11. Financial Planning

Question 1

budgets

Answer 1

• helps to set target and to achieve goals
• covey goals and strategy to employees and managers
• promote coordination and communication
• motivate employees and managers
• provide a framework for judging perfomance

Question 2

master budget

Answer 2

• operating decision
• financial decision

→ based on one expected scenario

→ finalized after several rounds of discussions

Question 3

master budget

Answer 3

• is a comprehensive system of targets
• is usually defined for one year in advance
• comprises management’s operating and financial plans, included budgeted financial statements
• sets targets for each responsibility centre in organization
• is adapted on a “rolling horizon” basis (continuous budget)
• is used for management controls: measures difference between budgeted performance and actual performance

Question 4

preparing a master budget

Answer 4

• find a hierarchy of activities
  → lower ranking activities must be adapted to the requirements of higher-ranking ones
• each partial plans is subject to restrictions:
  • the requirements of higher-ranking activities might turn out feasible when planning lower-ranking ones
  • then the higher-ranking plans must be adapted to the bottleneck in the lower-ranking plans

Question 5

starting points of planning

Answer 5

• turn to the functional area with the least discretionary leeway
• this usually is REVENUES

→ all other activities (production, material, labor) are planned o ensure that the revenue budget can be met

→ amount of revenues strongly determined by lower-ranked activities

Question 6

operating budget

Answer 6

• sales budget
• production budget
• direct material purchase budget
• (manufacturing) overhead costs budget
• direct (manufacturing) labor budget
• ending inventory budget
• costs of goods sold burger
• non-manufacturing costs budget

Question 7

financial budget

Answer 7

• cash budget
• budgeted income statement
• budgeted balance sheet

Question 8

cost terminology

Answer 8

• cost accumulation: the collection of cost data in some organized way by means of an accounting system
• cost object: anything for which a separate measurement of cost is desired
• cost assignment: general term that encompasses:
  • tracing accumulated costs that have a direct relationship to a cost object
  (direct cost)
  • allocating accumulated costs that have an indirect relationship to a cost
  object (indirect cost)

Question 9

costs may be simutaneously

Answer 9

• variable and direct
• variable and indirect
• fixed and direct
• fixed and indirect

Question 10

designing a financial budget

Answer 10

step 1: cash flow

step 2: cash budget

step 3: extended income statement

step 4: budgeted balance sheet

Question 11

step 1: cash flow

Answer 11

• collection from customers and disbursements need to be planned
• liquidity needs to be ensured throughout the whole period
• an increase in cash balance over the period does not ensure liquidity since all cash outflows may occur at the beginning period while inflows occur towards the end
• sub-periods need to be considered

Question 12

step 2: cash budget

Answer 12

financing needs are determined for each sub-period

   cash balance, beginning
\+ collections from customers
\+ disbursements
\+ minimum cash balanced desired
= cash deficiency (or excess)
\+ borrowing
- repayment
- interest
= cash balance, ending

Question 13

step 3: extended income statement

Answer 13

effects from financing and taxes are accounted for:

operating income
- interest expense
- income taxes
= net income