Budgets Flashcards
Explain the main differences between a cash budget and a budgeted P/L account.
A Cash Budget is a vital planning tool. Cash is the oxygen of an organisation and its unavailability would inevitably lead to a modification of budgets. Cash flows of both revenue and capital nature are included in a cash budget.
Cash is not equivalent to profits. The profit or loss made by the organisation during a financial period does not reflect its cash flow position.
The P/L account measures profit or loss on an accruals basis. While, the cash budget is on a cash basis. The transactions may not have the same cash inflows and outflows.
An example of this is the purchase of NCA’s. The cash budget shows the purchase of the market value, while the P/L only reflects the depreciation
Why is a cash budget important?
- Cash is the oxygen of an organisation and its survival depends on the availability of cash.
- It is a tool for liquidity analysis.
What is a flexible budget and what is ONE of its purposes?
A flexible budget is designed to flex with the level of activity. Besides being used for control purposes, it is also used at the planning stage to ascertain the costs for different levels of output. It is produced using the marginal costing techniques. More so, a flexible budget is a budgetary control tool.
