Accounting and Finance

Question 1

What is the budgeting process?

Answer 1

Establishing the aims and objectives of the business.
Set production, marketing and financial budgets.
Next the budget should be further broken down.
Procedures for monitoring budgets should be established.
Any variance from predicted budgets should be examined and reacted too.
The experience and knowledge gained from setting one period’s budgets, should be applied to the setting of the following period’s budgets.

Question 2

What are the benefits of budgeting?

Answer 2

Improved management control of the organisation.
Improved financial control.
Allows managers to be aware of their responsibilities.
Makes sure that resources are used where most effective.
Can motivate managers.
Can improve communication systems with organisations.

Question 3

Problems with budgeting

Answer 3

Those excluded from the budgeting process, may not be committed to the budgets and may feel demotivated.
If budgets are inflexible then changes in the market or other conditions may not be met by appropriate changes in the budget.
An effective budget can only be based on good quality information.

Question 4

What is a historical budget?

Answer 4

It’s where you base the budgets on last years spending, plus an amount for inflation.

Question 5

What is objective based budgeting?

Answer 5

It is when budgets are based what the firm is trying to achieve.

Question 6

What is zero budgeting?

Answer 6

This involves managers starting with a clean sheet; they have to justify all expenditure made.

Question 7

What is competitor based budgeting?

Answer 7

Often used when setting advertising budgets, when matching competitor spends is needed to maintain market share.

Question 8

What is funding based budgeting?

Answer 8

A budget is directly related to income, so a staff budget may be 20% of sales.

Question 9

What is calculation of variances?

Answer 9

The actual figure must be compared with the budgeted figure and the difference shown as either favourable or adverse. These variances should then be totalled to gain an overall favourable or adverse figure.

Question 10

What is a favourable variance?

Answer 10

A favourable variance occurs when expenditure is less than expected or revenues are higher than expected.

Question 11

What is an adverse variance?

Answer 11

An adverse variance occurs when expenditure are higher than expected or revenues are lower than expected.

Question 12

What are budget holders?

Answer 12

They are people responsible for spending or generating the money for each budget.

Question 13

What are master budgets?

Answer 13

These help businesses understand their cash flow situation as a whole, and the department and activity budgets help local managers control and coordinate their work.

Question 14

What are the two types of cash flow statement?

Answer 14

Actual cash flow statements

A forecast cash flow statements

Question 15

What is revenue?

Answer 15

The income received by a business for goods sold or services provided.

Question 16

What are cash sales?

Answer 16

These occur when sales are made and payment is immediate.

Question 17

What are debtor payments?

Answer 17

Many businesses sell on credit; payment for the goods may not be due for 30 days or more.

Question 18

What is total revenue?

Answer 18

All the payments received by a business within the time period.

Question 19

Benefits of a cash flow forecast.

Answer 19

An accurate forecast will allow a firm to get a clear idea of how the business is doing- and how it is likely to perform in the future.
It allows managers to be able to specify times when the business may need additional funding, such as when cash flow exceeds inflow.
Inconsistencies in performance can be identified, predicted and remedied.
Changes in inflows and outflows resulting from major new investment can be accurately assessed.

Question 20

Limitations of cash flow

Answer 20

Drawing up of cash flow forecasts takes management time that might be more productively used elsewhere in the business.
Cash flow forecasts need to be accurate to have value- is it just a guess?
The longer the time scale the less accurate the forecast is likely to be.
Inflation can impact on the accuracy of figures.
Cash flow forecast needs to be monitored to have ongoing usefulness.

Question 21

How do you work out the receipts?

Answer 21

Net cash flow + total payments

Question 22

How do you work out total payments

Answer 22

Add up all the payments
OR
Receipts - net cash flow

Question 23

How do you work out net cash flow?

Answer 23

Receipts - net cash flow
OR
opening balance - closing balance

Question 24

How do you work out the opening balance?

Answer 24

Previous months closing balance

Question 25

How do we work out the closing balance?

Answer 25

Opening balance + net cash flow

Question 26

Profit and loss accounts

How do you work out cost of sales?

Answer 26

Opening stock + purchases - closing balance = cost of sales

Question 27

Profit and loss accounts

How do you work out net profit?

Answer 27

Gross profit - total expenses = net profit

Question 28

What is a balance sheet?

Answer 28

Balance sheets are usually drawn up at a certain time of year usually at the end of the financial year, on this balance sheet we see the buildings the business owns, the equipment it uses, the stock it holds, how much money the business is owed and how much it owes. We also see where the money came from to buy all the assets of the business, this funding is the ‘balancing’ part of the balance sheet.

Question 29

What are fixed assets?

Answer 29

Fixed assets of a business are things the business owns which have a long term role in the operation of the business. The business would not normally sell fixed assets unless they were being replaced e.g. Machines

Question 30

What is operating profit?

Answer 30

A profit from business operations (gross profit - operating expenses) before deduction of interest and taxes

Question 31

What are liabilities?

Answer 31

They are the opposite of assets, they’re what the business owes.

Question 32

What is retained profit?

Answer 32

This is the profit kept in the company rather than paid out to shareholders as a dividend

Question 33

What are total assets employed?

Answer 33

This gives us the net value of all the assets currently being used by the business.

Question 34

What is a financing figure?

Answer 34

This tells us where the money has come from to finance the business.

Question 35

What is owners capital?

Answer 35

Money that the owner of the business has put in the business, it has come from their own resources.

Question 36

Why prepare accounts?

Answer 36

Legal requirements
Tax requirements
To accurately calculate profit
To estimate the possibility of growth
If they're seeking a loan
If they require credit

Question 37

What are fixed costs?

Answer 37

They will stay the same whatever the level of output is.

Question 38

What are variable costs?

Answer 38

Variable costs vary in direct proportion to the output; as output increases, variable costs increase.

Question 39

What are semi-variable costs?

Answer 39

These are made up of two components- such cost vary with output or increased business activity, but not in direct proportion to it. E.g. A firms electricity bill may include elements that are fixed (such as lighting that is required regardless of the level of production) and elements that are variable (such as electricity used by machinery directly involved in manufacturing)

Question 40

How do we work out the fixed costs?

Answer 40

Add up all the fixed costs per month the. Draw a straight line on that number e.g. £1000

Question 41

How do you work out variable costs?

Answer 41

Add up all the variable costs the. Times it by the middle point on the bottom axis. E.g. £6x300

Question 42

How do you work out total costs?

Answer 42

Start at the 0 point on the axis on the fixed costs line, then at the middle point add the two costs together e.g. £1000 + £1800 =£2800

Question 43

How do you work out revenue?

Answer 43

Number of sales x selling price per unit e.g. 300 x £10=3000

Question 44

Where’s the break even point?

Answer 44

The point where the revenue line cuts the total costs line is the break even point

Question 45

What is contribution?

Answer 45

Because each item produced or sold results in the firm spending money on variable costs, not all of the revenue received from selling that item can be profit. The difference between the revenue or selling price of an item, and the direct cost of producing that item is known as contribution. The difference is known as contribution because it is the amount each item sold contributes towards paying the other costs of the business I.e. The fixed costs

Question 46

What if analysis

Answer 46

What if analysis basically involves asking questions of the type ‘what if the price we sell at changes?’ And is used everyday by those involved in management accounts analysis and decision making.

Question 47

Calculating profit

Answer 47

Pick a point on the output/sales line and draw a vertical line, it has to go through the total costs line and he revenue line. If the revenue line is above the total costs line they are making a profit. As the vertical line meets the total costs line we draw a horizontal line. Then measure the gap between them.

Question 48

Calculating loss

Answer 48

The same process but when the total costs line is above the revenue line

Question 49

Margin of safety

Answer 49

The higher, the better
Margin of safety is the difference between the output level and break even output level. E.g. Output level-600 and the break even output level is 450 so the margin of safety is 150

Question 50

What is a budget?

Answer 50

A budget is a financial plan of action normally covering a specific time period usually six months to a year. A budget will describe expected levels of expenditure(money spent) and revenues(income) of a business or part of a business.