budget week 1

YANG YIJUN (JEFF)

<FASHION MARKETING>

<Budget>

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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

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LOs 1 2 3 4 5 6

Research &

problem solving

Subject Knowledge

Technical skills

Design& Creativity

Communication

and Social skills

Professionalism

Unit 11 X X

Unit 12 X X X

Unit 13 X X X

Unit 14 X X X

Unit 15

Unit 16 X X X

Unit 17 X X X

Unit 18 X X X

Unit 19 X X X

Unit 20 X X X

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

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Software Tools

Powerpoint

Excel

Word

Resources

Books

Articles

Web Links

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, semi-variable).Be able to plan and organize the budgeting process.Understand the procedures to prepare budgets.

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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 budgetsPrepare 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.

Roadmap & Objective

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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.

Roadmap & Objective

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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 securitiesBe 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.

Roadmap & Objective

Time Value of Money

Interest is therent paid for the useof money over time.

That’s right! A dollartoday is more valuable

than a dollar to bereceived 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

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

What is the balance inour account at theend of three years?

Compound Interest

Original balance 1,000.00$

First year interest 60.00

Balance, end of year 1 1,060.00$

Balance, beginning of year 2 1,060.00$

Second year interest 63.60


Balance, beginning of year 3 1,123.60$

Third year interest 67.42


Compound Interest

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

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


$1,000 × [1.06]3 = $1,191.02

We can generalize this as . . .

FV = PV (1 + i)n

FutureValue

Present Value

InterestRate

Numberof

Compounding Periods


Find the Future Value of $1

table in your textbook.


Find the factor for 6% and 3 periods.

Find the factor for 6% and 3 periods.

Solve our problem like this. . .

FV = $1,000 × 1.19102

FV = $1,191.02

FV $1


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 . . . .

FV

(1 + i)nPV =


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

Hey, it looks familiar!


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?


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.


FV = PV (1 + i)n

FutureValue

PresentValue

InterestRate

Numberof 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.

Solving for Other Values

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%

c. 4.5%

d. 5.0%

Determining the Unknown Interest Rate

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

An annuity is a series of equal periodic payments.

Basic Annuities

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

End End

Ordinary Annuity

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

Beginning Beginning Beginning

Annuity Due

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.

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?

Future Value of an Ordinary Annuity

Amount of annuity 2,500.00$

Future value of ordinary annuity of $1

(i = 8%, n = 10) × 14.4866

Future value 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.

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

Future Value of an Annuity Due

Amount of annuity 10,000$

FV of annuity due of $1

(i=6%, n=4) × 4.63710

Future value 46,371$

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

PV1PV2PV3PV4

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

1 2 3 4Today


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.

PV of $1 Present

Annuity Factor Value

PV1 10,000$ 0.90909 9,090.90$

PV2 10,000 0.82645 8,264.50

PV3 10,000 0.75131 7,513.10

PV4 10,000 0.68301 6,830.10

Total 3.16986 31,698.60$


PV of $1 Present

Annuity Factor Value

PV1 10,000$ 0.90909 9,090.90$

PV2 10,000 0.82645 8,264.50

PV3 10,000 0.75131 7,513.10

PV4 10,000 0.68301 6,830.10

Total 3.16986 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

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. $153,981

b. $171,190

c. $167,324

d. $174,680


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. $153,981

b. $171,190

c. $167,324

d. $174,680PV of Ordinary Annuity $1

Payment $ 20,000.00PV Factor × 8.55948Amount $171,189.60


Compute the present value of $10,000 received at the beginning of each of the next four years

with interest at 6% compounded annually.

Present Value of an Annuity Due

Amount of annuity 10,000$

PV of annuity due of $1

(i=6%, n=4) × 3.67301

Present value of annuity 36,730$

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?

1/1/06 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10

Present Value? $12,500 $12,500

1 2 3 4


Payment

PV of $1

i = 12% PV n

1 12,500$ 0.71178 8,897$ 3

2 12,500 0.63552 7,944 4

16,841$



1/1/06 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10


1 2 3 4


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.



1/1/06 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10


1 2 3 4


Payment

PV of

Ordinary

Annuity of $1

n=2, i = 12% PV

12,500$ 1.69005 21,126$

Future Value

PV of $1

n=2, i = 12% PV

21,126$ 0.79719 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?

Today End ofYear 1

Present Value $700

End ofYear 2

End ofYear 3

End ofYear 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) ÷ 3.31213

Annuity amount 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 Table

Table

Value Amount

Present

Value

Face value of the bond

PV of $1

n=10; i=6% 0.5584 1,000,000$ 558,400$

Interest (annuity)

PV of

Ordinary

Annuity of $1

n=10; i=6% 7.3601 50,000 368,005

Price of bonds 926,405$

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?

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: 978-1-118-97808-5

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budget week 1

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