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UNIT 4 CH 17

Budgeting Budgeting is the process of predicting/estimating the financial consequences of future events.
Info Budgeted CFS Reports: shows all expected future cash inflows and outflows, the actual BB at the start of the period, and the expected BB at the end of the RP
Info Budgeted IS: shows all expected future R and E, and the expected GP, adjusted GP and NP
Info Budgeted BS: shows all the expected A, L and OE at some point in the future.
3 differences between actual and budgeted reports: Budgeted reports report future events, not historical events. - focus on what will happen not what has already happened + they use estimates or predictions rather than actual, verifiable data.
accurate estimate of budgeted sales = important why? Main R in Budged IS, + generates significant cash inflows - as cash sales or receipts from D. ___ crucial in estimating E that depend on no. Of units sold (COS) ___ lvl of sales affects how much stock purchased - affects cash paid to creditors.
Budgets assist planning: Predicts what is likely to occur in future ___ allows owner to prepare so possible problems - managed + possible opportunities - taken.
Budgets assist decision making: Provides standard against which actual performance can be measured ___ allows owner to identify areas in which performance is unsatisfactory, remedial action can be taken ___ includes calc of budgeted ratio + other indicators of performance.
AP : why budgeting is described as a process. Going concern: business assumed continuous, so budgeting process - continuous too. Budgets are made, then compared against actual reports, problems identified, decisions made based on assessment, new budgets made for next RP.
Role of historical data in prep of budgeted reports: Info presented in budgeted reports based on historical data, but allowances made for changes and effect of new business decisions.
Operating Activities: Cash flows related to the firm’s day-to-day trading activities
Investing Activities Cash flows relating to the purchase or sale of NCA
Financing Activities Cash flows that are the result of changes in the firm’s financial structure
Explain why it is important that budgeted Net Cash Flows from Operations is positive. means that the business will generate sufficient cash from its O’s to meet its ongoing obligations (I and F activities) without the need for cap contrib or external finance.
2 actions the owner could take to improve estimated O inflows: 1. incr Sales (e.g. promos, greater ads or discounts) ___ 2. incr receipts from D (e.g. Offer discounts, contacting slow payers or reminder notices)
2 actions the owner could take to reduce O outflows: 1. _ defer payments to creditors __ 2__cut back on cash paid for E
Expected E not reported in budgeted CFS: Stock loss, COS, dep of NCA, loss on disposal of NCA, bad debts
Why is it usual for Net Cash Flows from I Activities to be negative. NCA are expensive, and sales of NCA are rare
possible relationship between the cash flows from I and F activities. F inflows (in the form of receipt of loan and capital contrib) are generally used for the purpose of financing the purchase of a NCA (I outflows).
Benefits of preparing budgets frequently: (more than once a yr) More frequent = more accurate = more useful as benchmarks ___ allow for earlier detection of problems, allows corrective action be taken in a more timely fashion, can stop small problem becoming large.
Budgeted CFS can assist planning: By allowing the owner to prepare in advance for an expected cash surplus or cash deficit.
Actions owner could take to address budgeted cash deficit: Defer purchase of NCA (or arrange credit facilities or loan) ___ defer loan repayments ___ take less cash drawings ___ make cap cont ___ organise OD facility
Actions owner could take to address budgeted cash surplus: Purchase more/newer NCA __ incr loan repayments __ incr cash drawings __ expand trading activities by increasing ads, employing more staff
Budgeted CFS can assist decision making: sets a standard (benchmark) for the assessment of the firm’s actual cash performance. By comparing budgeted and actual cash flows, owner can identify problem areas, and act to correct the situation.
AP: explain why it may be necessary to prepare a Schedule of Receipts from D when preparing a Budgeted CFS: credit sale to D and the receipt of cash from D may take place in different RP. May be necessary to calculate how much will be received from D during the budget period from credit sales made in previous periods and, in some cases, the current period.
role of historical data in the preparation of a Schedule of Receipts from Debtors. must calc cash that will be received in budget RP as a result of credit sales in earlier months. Because it may take 1, 2, 3 or even more months for debtors to pay their accounts, and this historical data and the debtor’s payment history, is likely to aff
Why Receipts from Debtors must be calculated using credit sales including GST. As with all sales, the amount owed by the debtor will include 10% GST added to the value of the sale. At point of sale. Therefore, this combined amount will be the amount to be received from the debtor.
Why the GST must be identified when Cash Sales are shown in the Budgeted CFS: GST received must be identified separately so that this amount can be used to calculate the balance owed to the ATO when preparing the GST C account.
why is GST not identified when cash is received from a debtor. GST was accounted for at the time of the original credit sale.
difference between a Budgeted CFS and a Budgeted IS: Cash + profit = different measures of performance, Bud CFS reports expected cash inflows/outflows and bud IS reports expected R/E earned and incurred over the budget period.
cash inflows that are not R: GST received___GST refund___cash sale of an NCA___cash capital contribution___receipt of a loan
cash outflows that are not E: GST paid___GST settlement___cash payment for an NCA/to sundry creditor___cash drawings___ repayment of loan principal.
R that are not cash inflows Stock gain ___ profit on disposal of an NCA
E not cash outflows: Stock loss, stock write down, loss on disposal of an NCA, bad debts, dep,
How a Budgeted IS can be used to assist planning: It indicates the future requirements of the firm relating to issues such as staffing, which may require hiring or firing; stock levels; or advertising campaigns.
How a Budgeted IS can be used to assist decision making: Provides standard against which trading performance can be measured, allowing problems to be identified and corrective action taken. Benchmark can also act as a target or goal to motivate staff and management.
3 areas of business performance owner might assess using bud IS as benchmark: Sales + effectiveness of ads, mark up achieved, level of stock loss to assess stock management procedures, E control, staff performance.
What is in Budg BS but not in Budg CFS? Acc dep
How the Budgeted BS can be used to assist planning: expected figure of CV for a NCA- helps owner prepare replacement. When used in conjunction with the CFS, it can also be used to plan for the repayment of loans, + to set the level of drawings for the coming period.
How the Budgeted BS can be used to assist decision making: By setting a benchmark for indicators that assess liquidity and stability. And owner to calculate the Budgeted WCR, which can be used to assess liquidity and the DR, which can be used to assess stability.
Purpose of reconstructing a ledger account: Where only some info is known, reconstructing a ledger account allows us to calculate missing or unknown figures necessary to complete the budgeted reports.
When it would be more appropriate to reconstruct the Debtors Control account than prepare a Schedule of Receipts from Debtors. When insufficient information is available to prepare a Schedule, such as previous credit sales and debtor payment history
What info is shown in a cash Budg Variance report? compares actual and budgeted cash flows, calculation of the variance and whether the variance is favourable or unfavourable
What info is shown in a IS Budg Variance report? compares actual and budgeted R and E, calculation of the variance and whether the variance is favourable or unfavourable.
Variance: Difference between an actual figure and a budgeted figure, expressed as favourable or unfavourable.
When is a variance considered to be favourable if reported in the IS variance report: If cash is higher than expected in budget
When is a variance considered to be favourable if reported in the Cash Variance Report: When NP is higher than expected in budget
how a variance report can be used to assist planning: used in planning the next budget, so that it is more accurate. Variances should be investigated so that more informed estimates can be used in the next budget.
how a variance report can be used to assist decision-making. The unfavourable variances should be investigated, and their cause identified. This will allow the owner to take corrective action.
What may cause a variance in depreciation of an NCA? Sold earlier/later __ replaced earlier/later
Possible cause for variances in sales or sales returns: Quality of goods __ suitability of stock __ advertising
Possible causes for variances in loan or interest on loan etc: Lower/higher interest rate __ repaid more of load principal than expected
TIP: ABOUT REC from D and payments to Creditors take into account: DISCOUNTS!! + read months carefully!
Account Reconstruction - in DC account: sales returns, decrease GSTC (10% of Sales Return) as well.
Account reconstruction - in SC account: no sales returns but record it at COS
Sales can be seasonal e.g: Tennis balls sales incr in summer
Created by: 96.0



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