International Accounting Standard Mib Water For All - Essay Example

International Accounting Standard Mib Water For All (Mibw4a) Evaluating business plan Launched in 2010 after a group of friends identified the need to fill the market gap, MIBW4A main objective was to use venders and technology to supply clean water to the consumers and families especially in South American State of Peru. According to a report filled by the health departments, waterborne pathogens such as diarrhea accounted for more than 4 million deaths among children in South America. More children succumbed to water related deaths than malaria, hence the need for clean and treated water. Wanting to conduct business, MIBW4A identified an economical and sustainable method of providing safe and treated drinking water. "Most other efforts to bring clean water to the underserved citizens had relied on volunteerism and had ultimately failed. Those efforts were not market-based and proved to be unsustainable" Kaputt said. MIBW4A established a strong and mutually profitable partnership with the water vendors to help in the distribution of low salt level drinking water to the consumers (Salzman, 2012, p.5). Objectives of MIBW4A Public Health: To reduce the rate of death and health related complications which arise from use of unsafe water. Profitability: To create a sustainable business enterprise with a potential of generating revues excess of the operational costs, and be able to finance future growth. In addition, the company aims at establishing itself by developing quality brands, popular among its consumers. Community Building: MIBW4A would employ and hire technical and casual staff to service their water filters and serve the vendors or other distributors. Besides, the company will focus on community educational programs about benefits of consuming clean water. Corporate Social Responsibility - Environment: MIBW4A will bear the cost of externalities incurred in the process of boiling the water, by ensuring reduced deforestation (popularly associated with charcoal burning). This would be attained by reducing the demand and need for bottled and bagged water, which potentially pollutes and litter the environment. The Business Plan With a daily average of 150-350 venders, the company estimated that each consumer will need at least 1 litre clean drinking water on a daily basis. Within the first year, the company planned to acquire 50 water filters. By the end of three years of operation, MIBW4A estimates their customer base to reach 3000, thus calling for acquisition of more filters in the subsequent years. After conducting an extensive market research, MIBW4A introduced its purified water products priced at USD 0.08 per litre. By only attracting 12% of the potential consumers, the company estimated daily average sales of 450,000 litres of clean water. Within the first year of operation, MIBW4A relies on hired expertise services from Blue Future Ltd to supply them with slow sand filters. However, to reduce the cost of capital, the company plans to manufacture their own filters at a cost of USD 250 per sand filter by the second year of operation. This would be more economical as it is relatively cheaper than importing each filter at USD 400. Other capital expenditures to be met by the company are associated with acquisition of trucks and motorcycles to aid in ferrying equipments and technical staff to their work stations. By the end of third year, the team planned to have 150 motorcycles at a cost of USD 2,500 per motor. In addition, MIBW4A planned to have 12 service trucks in good working condition by the beginning of the third year (Salzman, 2012, p.5). To determine the unit water pricing, it was essential for MIBW4A to depreciate their capital expenditures at the effective market cost of capital, which was helpful in determining the unit cost of distributed water. All the capital expenditure items are expected to have a 15 year economic life span. The team used a straight line depreciation method to allocate equal depreciation costs to each item over its economic time. MIBW4A incurred operational costs in paying salaries and wages for the technical team. Each technician received a monthly salary of USD 100. Annually, MIBW4A will incur USD 3600 within the first year of operation as it will hire three more technicians. With the need to install more filters, MIBW4A will incur more operational cost in salaries in the subsequent years. Other members of the local staff in the monthly payroll include subordinate staffs and operating officers whose salaries would total to USD 845,000. To increase their sales volume, the company plans to hire a sales team of 20 in the second and third year. In the first year of operation, the company hired no team to sale their products, hence incurring no expenses on sales staff within the first twelve months. Each sales person takes away USD 150 per month. In their annual budget, MIBW4A planned for a weekly testing expenditure on filters estimated to be USD 525,200 over the three year period. Strength and weakness of the business plan As outline above, MIBW4A business faces a lot of challenges. The business incurred a lot of expense both in operation and fixed costs. In total, the fixed costs and variable costs incurred by the company within the first three years of operation exceed the income generated over the same period. Besides, the company has to incur other informal costs in doing business in Peru because of lack of transparency in the business unit and the police sectors. To keep operating, MIBW4A has to spend s a lot of resources in corrupt deals (Salzman, 2012, p.11). By deploying sales representatives and water vendors, MIBW4A stands a greater chance of increasing their market dominance and thus higher sales revenue. The constant vendor auditing process conducted by the company for evaluate the sales data of each vendor was critical in reducing revenue underreporting. On the other hand, MIBW4A had strong ground in their business plan as it accounted for all the fixed and viable cost over the three year period. MIBW4A made accounting for depreciation on fixed assets and other capital expenditure items on a straight line basis this would be very significant in spreading the usage cost of these items within their economic life time. The middle men such as vendors constantly underreported their sales volumes and incomes, thus making MIBW4A to report a 10-15% underreported sales. The profit sharing agreement between MIBW4A and the vendors was a bigger threat to the success and profitability of the company as vendors created little financial incentive for the firm (Walton & Aerts, 2006, p.79-80). Given the large capital investment needed, MIBW4A heavily relied on external source of finance within the first two years of its operation. However, in the third and subsequent periods, MIBW4A used internal source of finance accrued from retained profits and amortized depreciation. In the two year period, the company outsourced approximately USD 1,200,000. The required resources were to be raised through 20 per cent equity share investments, and a loan debenture attracting 10% annual interest rate (Salzman, 2012, p.12). Accounting policies and investment decision The accounting policies by the company which included estimating depreciation on fixed asset on straight line basis over the active economic period of the firm is advantageous method of working the cost of tear and wear for a young company. This method of accounting for depreciation (popularly referred to as fixed) has a number of advantages over other methods. First, equal-installment depreciation is simple and easy to account for in a firm and is very acceptable for equipments which operate uniformly over their economic period (Banerjee, 2005, p.56). This method is easy to understand and apply as opposed to the approaches to depreciation. Under this method, equal amount of depreciation is depreciated from the company’s financial records. Straight line depreciation method is preferred for assets which are relatively expensive. Assets which can be legally written off with zero residual value at the end of their active economic time are depreciated using fixed-line. Straight-line depreciation is limited in case of an asset which has unevenly distributed performance. As the asset gets older and older, the rate of depreciation, tear and wear also increases, hence should be depreciated more in its late economic life time. Besides, fixed-installment depreciation does not effectively accounts for repair and maintenance costs, hence unsuitable for expensive items assets such as plants or machinery. Finally, its complex to accurately establish the functional economic life of each asset, therefore this method is not appropriate where the economic life of an asset is unpredictable (Warren et al., 2012, p.89). From the financial report of the MIBW4A, it is worth investing in this company. As outlined in the financial statements, MIBW4A is a highly profitable corporation which records net sales and excess revenue over costs. Besides, with the increase in the water market dominance, MIBW4A has a higher potential of growth in the coming years (Kurz & Rhodes, 2003, p.120). By investing in the firm, an investor takes away 8% interest on fixed investments which are payable semi-annually. From the financial and operational records of the company, the company is financially stable and thus able to meet both its long term and short-term financial obligations when they fall due. Bibliography Banerjee, B. (2005). Financial Policy And Management Accounting. New Delhi, Prentice Hall Of India, p.56. Diego Salzman, 2012. International Accounting Standard Individual Assignment, Hult International Business School, P.1-14. Walton, P. J., & Aerts, W. (2006). Global Financial Accounting And Reporting: Principles And Analysis. London, Thomson, p.78-81 Kurz, D. W., & Rhodes, D. K. (2003). Policies And Procedures Manual For Accounting And Financial Control. New York, Ny, Aspen, p.120. Warren, C. S., Reeve, J. M., Duchac, J. E., & Warren, C. S. (2012). Financial And Managerial Accounting. Mason, Ohio, South-Western Cengage Learning, p.89. Read More