revenue is the advance received on goods and services and the same is presented in liability side (Bodie, 2013). Advance relating to party order might be available at the liability side of the financial statement as this income cannot be recognised until the order is fulfilled. The prepaid expense will be paid to the dealers for providing the supplies or payment to employees in case they required.

Other Information required by bank for granting business loan

The other details which will be required by the bank for the purpose of granting business loan are details regarding the budget. As through them, bank will know details about the financial framework and strategic planning of the cafe. The various kinds of budgets can be demanded such as sales, purchase, cash and capital budgets. The details relating to capital contribution will be required by the financial institution. The forecasted profit and loss and balance sheet (financial statements) and ratio analysis of upcoming years might be asked by the banks for the purpose of assessing the ability of organisation in earning profits (Bhowmik, & Saha, 2013). Trend analysis could be asked by the banks for assessing the future direction of various items. Revenue and expenses are expressed in percentage in trend analysis. Thus the same is also referred as common size statements. According to Annand  & Dauderis (2014), the details of accounting policies followed by the company will have to be provided in detail so that bank can gain information relating to policies applied behind the formation of financial statements. Ratio analysis might also be asked for interpreting the results of financial statements. It assesses in evaluating profit relative to resources available for generating the profit through calculating profitability ratios. Thus all the above-specified details will assist the bank in taking a decision in an appropriate manner relating to granting the loan.

References

Annand, D., & Dauderis, H. (2014). Introduction to Financial Accounting.

Bhowmik, S. K., & Saha, D. (2013). Sources of Finance. In Financial Inclusion of the Marginalised (pp. 61-71). Springer .

Bodie, Z. (2013). Investments. McGraw-Hill.

Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Demski, J. (2013). Managerial uses of accounting information. Springer Science & Business Media.

Farrell, B. (2016). Depreciation and the Time Value of Money. arXiv preprint arXiv:1605.00080.

Govendir, B., & Wells, P. (2014). The influence of the accruals generating process on earnings persistence. Australian Journal of Management, 39(4), Pp 593-614.

Hertz, G. T., Beasley, F., & White, R. J. (2015). Selecting a Legal Structure: Revisiting the strategic issues and views of small and micro business owners. Journal of Small Business Strategy. 20(1).Pp 81-102.

Liapis, K. J., & Kantianis, D. D. (2015). Depreciation methods and life-cycle costing (LCC) methodology. Procedia Economics and Finance, 19. Pp314-324.

Peirson, G., Brown, R., Easton, S., & Howard, P. (2014). Business finance. McGraw-Hill Education Australia.

Radu, M. (2013). The Impact of Depreciation on costs. Annals of the University of Petroşani, Economics, 13(1). Pp 251-260.

Steingold, F. S. (2015). Legal guide for starting & running a small business. Nolo.

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