Topic 7: Cash Budgets and Bank Reconcilations

Question 1

What source of finance is linked to profitability? And Why?

Answer 1

Additional Capital

Owner gets good return on investment —> should continue to invest further into the business

Question 2

What source of finance is linked to liquidity? And Why?

Answer 2

Leasing

Good Cashflow —> Likely to cover leasing payments

Question 3

What source of finance is linked to solvency? And Why?

Answer 3

Loans

Own majority of assets —> Low Risk —> Can afford to take on a loan

Question 4

What is leasing?

Answer 4

Paying smaller amounts for control and use of an asset

Question 5

What are the advantages of leasing?

Answer 5

• Smaller payment amounts

- No negative affect on gearing

Question 6

What are the disadvantages of Leasing?

Answer 6

• Don’t own asset (can’t claim depreciation)
• No tax benefit
• Can be an expensive source of finance

Question 7

What is additional capital?

Answer 7

Owner contributing their own money into the business

Question 8

What are the advantages of Add. Capital?

Answer 8

• Don’t need to pay back money (interest free)

- Positive affect on gearing

Question 9

What are the disadvantages of Add. Capital?

Answer 9

• Owner may not have money to invest

- Will reduce current return on equity ratio

Question 10

What are the advantages of loans?

Answer 10

• Improves cashflow

- Loan can match life of asset (minimise interest repaid)

Question 11

What are the disadvantages of loans?

Answer 11

• Affects solvency of business (negative effect on gearing)

- Interest rates may increase

Question 12

What is the purpose of a cash budget?

Answer 12

Acts as a money plan for the future to indicate the business future cash position, helping to control cash.

Question 13

What are the problems associated with too much idle cash?

Answer 13

• Slows the business down

- Idle cash can be used for more worthwhile revenue earning purposes

Question 14

What is involved in the ‘Forecast’ stage of the budget process?

Answer 14

Using past and present data to determine expected cash receipts and cash payments to make predictions about the future.

Question 15

How is profit different from cash?

Answer 15

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

Question 16

What are examples from a cash budget that show the difference between cash and profit?

Answer 16

Drawings - ONLY impacts cash not profit

Depreciation and Bad debts - ONLY impact profit not cash

Question 17

How is a cash budget used to help control cash?

Answer 17

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.

Question 18

Why is it important for a business to control its cash?

Answer 18

Cash is needed to efficiently run a business, pay bills, trade stock, etc..

Question 19

What are two methods/statements that are used to maintain cash control?

Answer 19

• Statement of cashflows
• Cash budget
• Bank Rec. Statement

Question 20

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?

Answer 20

• Deposits not yet credited to the bank

- Unpresented cheques

Question 21

Why would the bank statement for the business account show a credit balance whereas the business records would show a debit balance?

Answer 21

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

Question 22

What is involved in the ‘Plan’ stage of the budget process?

Answer 22

Using Cash budget, business plans what actions are needed to ensure maximum business return

Question 23

What is involved in the ‘Control’ stage of the budget process?

Answer 23

Budget is used to monitor and track actual business performance

Question 24

What is the purpose of a Bank Reconciliation?

Answer 24

Match OUR cash records with the banks cash records to account for any timing differences in the balances.

Question 25

What are the titles in a Bank Rec. Statement?

Answer 25

Bank Statement Balance
(+) Deposits
(-) Unpresented Cheques
Reconciled Bank Balance