module 8

Question 1

strategic planning

Answer 1

long-term planning (3-5 years)

• typically carried out by senior management
• concerns broader issues –> business takeovers, expansion plans, etc.

Question 2

budgeting

Answer 2

• focuses on short term (typically looking forward to 1 year)
• sets the financial framework of the time period
• how an entity is going to achieve its goals

Question 3

budget

Answer 3

QUANTITATIVE expression of an entity’s plans

Question 4

how can budgeting assist decision making?

Answer 4

• putting into operation longer term plans
• Assessing the feasibility of strategic plans
• setting targets for managers
• identifying resource constraints in budget period
• identifying periods of expected cash shortages and excess cash holdings (working capital management)
• assisting with short-term planning decisions, such as capacity utilisation

Question 5

master budget

Answer 5

a SET of interrelated budgets (individual operating budgets) for a future period which provides a framework for viewing relevant budgets of an entity

Question 6

in order for the master budget to be used as a control tool, it needs to…

Answer 6

mirror the entity’s chart of accounts

Question 7

sales budget shows…

Answer 7

1. Sales revenue per period—the amount of inventory (retail and manufacturing) or employee time (service) to be sold each period, converted into dollars
2. Cash collections from sales (and when)

Question 8

total revenue

Answer 8

BP(BQ)

Question 9

purchase budget shows…

Answer 9

purchases (in units and dollars) required each period to forecast how many units of inventory to purchase

Question 10

2 purposes for purchase budget

Answer 10

1. meet “expected” sales target (formulated by sales budget)

2. keep inventory at desired levels.

Question 11

selling expenses + associated cash payments budget examples

Answer 11

• delivery costs

- advertisements

Question 12

general and administrative expenses and associated cash payments budget example

Answer 12

• salaries

- general overheads

Question 13

cash budget

Answer 13

statement of expected future cash receipts and payments

- data comes from PREVIOUSLY PREPARED budgets (such as sales budget)

Question 14

how does the cash budget assist in decision making?

Answer 14

• documenting timing of all cash receipts and payments
• helping to identify periods of expected cash shortages and surpluses
• identifying suitable times for purchase of non-current assets
• assisting with planning and use of borrowed funds
• providing a framework for ‘what if’ analysis

Question 15

projected income statement

Answer 15

summarises a business’ expected revenues and expenses for the budget period

Question 16

3 ways to calculate COGS

Answer 16

1. Cost of Opening Inventory + Cost of Purchase – Cost of Closing Inventory
2. Purchase price per unit * Total sales units
3. percentage of sales rev ex: COGS = 55% of sales rev

Question 17

net cash flow (cash budget)

Answer 17

cash receipts - total payments

Question 18

suggestions for improving cash flow

Answer 18

• selling excess non-current assets
• reducing unnecessary stock levels
• seeking ways to improve sales or fees

Question 19

ways cash outflow can be reduced

Answer 19

• keeping inventory levels to only what is required
• cutting expenses by identifying areas of waste, duplication or inefficiency
• reducing carbon footprint

Question 20

the style of budgeting processes is…

Answer 20

the extent of participation by managers in the annual budget process

Question 21

behavioural aspect of budgeting explores 2 key areas:

Answer 21

1. the “style” of budgeting process

2. the impact of budget targets on manager’s motivation, behaviour & decision making

Question 22

authoritarian style of budgeting

Answer 22

• top-down approach
• senior management are the ones that set the target/budget for unit managers
• ^ unit managers have no say

Question 23

participative style of budgeting

Answer 23

• bottom-up approach
• targets and budgets are arrived at by a process of discussion and negotiation between senior management and unit managers
• share information (lower level management has more info + contact on customers)

Question 24

limitation of bottom-up approach

Answer 24

• budgetary slack (setting targets too low –> meaningless)

Question 25

strength of bottom-up approach

Answer 25

• coordination
• motivation
• better communication + sharing information

Question 26

limitation of top-down approach

Answer 26

• no feedback
• closed perspective
• lack of motivation from employees and lack of communication

Question 27

strength of top-down approach

Answer 27

• efficient
• very structured
• goals are set + organised

Question 28

accounts receivable in cash budget

Answer 28

opening balance of the month (closing balance of last month)

Question 29

problems with cash flow despite having a healthy margin of safety

Answer 29

1. margin of safety = accrual accounting
   (cash is recorded based on the event, not when the time is paid) –> there could be records that cash has been paid when it hasn’t, which could lead to cash shortages
2. cash balance takes into account of investing + finance activities (marginal safety does not)

Question 30

problems asking for the AR at the end of the month with different timings of cash collections for each month

Answer 30

(1 month ago sales * amount% that is collected in the second month) + (current month * [amount% that is collected in the following month + amount% that is collected in the second month])

Question 31

Which budget is the basis for all of the operating budgets?

Answer 31

sales budget

Question 32

Which of the following is an interrelated report associated with a master budget?

Answer 32

General and administrative expenses budget.

Question 33

purchase in units

Answer 33

sales in units + ending inventory - beginning inventory

Question 34

accounts payable equation

Answer 34

• finding the purchase amount

purchase = COGS + EI - BI