Accounting Business Reporting for Decision Making

518 Accounting: Business Reporting for Decision Making

Goodwill and future opportunities

Goodwill is built up over time by entities through giving customers the service and quality they demand.

Service can mean fast response times, always having the necessary stock on hand, and completing supply

contracts on time and at the right price. Quality in relation to goods and services normally means that the

goods and services are useful and appropriate, and indeed do the job better than expected.

Entities able to deliver quality service tend to build up loyalty among their customers. The loyalty

may have nothing in the way of a reward for past service, but may be merely self-serving on the part of

the customers, in that they know they will get what they want, when they want it, and for the price they

are prepared to pay.

It may be necessary sometimes for an entity to take on projects or investments that it would rather

not, but which it does to keep faith with its customers, in the hope that such service will be recog-

nised and that there will be further mutually satisfactory business deals in the future. It is through

this sort of behaviour that entities build loyal customer bases, which are assets to the entities, just as

much as are machinery and skilled employees. An example of a project that would assist in building

a loyal customer base is illustrated in the reality check ‘How to earn Qantas frequent-flyer points

without flying’.

Social responsibility and care of the natural environment

Social responsibility and care of the natural environment have become important concerns for an

increasing proportion of the investor community. Chapter 2 of this text focused on sustainability issues

in accounting. Environmental issues, such as the wood chipping of old-growth forests and the release of

greenhouse gases into the environment, are important issues for both companies and their stakeholders.

Investors should be aware of these issues, the possibility of changes in legislation and the need to

consider this source of risk before they commit their funds.

Conclusion — Coconut Plantations’ potential coconut oil

manufacturers’ investment decisions

Throughout this chapter, we have used the data given in illustrative example 12.1 to show how the

various decision tools are calculated. Table 12.4 summarises the results of these calculations before dis-

cussing the final decision.

TABLE  12.4 Decision tool results

Tool Result

ARR 33.3% or 11.1% with the opportunity cost of labour included

PP 2.6 years

NPV $62 720 with 10% discount factor

IRR 28%

From table 12.4, all the tools seem to indicate that the coconut oil manufacturing project is a reason-

ably good investment. However, as noted earlier in the chapter, managers make their decisions based

on their entity’s past performances, their expectations, industry averages or current production in com-

parable markets. Hence, it is an individual manufacturer’s decision as to whether 11.1 per cent is an

acceptable return as indicated by the ARR measure. However, in an environment where many manufac-

turers normally make less than 5 per cent return on their assets, a double-digit return looks acceptable.

Moreover, at 2.6 years, the PP tool indicates a project that most managers would probably view as worth