S2 - cash and flexible budgets

Question 1

what are the reasons to hold cash

Answer 1

transactions motive
Precautionary motive
Speculative motive

Question 2

what is a cash budget

Answer 2

good cash management requires good planning
Need to know when to borrow or invest
Allows for forward planning
Identify cash surplus and deficit

Question 3

what are the reasons for a cash budget

Answer 3

monitor cashflow and financing requirements
Control over income and expenditure streams in line with budget
Monthly management reporting of variances
Planning for significant cashflows
Coordinate levels of working capital around cashflow for company liquidity

Question 4

what is a fixed budget

Answer 4

master budget prepared prior to the financial year is said to be the fixed budget
No plans are made for differing levels of production or sales
When actual results are known, no changes are made to the fixed budget to represent new targets to be achieved for the new level of activity

Question 5

what is a flexible budget

Answer 5

recognises different cost behaviour patterns and is designed to change as volume of output changes
Uses principles of marginal costing
May be used to support the fixed budget as a contingency
May be used at the end of the control period to establish what results should have been under the circumstances - yardstick for comparison
Comparing actual with fixed budget would be misleading as businesses are dynamic so we flex the fixed budget to the level of activity actually achieved

Question 6

what is budgetary control

Answer 6

practice of establishing budgets for which individual managers will have responsibility
Control is exercised by comparing actual results with expected
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