Budgeting

Question 1

What is a budget

Answer 1

a plan of future business activities expressed in money terms

Question 2

3 Advantages of a budget

Answer 2

• A budget provides a business with a set of objectives to be met
• A budget helps to identify potential problems such as, a likely future shortage of cash
• A budget helps co-ordinate business activities
  
  • All sections of a business must work together to implement the budget
• A budget helps a business evaluate its performance
  
  • Actual results can be compared to expected and poor performance areas can be identified

Question 3

Disadvantage of a budget

Answer 3

It is time consuming

Question 4

Master Budget Nature and 3 Importances

Answer 4

Nature

• A set of budgets prepared by management for a defined period to plan for future business activities
• Purpose is to plan future events, co-ordinate resources and control expenditure; all in monetary terms

Importance

• Provide guidelines for spending to meet goals
• Motivates employees to reach targets
• Identify potential problem areas
• Evaluate performance and previous targets set
• Co-ordinate resources needed

Question 5

Operating Budgets definition + 3 Examples

Answer 5

• Set of budgets that provide info required to prepare a budgeted income statement. Examples include
  
  • Sales Budget
  • Production Budget
  • Raw Materials Budget
  • Direct labour cost budget
  • Cost of Sales budget
  • Other expenses budget
  • Budgeted income statement

Question 6

Financial Budget Definition + 3 Examples

Answer 6

• A set of budgets to plan and assess financial stability and liquidity levels. Examples include:
  
  • Cash budget
  • Budgeted balance sheet
  • Capital expenditure budget

Question 7

What are Cash Receipts and 2 ways in which they can be recieved

Answer 7

• A cash receipt is an inflow of cash
• Cash inflow may be from an income transaction such as
  
  • cash sale of goods
  • cash fees for services
• Cash inflow may also be from non-income transactions such as
  
  • cash received from a loan
  • cash capital contributed by the owner

Question 8

What is cash payment and give 2 examples

Answer 8

• A cash payment is an outlay of cash
• Cash payment may be for an expense such as
  
  • Wages
  • Purchases of non-current assets (land)
  • To repay a liability
  • As drawings of the owner

Question 9

2 Functions of Cash Budget

Answer 9

Function

• To estimate the cash balance for a future set period
• To outline the estimated cash inflows and cash outflows

Purpose

• Warn of impending cash shortages
• Identify idle cash for reinvestment
• Control cash expenditures
• Assess liquidity levels

Question 10

2 Functions of a Budgeted Income Statement

Answer 10

Function

• To estimate financial performance for a future set period
• To outline all income to be earned and expenses to be incurred

Question 11

1 Function of a Perfomance Report

Answer 11

Function

• Compares budgeted with actual performances to determine variances

Question 12

3 Purposes of a Cash Budget

Answer 12

• Warn of impending cash shortages
• Identify idle cash for reinvestment
• Control cash expenditures
• Assess liquidity levels

Question 13

3 Purposes of an Income Budget

Answer 13

Purpose

• Assess profitability for investment returns to owners and investors
• To acquire internal or external finance
• To assess credit worthiness of a particular business

Question 14

3 Purposes of a Perfomance Report

Answer 14

Purpose

• To determine favourable and unfavourable variances for further analysis
• To determine area for control and improvement
• To reassess future budgeting forecasts