Budgeting

Question 1

Budgeting

Answer 1

The process of predicting / estimating the financial consequences of future events.

Question 2

Purposes of Budgeting - Planning

Answer 2

To assist planning by predicting what is likely to occur in the future à this allows the manager to consider what action they should take (e.g. pay down debt if a cash surplus is expected). Drawing up a budget is a form of planning.

Question 3

Purposes of Budgeting - Control

Answer 3

To aid control once actual reports available or before these reports become avaialble as it provides limits that can be used as measures or to hold staff to account.

Question 4

Purposes of Budgeting - Decision Making

Answer 4

•To aid decision-making by providing a benchmark against which actual performance can be measured → and then deciding action that can be taken to improve, including what should be included in budgets for the next period.

Question 5

The budgeting process

Answer 5

Prepare budgeted reports → prepare actual reports → prepare variance reports → make decisions → prepare the next periods budgeted reports.

Question 6

Use of Budgeted Cash Flow Statement

Answer 6

1. Aids planning
2. Aids control
3. Aids decision making

Refer Purposes of Budgeting - Planning, Purposes of Budgeting - Control, Purposes of Budgeting - Decision Making for more info on each.

Question 7

Planning – if budget predicts a net decrease in cash position

Answer 7

Net Decrease in Cash Position

• Reduce cash outflows related to operating activities such as purchases of inventory, rent payments etc.
• Defer purchase of non-current assets or apply for a term loan to fund the purchase
• Defer loan repayments to reduce cash outflows from financing activities.
• Advise owner to reduce cash as drawings to reduce cash outflows from financing activities.
• Request the owner makes a cash capital contribution to increase cash inflows from financing activities.
• Organise (or extend) an overdraft facility to facilitate a business moving toward a negative balance in their bank account.

Question 8

Planning – if budget predicts a net increase in cash position

Answer 8

Net Increase in Cash Position

• Utilise additional funds to expand trading activities by increasing advertising or employing more staff
• Utilise additional funds expand business through purchase of non current assets / upgrade existing assets.
• Increase loan repayments to reduce debt levels.
• Advise owner they can increase cash drawings

Question 9

Control & Decision making when using a Budgeted Cash Flow Statement

Answer 9

Suggested areas:

• Effectiveness of advertising in generating Cash Sales can be reviewed as budgeted sales will be included in the budget.
• Accounts Receivable collection procedures can be reviewed if “receipts from Accounts Receivable” is not hitting the budgeted levels.
• Accounts Payable payment policies, ensuring the business is paying on time.
• The level of cash payments for expenses
• Level of cash drawings
• Adequacy of finance for the purchase of non-current assets

Question 10

Schedule of Receipts from Accounts Receivable

Answer 10

A table used to calculate how much cash will be received from Accounts Receivable in the budget period as a consequence of credit sales in the current and previous periods.

Also referred to as “Accounts Receivable Aging Analysis”

Question 11

Schedule of Payments to Accounts Payable

Answer 11

a table used to calculate how much cash will be paid to Accounts Payable in the budget period as a consequence of credit purchases in the current and previous periods

Also referred to as “Accounts Payable Aging Analysis”

Question 12

Uses of the Budgeted Income Statement - to aid planning - how?

Answer 12

• Initial planning involved in establishing or drawing up the Budgeted Income Statement leads to establishing goals/KPIs around profitability.
• Once in place, can be used to plan specific action required to ensure the goals /KPIs are achieved, for example, what advertising will be required to achieve the sales targets, what inventory levels will be required at what times of the year, what are the staffing requirements, are there areas of the business where expenses need to be cut, drawing up goals for staff.

Question 13

Uses of the Budgeted Income Statement - to aid control - how?

Answer 13

• Actual results can be compared against budgeted results/data.
• Reasons determined/relevant staff held to account for the results with bonuses paid for good performance and questions asked for poor performance.
• Budget used to help control spending by providing a framework or target

Question 14

Uses of the Budgeted Income Statement - to aid decision making - how?

Answer 14

Decision Making (Budgeted Income Statement provides a standard against which trading performance can be measured, allowing problems to be identified and corrective action taken.)

Specifically, the owner could assess:

• Level of sales and the effectiveness of advertising
• The mark-up achieved and whether it is adequate
• The level of stock loss to assess stock management procedures
• Expense control
• Staff performance - do changes needs to be made, do they need more training, do we need staff with particular skill sets.

Question 15

Uses of a Budgeted Balance Sheet - to aid planning - how?

Answer 15

• Preparing the Budgeted Balance Sheet provides targets / goals / KPIs
• Details expected carrying value of assets, helps prepare for the replacement of non-current assets – how will this be financed?
• Prepare for loan repayments, set drawing levels (in conjunction with Budget Cash Flow Statement).

Question 16

Uses of a Budgeted Balance Sheet - to aid control - how?

Answer 16

• Ensuring targets are high and adequate levels of liquidity and stability are achieved.

Question 17

Uses of a Budgeted Balance Sheet - to aid decision making - how?

Answer 17

• By setting a benchmarks for indicators that assess liquidity (Working Capital Ratio) and stability (Debt Ratio).
• Does the business need to look at additional cash sources to improve WCR and/or Debt Ratio
• How to finance replacement / purchase of new non-current assets.

Question 18

3 steps to follow for (Ledger) Account Reconstruction for determining missing budgeted or actual figures.

Answer 18

Reconstructing a ledger account involves 3 steps:

1. Identify the entries we would expect to see in a particular ledger account
2. Match these entries with figures that are known
3. .Complete the ledger account to calculate the figures that are not known.

NB: Sometimes you need to reconstruct more than one ledger account to determine the answer – for example Accounts Payable and Inventory are linked.