Competency 1 of ACCCB/543 comments on the fact of why investors decide to invest in a particular business or why a company chooses to improve its operations. According to the module materials, it is necessary to rely on financial statements and two economic indicators, Net Present Value and Internal Rate of Return, to find the information above. That is why it is good that the given Competency helps me master this essential skill from the sphere of accounting.
On the one hand, it is worth admitting that Competency 1 allowed me to deal with financial statements and calculate a ratio analysis based on them. It is challenging to overestimate the significance of this ability for an accountant. The rationale behind this suggestion is that financial statements are records highlighting a company’s business activity and financial performance. Consequently, every financial expert reviews these records to identify how a firm operates, whether it has any economic problems, and how healthy the business is in general. That is why there is no doubt that it is of significance for managerial accounting students to become familiar with this phenomenon.
On the other hand, the given Competency helped me learn how to work with the Net Present Value and the Internal Rate of Return. The Net Present Value demonstrates an expected cash flow of a specific project. This financial indicator is used to predict whether investing in a business will result in a cash surplus or loss (AccountingTools, 2021). As for the Internal Rate of Return, this index presents the percentage rate of return that the project is going to yield (AccountingTools, 2021). It is also necessary to admit that the two indicators are helpful in evaluating a potential capital expenditure, which is significant for guiding investment decisions.
Now, it is rational to comment on the fact that Competency 1 helped me understand the differences between the two metrics. Firstly, the Net Present Value demonstrates how much dollar value a project is going to produce, while the Internal Rate of Return reveals the project’s potential return in a percentage form. The two indicators offer different forms of the same financial information. Secondly, I have found that the Internal Rate of Return is a more straightforward calculation method because it does not require a discount rate that is necessary to get the Net Present Value. Instead of it, underlying cash flows can only be used to obtain the Internal Rate of Return. This information denotes that the Net Present Value is a more complicated approach that requires more effort to be taken to obtain the necessary results.
In conclusion, it is possible to mention that Competency 1 has contributed to the fact that I have mastered the understanding of basic managerial accounting phenomena. It is impossible to deny the fact that the skills of working with the financial statements, Net Present Value, and Internal Rate of Return are of significance for my future professional practice. I have also learned that the computations under consideration can be helpful in making investment decisions. In particular, higher financial indicators lead to an increased likelihood of obtaining higher revenues. This information allows me to stipulate that I have met the learning objectives. Finally, all this description results in sufficient arguments to claim that I am prepared for completing the Competency 1 Assessment.
Reference
AccountingTools. (2021). The difference between NPV and IRR.