Cash budgets Flashcards
What is a budget?
A budget can be defined as a detailed, quantitative plan of organisational activities for a specified time period, perhaps monthly, quarterly or yearly, and these plans can relate to both financial and non-financial aspects of performance.
Who are budgets prepared for?
Budgets are usually provided to those people within an organisation who have responsibility for the resources used in undertaking particular activities.
The main audience for the budgets are the managers within the organisation. Budgetary information would not typically be made publicly available.
What is the master budget?
A comprehensive set of interdependent budgets that provides coverage of an organisation’s activities and plans for a specified time period.
What are the two types of budgets which make up the master budget?
- Operating budgets (sales budget, production budgets and various costs budget)
- Financial budgets (cash budget, budgeted income statement, and budgeted balance sheet)
What factors are considered when estimating sales for the sales budget?
- Internal Factors: past sales levels, new products planned, intended pricing policies, and planned advertising and promotional activities.
- External Factors: general economic trends, specific industry trends, local political and social events, expected activities of competitors, and changing tastes and expectations of customers.
What does the cash budget document?
The cash budget documents planned cash receipts and planned cash payments for a particular period of time.
What are the three components that cash payments and cash receipts can be subdivided into?
- Operating activities
- Investing activities
- Financing activities
What are operating activities?
Cash inflows and outflows that arise as a result of an organisation undertaking the main purposes for which it has been established. E.g. receipts and payments relating to the manufacturing and sale of products. Operating activities provide the funding necessary for much of the investment activities of the organisation, as well as for providing payments to owner.
What are investing activities?
The predicted cash flows associated with an organisation’s investment activities, which include cash flows related to the purchase or sale of property, plant and equipment, as well as investments made in other organisations.
What are financing activities?
The budgeted cash flows associated with activities such as borrowing and repaying funds (liabilities) from lenders (banks), as well as predicted contributions and payments to, or withdrawals by, owners.
What are the final three rows labelled in a cash budget?
- Net cash flows for the [time period]
- Opening cash for the [time period]
- Expected closing balance of cash
What expense is not included in the cash budget?
Depreciation because it is a non-cash item.
Why is too much cash not beneficial?
Cash as itself is not a productive asset so leaving cash in a simple deposit accounts earns an organisation very little interest revenue. If an organisation has surplus cash, it should consider putting the cash to more productive uses such as investments.
How do managers’ bonuses work?
Managers are paid bonuses that are linked to organisational targets which should be good for the managers and for the organisation as a whole.
Why should variances between budgeted performance and actual performance be investigated?
Regardless of if the variance is favourable or unfavourable, managers need to know why, and how, to get the process back under control.
