Unit 4 Acc Chapter 17 Review Questions (Budgets) Flashcards
RQ 17.1 // Budgeting
Q1. Define the term ‘budgeting’.
Budgeting is the process of predicting/estimating the financial consequences of future events.
RQ 17.1 // Budgeting Q2. Identify the information that is reported in a: ● Budgeted Cash Flow Statement ● Budgeted Income Statement ● Budgeted Balance Sheet
● Budgeted Cash Flow Statement – shows all expected future cash inflows and cash outflows, the actual bank balance at the start of the period, and the expected bank balance at the end of the period
● Budgeted Income Statement – shows all expected future revenues and expenses, and the expected Gross Profit, adjusted Gross Profit and Net Profit
● Budgeted Balance Sheet – shows all the expected assets, liabilities and owner’s equity at some point in the future.
RQ 17.1 // Budgeting
Q3. State two differences between the information presented in budgeted reports and actual reports.
● Budgeted reports report future events, rather than historical events. They focus on what will happen rather than what has already happened
● Budgets use estimates or predictions rather than actual, verifiable data.
RQ 17.1 // Budgeting
Q4. Explain why it is important to have an accurate estimate of budgeted sales.
It is essential that the preparation of budgeted reports begin with an accurate estimate of budgeted sales. This is because:
● it is the main revenue item in the Budgeted Income Statement and generates significant cash inflows, either as cash sales or receipts from debtors (if credit sales are involved)
● it is crucial in estimating the expenses that vary with the number of units sold (such as Cost of Sales and wages) and their corresponding cash outflows
● the level of sales will affect how much stock is purchased, which will, in turn, affect cash paid to creditors.
RQ 17.1 // Budgeting
Q5. Explain how budgets assist planning.
Budgets assist planning by predicting what is likely to occur in the future. This allows the owner to prepare so that possible problems may be managed, and possible opportunities may be taken.
RQ 17.1 // Budgeting
Q6. Explain how budgets assist decision-making.
Budgets assist decision-making by providing a standard against which actual performance can be measured.
This allows the owner to identify areas in which performance is unsatisfactory, so that remedial action can be taken.
This can also include the calculation of budgeted ratios and other indicators of performance.
RQ 17.2 // The Budgeting Process
Q1. Explain why budgeting is described as a process.
Under the Going Concern principle, businesses are assumed to be continuous, so the budgeting process should be continuous too.
Budgets should be compared against actual reports to allow problems to be identified, decisions should be made based on that assessment, and then new budgets should be prepared for the next period.
RQ 17.2 // The Budgeting Process
Q2. Outline the various stages in the budgeting process.
● Budgeted Reports - prepared predicting what is likely to occur
● Actual Report - prepared to detail what has happened in the current period
● Variance Report - prepared to highlight differences/problem areas
● Decisions - made to improve business performance for the next period
RQ 17.2 // The Budgeting Process
Q3. Explain the role of historical data in the preparation of budgeted reports.
The information presented in budgeted reports should be based on historical data, but allowances must be made for changes and the effect of new business decisions.
