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Management accounting techniques > Cash budgetings and resources ratios > Flashcards

Cash budgetings and resources ratios Flashcards

1
Q

What is the purpose of cash budgets ? P307

A
  • Details – bank receipts and payments
  • Monty by month basis -3, 6, or 12
  • Forecasts bank balance
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2
Q

What does a cash budget focus on ? p307

A
  • detail receipts and payments
  • Focus – liquid funds held in a bank
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3
Q

What do managers get from a cash budget ? P307

A
  • Action to take : surplus money/ overdraft to be arranged
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4
Q

What is the main difference between cash and profit? p307

A
  • Cash – money in bank/ physical cash (e.g. cash till)
  • Profit – calculated -surplus of income over expenditure
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5
Q

What does profit take into consideration that cash does not? P307

A
  • Adjustment to accruals and prepayments
  • Non cash items – depreciation and provision of doubtful receivables
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6
Q

What does profit not take into consideration? P307

A
  • Capital expenditure – purchase of non current assets
  • Owners drawings/ dividends
  • Loan raises and repaid
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7
Q

What is the difference between cash and profit when looking at inventory? p308

A
  • More inventory purchased = increase in profit when selling
  • Paying for inventory = reduces money in the bank – money back (ex sales)
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8
Q

What is the difference between cash and profit when considering prepayment of expenses at the year end? P308

A
  • Prepayment = next year = no effect -this year’s profit
  • Bank balance affected
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9
Q

What is the difference between cash and profit when looking into loansre payment? p308

A
  • Profit = no effect
  • Bank balance = reduce
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10
Q

What is the difference between cash and profit when considering drawings/ dividends paid to owners?

A
  • Profit = no effect
  • Bank balance affected
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11
Q

How would the differences work if the business is not making a profit? P308

A
  • Reverse
  • Money flowing in – to extent – receipts from receivables/ payments to payables / sale of nca
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12
Q

What can a business show within receipts/ payments in a cash budget on a spreadsheet ? P309

A
  • Innumerable row items – no set format
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13
Q

What does the summary of the bank account -at the bottom of the cash budget show? P309

A
  • Net cash flow (total receipts – total payments) + bank balance
  • Estimated closing bank balance/ overdraft end of the month.
  • Overdraft = figure in brackets/ minus sign
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14
Q

What does depreciation of non current asset not feature in cash budgets ? P310

A
  • Non-cash expense i.e. no cash flow
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15
Q

Why is the timing of receipts and payments important when preparing a cash budget? p310

A
  • Preparing budgets – purchases, sales, expenses , acquisition/ disposal of nca
  • timing estimated
  • Requirement for capital/ loans / bank overdraft can be anticipated
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16
Q

Why is the timing of receipts from trade receivables important in a cash budget? P311

A
  • Cash flow of business affected – credit financed from seller
  • Cash flow from customers = no delays
  • Delayed payment = credit controller chase systematically
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17
Q

What allowances must be noted for trade receivables when looking at cash budgets? p311

A
  • Prompt payment discount
  • Irrecoverable debts
18
Q

Why is timing of payments to trade payables important in a cash budget? P312

A
  • Delivery refusal / production of whole business
  • financed by seller
  • cash must be available
19
Q

What are payments to supplier linked to ? P312

A
  • Cash budget - records payment to trade payable
  • Master budget - liability - forecast SOFP
20
Q

What allowances must be noted for trade payables when looking at cash budgets? p312

A
  • Prompt payment discount – affect budgeted cash payments
21
Q

What are the main funding methods available for acquiring non -current assets? P314

A
  • Cash purchase
  • Part-exchange
  • Borrowing – loans
  • Borrowing – hire purchase
22
Q

What is the cash purchase way of acquiring a non-current asset? p314

A
  • Sufficient funds
  • standard commercial credit
  • legal title acquired - date of purchase
23
Q

What is the part-exchange way of acquiring a non current asset? P314

A
  • Old asset – traded in – new asset
  • Remaining balance – cash / borrowing
24
Q

What is the borrowing (loans) way of acquiring a non-current asset? P314

A
  • Bank / finance company lends money
  • Ownership of asset for business – security
  • Repayment for interests
    *
25
Q

What must be noted about bank overdrafts and loans? p314

A
  • Not the same as loan
  • Short term facility
  • Not for funding – NCA
26
Q

What is the hire purchase way of acquiring a non-current asset? p315

A
  • Use of NCA = Deposit
  • owned by finance company
  • end of term - business owns
  • medium term agreement
27
Q

What are resources ratios used for? P315

A
  • measures- management control – aspects of business (inventories, payables, receivables)
  • Comparisons – figures previous year/ similar business
28
Q

What is the inventory holding period calculation show ? P315

A
  • Average number of days inventory held
  • Types of goods sold – florist 1 day & jewellary (60/ 90 days)*
29
Q

What is the goal with inventory holding periods? p315

A
  • Short as possible – meet needs of customer
30
Q

What is the formula for inventory holding periods? P315

A

Inventories/ costs of sales * 365

31
Q

What type of business can an inventory holding period only be calculated for? p315

A
  • Company providing goods – not service.
32
Q

What is the formula for trade receivable collection period? P315

A

Trade receivables / revenue * 365

33
Q

What is the trade receivable collection period calculation show ? p315

A
  • Average days – payment received from trade receivables
  • Comparison – year to year or similar businesses – efficiency in collecting money
34
Q

What is the goal with the trade receivable collection period? P316

A
  • Reduction
  • Goal = Receivables’ days shorter than payable days
  • Money received before paid – payables
35
Q

What is the trade payable collection period? p316

A
  • Speed – payment to trade payables
  • Longer than trade receivables
  • Similar figure one year to the next = stable company
36
Q

What is the trade payable formula? P316

A
  • Trade payables / costs of sales * 365
37
Q

What is the working cycle calculation ? P316

A

working capital cycle = inventory days + receivable days - payable days

38
Q

What is the working capital cycle concerned with? p316

A
  • Ratio further use - working capital items:
    1. Inventory
    2. Trade receivables
    3. Trade payables
  • Time between – payment of goods received and collection of cash
  • Shorter time outlay & collection of cash = lower amount of working capital
39
Q

What must be done with a working capital once calculated? P317

A
  • Compared – previous year / similar business
  • Better position = time has reduced
  • Worse position = time has increased *
40
Q

What are the two options available when a business has been set up with too little liquidity? P318

A
  • Additional finance- form of capital
  • Additional debt finance – loans, overdrafts, hire-purchase
  • Smaller businesses – family/ friends help with finance
41
Q

What are the options for improving the cash flow of working capital cycle? p318

A
  • Speedup debt collection
  • slow down - payment suppliers
  • reduce inventory
  • Customer prompt payment discount
  • NCA disposal

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