Lesson 23/24 - Booklet 3 Revision

Question 2

What is a recommended retail price?

Answer 2

Recommended retail price is a selling price that is recommended by the manufacturer or wholesaler.

Question 3

What is a competitors price?

Answer 3

Competitors price is a price charged by business competing in the same market.

Question 4

What is mark-up percentage?

Answer 4

Mark-up percentage is a way of determining selling prices by adding to the cost price a predetermined profit margin.

Question 5

What is cost-volume-profit (CVP) analysis?

Answer 5

Cost-Volume-Profit (CVP) analysis is a financial management tool used by businesses to assess the relationship between costs, sales volume, and profitability. It helps organizations understand how changes in sales, costs, and pricing affect their profit and break-even point.

Question 6

What is the breakeven point?

Answer 6

The level of sales where total revenue equals total expenses and the business makes neither a profit nor a loss.

Question 7

Variable costs are…

Answer 7

Costs that vary directly with the level of activity.
E.g. materials, electricity, wages, petrol.

Question 8

Fixed costs are…

Answer 8

Costs that do not vary with the level of activity.
E.g. rent, insurance, salaries, internet

Question 9

What is the CVP formula?

Answer 9

Question 10

T/f - Wages are a variable cost.

Answer 10

True - wages are an expense that vary directly with the level of output.

Note: Remember that wages are variable, whilst salaries are a fixed cost as these do not vary with the level of output.

Question 11

A cash budget is…

Answer 11

An accounting report which predicts future cash receipts and payments, determines the expected cash surplus or deficit, and thus estimates the bank balance at the end of the budget period.

Question 12

The structure for the Cash Budget is made up of…

Answer 12

Budgeted cash receipts
Budgeted cash payments
Budgeted cash surplus/deficit
Add Bank Balance at Start
Budgeted Bank Balance at End

Note: The structure is identical to the Statement of Receipts and Payments, just with the word “Budgeted” at the start.

Question 13

How can cash budgets be used as a decision making tool?

Answer 13

Cash budgets serve as a valuable decision-making tool. They help you make informed financial decisions, such as when to make major purchases, hire employees, or negotiate better payment terms with suppliers. By monitoring your cash budget regularly, you can adapt your financial strategies to achieve your goals more effectively.

Question 14

How does a cash budget help a business to plan for a surplus or deficit?

Answer 14

One of the primary goals of a cash budget is to identify potential cash deficits (when payments exceed receipts) or cash surpluses (when receipts exceed expenses). This allows you to plan for these situations, such as arranging for financing during shortages or investing surplus funds wisely.

Question 15

What is the purpose of a cash budget?

Answer 15

A cash budget is a financial tool used by businesses and individuals to plan and manage their cash flows. It helps the business to estimate how much money they’ll receive and spend over a specific period, typically on a monthly or quarterly basis.

Question 16

True or False: Cash budgets only consider cash transactions, excluding non-cash items like Accounts Receivable.

Answer 16

True. Cash budgets focus solely on actual cash movements.

Question 17

True or False: The primary purpose of a cash budget is to calculate net profit.

Answer 17

False. The primary purpose of a cash budget is to forecast and manage cash flows, not to calculate net profit, which is the focus of an income statement.

Question 18

True or False: Cash budgets are typically prepared for very short time periods, like a day or a week.

Answer 18

False. Cash budgets are typically prepared for longer time periods, such as a month or a quarter.

Question 19

True or False: A cash budget helps identify potential cash deficits but not surpluses.

Answer 19

False. A cash budget helps identify both potential cash deficits and surpluses.

Question 20

True or False: If a company’s cash budget shows a surplus, it should consider reinvesting the excess cash back into the business to expand and generate more sales in the future.

Answer 20

True.

Question 21

True or False: A cash budget does not take into account accounts payable, only accounts receivable.

Answer 21

False. A cash budget considers neither accounts receivable (money expected to be received) and accounts payable (money expected to be paid).

Question 22

True or False: A cash budget is a historical document that records past cash flows.

Answer 22

False. A cash budget is a forward-looking report that predicts future cash flows based on projections and estimates.

Question 23

What is a variance report?

Answer 23

An accounting report that compares actual and budgeted figures, highlighting variances so that problems can be identified, and corrective action taken.

Question 24

What are the two terms used to describe differences between the actual and budgeted figures in a variance report?

Answer 24

Variance is the difference between the actual figure and a budgeted figure, expressed as ‘favourable’ or ‘unfavourable’.

Question 25

A favourable variance is considered…

Answer 25

A good result. This will have a beneficial impact on the businesses finances/bank account.

Question 26

An unfavourable variance is considered…

Answer 26

A bad result. This will have a negative impact on the businesses finances/bank account.

Question 27

A variance report compares…

Answer 27

Budgeted figures with actual figures.

Question 28

True or False: A variance report is a financial statement that shows the difference between actual and budgeted amounts.

Answer 28

True. A variance report is used to compare actual financial results with the budgeted or expected amounts.

Question 29

True or False: A favorable variance occurs when actual expenses are higher than budgeted expenses.

Answer 29

False. A favorable variance occurs when actual expenses are lower than budgeted expenses.

Question 30

True or False: Variance reports are primarily used for historical analysis and have no impact on future decision-making.

Answer 30

False. Variance reports are used for both historical analysis and future decision-making, as they help identify areas that require corrective action.

Question 31

True or False: Variance analysis is only applicable to expenses and does not apply to revenue.

Answer 31

False. Variance analysis applies to both expenses and revenue. Positive revenue variances are typically favorable, while negative variances are unfavorable.

Question 32

True or False: An unfavorable variance is always a sign of poor performance or a problem.

Answer 32

False. An unfavorable variance may indicate a problem, but it can also result from changes in external factors beyond a company’s control.

Question 33

True or False: Variance reports are only relevant for large corporations and are not useful for small businesses.

Answer 33

False. Variance reports can be useful for businesses of all sizes to assess financial performance and make improvements.

Question 34

True or False: Variance reports are typically prepared on an annual basis for external reporting purposes.

Answer 34

False. Variance reports can be prepared on various timeframes, including monthly, quarterly, or annually, depending on the needs of the organization.

Question 35

True or False: Variance reports provide a holistic view of financial performance and are the only tool needed for performance evaluation.

Answer 35

False. Variance reports provide valuable insights, but they should be used in conjunction with other financial analysis tools and reports to gain a comprehensive understanding of performance.

Question 36

The template for the budgeted income statement is…

Answer 36

The same as the regular income statement.

Question 37

The purpose of the budgeted income statement is to…

Answer 37

Predict future revenues and expenses in order to predict Net Profit/Loss for the period.

Question 38

The budgeted income statement is an example of a…

Answer 38

Budgeted report

Question 39

What are the 4 steps of the budgeting process?

Answer 39

1. Budgeted reports
2. Actual reports
3. Variance reports
4. Decisions

Question 40

If a business budgets a Net Loss, it should implement strategies to…

Answer 40

Increase budgeted revenues
OR
Decrease budgeted expenses

Question 41

How might a business increase its revenues?

Answer 41

• Increase the use of effective advertising.
• Increase the sale of complementary goods.
• Improve its inventory mix.

Question 42

How might a business reduce its expenses?

Answer 42

• Find cheaper suppliers
• Renegotiate with existing suppliers.
• Buy in bulk to reduce cost per unit.
• Find alternatives

Question 43

How do you calculate Net Profit/Loss?

Answer 43

Revenues - Expenses