Topic 7: Cash Budgets and Bank Reconcilations Flashcards
What source of finance is linked to profitability? And Why?
Additional Capital
Owner gets good return on investment —> should continue to invest further into the business
What source of finance is linked to liquidity? And Why?
Leasing
Good Cashflow —> Likely to cover leasing payments
What source of finance is linked to solvency? And Why?
Loans
Own majority of assets —> Low Risk —> Can afford to take on a loan
What is leasing?
Paying smaller amounts for control and use of an asset
What are the advantages of leasing?
- Smaller payment amounts
- No negative affect on gearing
What are the disadvantages of Leasing?
- Don’t own asset (can’t claim depreciation)
- No tax benefit
- Can be an expensive source of finance
What is additional capital?
Owner contributing their own money into the business
What are the advantages of Add. Capital?
- Don’t need to pay back money (interest free)
- Positive affect on gearing
What are the disadvantages of Add. Capital?
- Owner may not have money to invest
- Will reduce current return on equity ratio
What are the advantages of loans?
- Improves cashflow
- Loan can match life of asset (minimise interest repaid)
What are the disadvantages of loans?
- Affects solvency of business (negative effect on gearing)
- Interest rates may increase
What is the purpose of a cash budget?
Acts as a money plan for the future to indicate the business future cash position, helping to control cash.
What are the problems associated with too much idle cash?
- Slows the business down
- Idle cash can be used for more worthwhile revenue earning purposes
What is involved in the ‘Forecast’ stage of the budget process?
Using past and present data to determine expected cash receipts and cash payments to make predictions about the future.
How is profit different from cash?
Profit is not the same as cash.
Profit only looks at Revenue and Expenses but cash looks at all aspects of the accounting equation.
Profit also includes non-cash transactions
What are examples from a cash budget that show the difference between cash and profit?
Drawings - ONLY impacts cash not profit
Depreciation and Bad debts - ONLY impact profit not cash
How is a cash budget used to help control cash?
The cash budget can be used to monitor and track business performance by checking the budget figures to the actual figures.
This allows business to determine if there any variations
allowing business to take corrective actions.
Why is it important for a business to control its cash?
Cash is needed to efficiently run a business, pay bills, trade stock, etc..
What are two methods/statements that are used to maintain cash control?
- Statement of cashflows
- Cash budget
- Bank Rec. Statement
What are 2 reasons why the cash at bank figure in the business records would be different from the figure that would appear on the bank statement?
- Deposits not yet credited to the bank
- Unpresented cheques
Why would the bank statement for the business account show a credit balance whereas the business records would show a debit balance?
From Bank’s POV - business is a LIABILITY as bank owes the business money, hence credit balance.
From Business’s POV - Bank is ASSET, hence debit balance
What is involved in the ‘Plan’ stage of the budget process?
Using Cash budget, business plans what actions are needed to ensure maximum business return
What is involved in the ‘Control’ stage of the budget process?
Budget is used to monitor and track actual business performance
What is the purpose of a Bank Reconciliation?
Match OUR cash records with the banks cash records to account for any timing differences in the balances.
What are the titles in a Bank Rec. Statement?
Bank Statement Balance
(+) Deposits
(-) Unpresented Cheques
Reconciled Bank Balance
