Final Accounts
What is depreciation?
A reduction in the value of a non-current asset over time.
What does NPV stand for in investment appraisal?
Net Present Value.
What is a budget in business?
A financial plan outlining expected costs, revenues, or cash flow for a set period.
What is a favourable variance?
When actual profits are higher than expected.
What does the straight-line method of depreciation assume about asset value over time?
That it decreases by the same amount each year.
What type of expenditure does depreciation apply to?
Capital expenditure.
Why is money today worth more than the same amount in the future?
Because of risk, opportunity cost, and the time value of money.
What is the difference between a cost centre and a profit centre?
A cost centre incurs costs but doesn’t generate revenue; a profit centre tracks both costs and revenues.
Give one example of a cost centre in a business.
Finance or IT department.
What is the main purpose of using Net Present Value (NPV) in investment appraisal?
To evaluate the profitability of an investment by considering the time value of money.
Why do businesses depreciate their assets?
To reflect wear and tear, allocate costs accurately, and show realistic asset values.
What information is needed to calculate NPV?
Initial investment cost, discount rate, expected cash flows, project duration, and residual value.
Name two reasons why businesses create cost or profit centres.
To improve accountability and support decision-making.
Why might a business use variance analysis?
To compare actual performance with budgeted figures and make informed decisions.
Why might a business prefer early cash inflows in an investment project?
Because money received sooner has a higher present value.
What is the formula for calculating straight-line depreciation?
(Cost − Residual Value) ÷ Useful life in years.
What is the formula for calculating NPV?
NPV = Sum of Present Values – Cost of Investment.
What does a favourable variance mean in budgeting?
Actual profits are higher than expected due to lower costs or higher revenues.
A company budgeted $3,000 for wages but spent $3,200. What is the variance and is it favourable or adverse?
$200 adverse variance.
A company invests $10,000 and expects $12,000 in discounted cash inflows. What is the NPV?
$2,000.
When is the units of use method more appropriate than straight-line depreciation?
When asset value depends on usage, like vehicles or printers.
Why is NPV considered more accurate than the Average Rate of Return (ARR) method?
Because it accounts for the time value of money and discounts future cash flows to their present value.
How can budgets and variances support business decision-making?
They help measure performance, allocate resources, control spending, and guide strategic decisions.
Explain how budgets can help with resource allocation in a large business.
Budgets help forecast performance and distribute financial and human resources effectively, ensuring high-performing areas receive appropriate support.
Explain one limitation of using cost and profit centres in large organizations.
They can lead to unhealthy competition or short-term thinking, reducing collaboration and long-term planning.