Budgeting and Forecasting Flashcards
What is the difference between a budget and a forecast?
A forecast is a prediction of what is likely to happen in the future
A budget is a quantified plan of what the organisation intends should happen in the future
- Budget is based on the forecast
- Forecasts allow informed budgeting decisions
What is the difference between a master budget and a functional budget?
Master budget: A consolidation of all the subsidiary budgets
Functional budgets: Divisional budgets that are combined into the master budget
What is a principal budget factor?
The budgeted factor which limits the activities of an organisation
This is usually sales demand - a company’s production is limited by how much it can sell
Could also be;
* Machine capacity
* Avaliability of raw materials
What is a major disadvantage of the high-low method?
It only takes account of two sets of data - so may not be representitative of all the data avaliable
What are data outliers?
Things that are atypical and unlikely to occur again
Outliers should be deleted from trend analysis so as not to sqew results
What is working capital?
- Net working capital = Inventory + Recievables + cash - payables
- Current assets less Current liabilities
How do you measure the rate of inventory turnover?
Cost of sales ÷ Average inventory
The higher the better
How do you calculate the inventory turnover period?
(Average Invetory ÷ COS ) * 365
Shorter period is better
How do you measure the recievables collection period?
(Average recievables ÷ Annual credit sales revenue) * 365
Shorter period is better
How do you measure the payables payment period?
(Average payables ÷ Annual purchases) * 365
If annual purchases figure not avaliable, COS can be used
Longer period is better
How do you calculate the current ratio?
Current assets ÷ Current liabilities
Higher is better
How do you calculate the quick ratio?
(Current assets - Inventory) ÷ Current liabilities
If you are given inventory turnover ratio as 20 and need inventory turnover days, how would you go about this?
Rate of inventory turnover = COS ÷ Invetory
Inventory turnover in days = (Inventory ÷ COS ) * 365
So if COS ÷ Invetory = 20
Then Inventory ÷ COS = 1 ÷ 20
So (1 ÷ 20) * 365 = inventory turnover das
