3.5.2.1 Analysing Financial Performance: How to Construct and Analyse Budgets and Cash Flow Forecasts.

Question 1

Define a budget.

Answer 1

An agreed plan establishing, in numerical or financial terms, the policy to be pursued and the anticipated outcomes of that policy.

Question 2

Define budgeting.

Answer 2

The process involved in setting a budget.

Question 3

Outline the three types of a budget.

Answer 3

Income budget.

Expenditure budget.

Profit budget.

Question 4

Define an income budget.

Answer 4

Shows the agreed, planned income of a business over a period of time.

Question 5

What should income budgets be linked to?

Answer 5

The marketing targets of a business.

Question 6

Define an expenditure budget.

Answer 6

Shows the agreed, planned expenditure of a business over a period of time.

Question 7

What are examples costs that may be found in an expenditure budget?

Answer 7

Raw materials/ components.

Labour etc.

Question 8

What is useful for a new business to do, when using expenditure budgets?

Answer 8

Create a separate expenditure budget aka a capital budget.

Question 9

Define a capital budget.

Answer 9

Shows the items that must be budgeted “in these circumstances”.

Question 10

What are the items of expenditure included in a capital budget?

Answer 10

Construction costs.
premises.
Furniture and office equipment etc.

Question 11

Why are capital budgets helpful?

Answer 11

Helps estimate the level of risk involved in a new venture.

Question 12

Define a profit budget.

Answer 12

Shows the agreed, planned profit of a business over a period of time.

Question 13

What do budgets usually include?

Answer 13

Usually stated in terms of financial targets - also include targets for income, output, sales volume and profit.

Question 14

What should budgets incorporate?

Answer 14

An element of flexibility.

Question 15

What is step one to constructing a budget?

Answer 15

Set objectives.

Question 16

What is step two to constructing a budget?

Answer 16

Carry out market research - discover sales volume and benchmark market price for products.

Question 17

What is step three to constructing a budget?

Answer 17

Carry out research into cost, based on the expected sales volume.

Question 18

What is stage four to constructing a budget?

Answer 18

Complete the sales (income budget).

Question 19

What is stage five to constructing a budget?

Answer 19

Construct the expenditure budget.

Question 20

What is stage six to constructing a budget?

Answer 20

Combine 4 and five - create an overall profit budget.

Question 21

What is stage seven to constructing a budget?

Answer 21

Draw up divisional or departmental budgets?

Question 22

What is stage 8 to constructing a budget?

Answer 22

Summarise the detailed budgets in the master budget.