Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

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Multiple Choice

Which of the following best describes the appropriate discount rate to use when evaluating a new project?

The prime lending rate set by the central bank

The company's historical average return on equity

The risk-free rate of return

The company's weighted average cost of capital (WACC)

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Verified step by step guidance

Understand the concept of Weighted Average Cost of Capital (WACC): WACC represents the average rate of return a company is expected to pay its investors (both equity and debt holders) to finance its assets. It is used as the discount rate because it reflects the cost of capital for the company, adjusted for the risk of the project.

Identify why the other options are not appropriate: The prime lending rate set by the central bank is a general interest rate and does not reflect the specific risk or cost of capital for the company. The company's historical average return on equity is backward-looking and does not account for the current cost of capital. The risk-free rate of return is too low and does not incorporate the risk associated with the project.

Recognize that WACC incorporates both equity and debt: WACC is calculated by weighting the cost of equity and the cost of debt according to their proportions in the company's capital structure. This ensures that the discount rate reflects the blended cost of financing.

Understand the formula for WACC: The formula is \( \text{WACC} = \left( \frac{E}{E+D} \times \text{Cost of Equity} \right) + \left( \frac{D}{E+D} \times \text{Cost of Debt} \times (1 - \text{Tax Rate}) \right) \), where \( E \) is the market value of equity, \( D \) is the market value of debt, and the tax rate accounts for the tax shield on debt.

Apply WACC as the discount rate: When evaluating a new project, use WACC to discount the project's expected cash flows to determine its net present value (NPV). This ensures that the project is evaluated against the company's cost of capital, accounting for both risk and financing structure.