Budgeting

Question 1

Budget

Answer 1

A plan of future business activities expressed in money terms.

Question 2

Budget advantages

Answer 2

1. Provides a set of objectives to be met.
2. Helps identify short-term potential problems.
3. Helps co-ordinate business activities.
4. Can motivate employees to achieve the objectives set.
5. Helps a business evaluate its performance.

Question 3

Master budget

Answer 3

The full set of budgets prepared by a business for a period of time.

Question 4

Operating budgets

Answer 4

Set of budgets that provide the information required to prepare a budgeted income statement.

Question 5

Financial budget

Answer 5

Remaining budgets prepared by a business, includes cash budget, budgeted balance sheet and a capital expenditure budget.

Question 6

Capital expenditure budget

Answer 6

Set out the type and cost of the non-current assets that must be purchased in order to meet the objectives of the business for a given future period of time.

Question 7

Cash budget

Answer 7

Shows the current cash balance. the future cash inflows and outflows of a business and the expected cash balance at the end of a budget period.
Records when cash transactions take place, that is whenever there is cash movement.

Question 8

Budgeted income statement

Answer 8

Sets out the expected income, expenses and profit or loss for a future period of time.

Question 9

Cash budget performance report

Answer 9

Consists of columns showing the budgeted and actual cash receipts and payments and a column showing the difference between these budgeted and actual figures.

Question 10

Budgeted income statement performance report

Answer 10

Sets out the expected and actual income, expenses and profit or loss for a future period of time.

Question 11

accrual accounting

Answer 11

transactions occur, even if there is no cash movement taking place.

Question 12

Explain the purpose of a cash budget performance report.

Answer 12

At the end of the budgeted period it is important to match the actual outcomes against the budgeted forecast to identify and quantify differences, both positive and negative. The variances are examined to evaluate the quality of the planning and to assist in shaping actions and future planning. This ensures that adequate cash reserves are available to meet the business’ needs, particularly for significant investments such as equipment purchases.

Question 13

Describe two possible causes of an unfavourable variance in a business’ growth profit.

Answer 13

• An increase in the cost of sales because of an increase in purchases, freight costs or import duties, without an accompanying increase in sales.
• A decrease in the volume of sales or a decrease in the sales price, without an accompanying decrease in the cost of sales.

Question 14

Explain the importance of appropriate management of accounts receivable for a business.

Answer 14

It is vital that a business collects cash from debtors quickly to:
- avoid bad debts
- maintain a healthy level of liquidity
Not extending credit to customers could adversely affect customer loyalty and potentially loss of sales.

Question 15

State the purpose and function of a performance report.

Answer 15

Purpose: to compare the actual performance against the budgeted performance for a period of time. The differences (variances) are determined.

Function: allows managers to compare and contrast actual with budgeted performance to evaluate the quality of current business plans and assist in determining future plans and actions.

Question 16

Comment on the management of accounts receivable by this company.

Answer 16

Collections from debtors are good with 80% of credit sales being collected in the month of sale and another 19% in the month after. This reflects internal control policies over debtor collection and is a favourable sign for the business.
There is still room for improvement however with bad debts at 1%. Internal control should include appropriate credit checks so that this percentage may reduce.

Question 17

State three reasons why cash is important to business viability.

Answer 17

• Allows payment of debt commitments as they fall due.
• Allows a business to continue as a going concern (avoids liquidation).
• Allows assets to be acquired to earn income.
• Provide a return to owners.

Question 18

Describe three ways that management can appropriately manage cash.

Answer 18

• Cash payments should be authorised by a senior person.
• Employees responsible for handling cash should not be responsible for recording cash entries.
• Cash should be stored in a secure location and should be banked daily.
• Staff should be regularly trained in appropriate cash handling controls.

Question 19

What are performance reports and how would these be used to benefit the firm.

Answer 19

Are reports produced at the end of the budget period in which actual performance, cash or profit, will be compared with the budget for each budget item and variations quantified.
Reports can help identify problem areas to enable improvements to be made in the future.
They may highlight errors that have been made in budgeting so that future budgets can be more accurate.
They may be used to evaluate management performance.

Question 20

State three corrective actions that may be needed to improve the company’s profit performance.

Answer 20

• Reviewing the most competitive prices for purchasing stock in order to reduce the cost of sales.
• Investigating why sales returns have increased and determine if there is a link to the quality of stock purchased to prevent any further increases inreturns.
• Reviewing wages and salaries by ensuring staff are working efficiently and reduce staff size if there are any inefficiencies by reducing working hours.

Question 21

Master budget nature and importance

Answer 21

The master budget plans, co-ordinates and controls all activities of a business. It includes a budget/planned income statement, cash flow, capital expenditure and statement of financial position that are all interrelated.
It shows the management’s operating plans for the upcoming periods, and thus forces all levels of management to think ahead, anticipate results and take action to remedy any poor results.