Chapter 17 Exercise Review Flashcards
Suggest two actions the owner may take to plan for the deficit in bank balance
Reduce payments, such as drawings
Reduce or defer the loan repayment
Pay only 6 months’ rent in advance
Defer or purchase the shop fittings on credit
Increase inflows by making a capital contribution
Use a loan to purchase the fittings
Organise a bank overdraft
Suggest two actions the owner might take to address any problems by deficit in one of the three months
Defer the purchase of the vehicle until March 2016
Bring the capital contribution forward to February 2016
Use credit/a loan to purchase the vehicle
Organise a bank overdraft
Explain one benefit of preparing a budgeted cash flow statement for consecutive periods
Monthly trends can be identified, allowing the owner to plan the best time to undertake a cash activity (such as the purchase of an NCA).
Suggest one reason for the trend in Sales from August to December
Start of summer sports (such as cricket, tennis)
Christmas
Explain one reason why the budgeted Net Profit and Budgeted Net Increase in cash position are likely to be different for December
Credit sales ($12 000) is budgeted to be higher than Receipts from debtors ($11 770), meaning cash inflows and budgeted Net Cash Flows from Operations will increase by more than revenues and budgeted Net Profit.
Explain how the preparation of budgeted Cash Flow Statement can assist planning
It allows the owner to prepare in advance for a budgeted increase or decrease in cash.
A budgeted decrease in cash might require the organisation of an overdraft or other finance, or the deferment of certain payments.
A budgeted increase in cash might allow for the repayment of loans, purchase of assets, or extra drawings.
Explain your treatment of depreciation of equipment (in relation to cash flow statement)
Excluded as it is does not involve a cash flow. It is a non-cash expense involving the allocation of the cost of a non-current asset over its useful life
Explain how cash drawings would be reported in the budgeted cash flow statement
As a Financing Outflow, as it is a cash outflow related to a change in the firm’s financial structure
Explain how the preparation of a budgeted cash flow statement can assist decision making
It can identify problem areas in the management of cash, so that corrective action can be taken. (This is particularly the case when it is used in conjunction with a Cash Variance Report.)
Explain two reasons why the budgeted Net Increase in Cash Position is much larger than the budgeted Net Profit for May
Capital contribution / Loan – ZNA are both cash inflows, which contribute to the Net Increase in Cash Position but are not revenues and so have no effect on Net Profit.
Depreciation – shelving / Stock loss are both expenses, which decrease Net Profit but are not cash flows and so do not affect the Net Increase in Cash Position.
Explain how a Budgeted Balance Sheet can assist planning
It predicts assets and liabilities at some point in the future, so the owner can:
- Begin preparing for the replacement of non-current assets, or the repayment of loans.
- Forecast liquidity by calculating budgeted Working Capital Ratio/Quick Asset Ratio
- Forecast stability by calculating budgeted Debt Ratio.
Explain two reasons why the net cash flows from operations is budgeted to be greater than the Net profit for the reporting period
Receipts from Debtors ($19 360) is a cash inflow, which will increase Net Cash Flows from Operations more than Credit Sales ($18 000) revenue will increase Net Profit.
Cost of Sales ($20 000) is an expense, which will decrease Net Profit more than cash Payments to Creditors ($9 405) will decrease Net Cash Flows from Operations.
Explain the importance of budgeted sales in the budgeting process
Budgeted Sales is a key revenue in the Budgeted Income Statement and cash inflow in the Budgeted Cash Flow Statement.
Further, a number of other budgeted items vary directly with the level of sales, such as purchases of stock/Cost of Sales/Wages/Receipts from Debtors
Explain one benefit of preparing a cash budget variance report
It aids decision-making by providing a benchmark for assessment of actual cash performance so that problems can be identified and corrective action taken.
OR
It aids planning by providing a basis for the formulation of the next Budgeted Cash Flow Statement.
State whether the variance in payments to creditors is favorable or unfavorable. Justify
Unfavourable
Actual Payments to Creditors is greater than budgeted, meaning the cash balance will decrease by more than expected.
Suggest one possible reason for the capital contribution
To prevent the business from exceeding its overdraft limit
Explain the effect on the actual closing bank balance of the variances in investing activities
The cash balance will be $14 000 lower than expected, because the equipment was sold for $2 000 less than budgeted, and the purchase of the shelving for $12 000 was not expected at all.
Given that credit sales decreased, suggest one possible reason for the variance in Receipts from Debtors (more than expected)
Decreased bad debts
Faster paying debtors
Better debtor management
Explain the importance of variance analysis in the budgeting process
It is a means of checking the performance of the business, and the accuracy of the budgets, before decisions are made and budgets are prepared for the next period.
Explain why the owner should be concerned about the firms profit performance when compared to the budget
Without the higher than expected profit on disposal of the vehicle, the profit variance would have been unfavourable, and such a profit is unlikely to happen every period.
Suggest two possible reasons for the variance in Sales Returns (Favourable)
Lower sales
Better quality/more suitable stock
Suggest one possible reason for the variance in Interest Expense (favourable)
Lower interest rate
Repaid more of the loan principal than expected
Explain one advantage of preparing budgets more than once a year
Variance reports can be prepared more frequently, allowing problems to be identified earlier so that more timely corrective action can be taken.
OR
More frequent budgets are likely to be more accurate, and thus more useful as a benchmark for comparison with actual figures.
Explain how a Budgeted Balance Sheet can be sued to assist planning
It details the expected carrying value of non-current assets at some time in the future so the owner can prepare for their replacement (by investigating options / prices).
It can be used to plan for the repayment of loans and to set a level for Drawings (must be done in conjunction with the Budgeted Cash Flow Statement).
Explain how the preparation of a Budgeted Income Statement could assist with planning to achieve an improved Gross Profit
It allows the owner to assess the adequacy of the firm’s mark-up, so that preparations can be made to access a cheaper supplier/raise or lower selling prices.
Explain one benefit of preparing a Budgeted Balance Sheet
It predicts assets and liabilities at some point in the future, so the owner can:
- Begin preparing for the replacement of non-current assets, or the repayment of loans
- Forecast liquidity by calculating budgeted Working Capital Ratio/Quick Asset Ratio
- Forecast stability by calculating budgeted Debt Ratio.
