Budgeting (Chapter 11) [P2] Flashcards
Definition of a cash budget
Forecast of the cash position of a business over a future period and sets out expected cash receipts and cash payments over budget period
Definition of a projected income statement
It is used to predict the amount of profit that a business will generate over a certain period and sets out the expected income to be generated and expenses to be incurred for the budget period
Importance of the cash budget
By analyzing the cash budget, the business can figure out if there is enough cash to:
- meet short-term commitments (paying creditors, repaying loans)
- purchase stock
- purchase additional fixed assets
What is a cash surplus in a budget?
(An increase in cash) arises when the expected cash receipts are greater than expected cash payments for budget period
What is a cash shortfall in a budget?
(decrease in cash) is recorded if expected cash payments exceed expected cash receipts for budget period
Cash receipts in a cash budget
- Cash sales
- Receipts from debtors
- Investment income (interest)
- Rent income received
- Asset disposal (for cash)
- Loans received
- Matured investments
Cash payments in a cash budget
- Cash purchases of stock
- Payments to creditors
- Operating expenses paid (insurance)
- Cash drawings by owner
- Cash purchases of fixed assets
- Loan repayments
- Investments (fixed deposits)
What does the projected income statement include
- All income that is expected to be earned during the budget period, whether received or not
- All expenses that are expected to be incurred during the budget period, whether paid or not
Importance of projected income statement
By analyzing the projected income statement, the business can figure out if:
- business will be profitable over budget period
- projected sales figures are satisfactory
- expenses need to be cut
- they can afford to hire additional staff, run an advertising campaign, etc
How to overcome ethical challenges associated with budgeting
- People involved in the budget process need to demonstrate integrity, objectivity, professionalism
- Senior management needs to guard against dangers of relying too heavily on budget targets to evaluate performance
- Senior management needs to be careful to create budgets that are realistic and attainable
- Employees need to adhere to principles of ethics and professional conduct and thus resist any temptation to protect their own interests when creating or working to a budget
Risks associated with the budgeting process
- Preparation of budgets
- Implementation of budgets
- Compliance with budgets
Internal control of the budget process
- written policies and procedures are established and maintained for budgeting
- budgets are prepared and revised in accordance with these policies and procedures
- only specifically authorized personnel are involved in budget preparation
- measures are taken to ensure the accuracy, integrity, reliability of budget information
- measures are taken to ensure that budgets are prepared timeously
- budgets should receive final approval from an appropriately high level of management
Internal audit of the budgeting process
- performing a risk-based assessment of the budget related activities to identify the areas of significant risk
- planning detail and scope of work to be performed during fieldwork phase, giving priority to those areas of greatest risk
- performing fieldwork to investigate measures taken to control risks associated with budgeting and to assess whether these risks are being adequately managed and controlled
- reporting to management on adequacy of risk management and internal control systems relating to VAT and providing recommendations for improvement
- establishing follow-up process to monitor any corrective action taken by management
