1

<FASHION MARKETING>
<Budget>

YANG YIJUN (JEFF)

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

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.

Learning Outcomes
LOs

Unit 11

Research
&
problem
solving

Subject
Knowledge

Unit 12

Technical
skills

Design&
Creativity

Unit 13

Unit 14

Communi Profession
cation
alism
and
Social
skills

X
X

X
X

Unit 15
Unit 16

Unit 17

Unit 18

Unit 19

Unit 20

X
X

X
X

X
X

X
X

X
4

Assessment Criteria
Participation: 10%
Assignment: 40 %
Final exam: 50%

Methods & Resources

<Briefly describe instructional methods used during
the module>

Lectures
Pair discussion/Group cooperation
Self-Study
In-class exercises
Exams

Software Tools

Resources

Powerpoint

Books
Articles

Excel
Word

Web Links
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Questions?

Unit <1>:
<Time Value of Money>

Roadmap & Objective

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

Roadmap & Objective

Unit Number

Unit Name

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 budgets
Prepare 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.

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Roadmap & Objective

Unit Number

Unit Name

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.

11

Roadmap & Objective

12

Unit Number

Unit Name

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 securities
Be 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.

Time Value of Money

Interest is the
rent paid for the use
of money over time.

Thats right! A dollar

today is more valuable
than a dollar to be
received 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

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

What is the balance in

our account at the
end of three years?

Compound Interest
Original balance
First year interest
Balance, end of year 1

$ 1,000.00
60.00
$ 1,060.00

Balance, beginning of year 2

Second year interest
Balance, end of year 2

$ 1,060.00
63.60
$ 1,123.60

Balance, beginning of year 3

Third year interest
Balance, end of year 3

$ 1,123.60
67.42
$ 1,191.02

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

Future Value of a Single Amount

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

Future Value of a Single Amount

3

$1,000 [1.06] = $1,191.02

We can generalize this as . . .

FV = PV (1 +
Future
Value

Present
Value

n
i)

Interest
Rate

Number
of
Compounding
Periods

Future Value of a Single Amount

Find the Future

Value of $1
table in your
textbook.

Find the factor for 6% and 3

periods.

Future Value of a Single Amount

Find the factor for 6% and 3 periods.

Solve our problem like this. . .
FV = $1,000 1.19102
FV = $1,191.02
FV $1

Present Value of a Single Amount

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 todays equivalent
to a particular amount in the future.

Present Value of a Single Amount

Remember our equation?

FV = PV (1 + i)

We can solve for PV and get . . . .

PV =

FV
n
(1 + i)

Present Value of a Single Amount

Find the Present

Value of $1 table
in your textbook.

Hey, it looks
familiar!

Present Value of a Single Amount

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?

Present Value of a Single Amount

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.

Solving for Other Values

FV = PV (1 +
Future
Value

Present
Value

n
i)

Interest
Rate

Number
of 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.

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

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%
Present Value of $1 Table
c.
4.5%
d.
5.0% $1,000 = $1,092 ?

$1,000 $1,092 = .91575

Search the PV of $1 table
in row 2 (n=2) for this value.

Basic Annuities

An annuity is a series of equal periodic

payments.

Ordinary Annuity

An annuity with payments at the end of the

period is known as an ordinary annuity.

End

End

Annuity Due

An annuity with payments at the beginning of the

period is known as an annuity due.

Beginning

Beginning

Beginning

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.

Future Value of an Ordinary Annuity

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?

Am ount of annuity

2,500.00

Future value of ordinary annuity of $1

(i = 8%, n = 10)
Future value

14.4866
$

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.

Future Value of an Annuity Due

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

Am ount of annuity

$ 10,000

FV of annuity due of $1
(i=6%, n=4)
Future value

4.63710
$ 46,371

Present Value of an Ordinary Annuity

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

Today

PV1
PV2
PV3
PV4

$10,000

$10,000

$10,000

$10,000

Present Value of an Ordinary Annuity

PV1
PV2
PV3
PV4
Total

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

PV of $1
Factor
0.90909
0.82645
0.75131
0.68301
3.16986

Present
Value
$ 9,090.90
8,264.50
7,513.10
6,830.10
$ 31,698.60

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.

Present Value of an Ordinary Annuity

PV1
PV2
PV3
PV4
Total

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

PV of $1
Factor
0.90909
0.82645
0.75131
0.68301
3.16986

Present
Value
$ 9,090.90
8,264.50
7,513.10
6,830.10
$ 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

Present Value of an Ordinary Annuity

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.
b.
c.
d.

$153,981
$171,190
$167,324
$174,680

Present Value of an Ordinary Annuity

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.
b.
c.
d.

$153,981
$171,190
$167,324
$174,680

PV of Ordinary Annuity $1
Payment
$ 20,000.00
PV Factor
8.55948
Amount
$171,189.60

Present Value of an Annuity Due

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

Am ount of annuity

$ 10,000

PV of annuity due of $1
(i=6%, n=4)
Present value of annuity

3.67301
$ 36,730

Present Value of a Deferred Annuity

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?

Present
Value?
1/1/06

1
2

12/31/06
1

Payment
$
12,500
12,500

12/31/07
2

$12,500

$12,500

12/31/08
3

12/31/09
4

PV of $1
i = 12%
0.71178
0.63552

$
$

12/31/10

PV
8,897
7,944
16,841

n
3
4

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?

Present
Value?
1/1/06

12/31/06
1

12/31/07
2

$12,500

$12,500

12/31/08
3

12/31/09
4

12/31/10

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.

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?

Present
Value?
1/1/06

Payment
$
12,500

12/31/06
1

PV of
Ordinary
Annuity of $1
n=2, i = 12%
1.69005

12/31/07
2

PV
21,126

$12,500

$12,500

12/31/08
3

12/31/09
4

Future Value
$
21,126

12/31/10

PV of $1
n=2, i = 12%
0.79719

PV
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?

Present
Value
$700
Today

End of
Year 1

End of
Year 2

End of
Year 3

End of
Year 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)
Annuity am ount

3.31213
$ 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
Face value of the bond
Interest (annuity)
Price of bonds

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?

Table
PV of $1
n=10; i=6%
PV of
Ordinary
Annuity of $1
n=10; i=6%

Table
Value

Amount

0.5584 $ 1,000,000

7.3601

Present
Value
$

558,400

368,005
926,405

50,000

Takeaways
Understand the time value of money.
Calculate the simple interest and
compound interest.
Apply the basic annuity.

52

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: 978-1118-97808-5

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