Ch. 9 - Budgeting Flashcards
Budget
A detailed quantitative plan for acquiring and using financial and other resources over a specified future time period
Budgetary Control
The use of budgets to control an organization’s activity
What are the purposes of budgeting?
- forces managers to plan
- provides resource information that can be used to improve decision making
- provides a standard for performance evaluation
- improves communication and coordination
Participative Budget Approach
Allows lower-level managers to participate in preparing their own budget estimates
Budgetary Slack
The difference between the revenues and expenses a manager really believes can be achieved and the amounts included in the budget
What are the 3 main sections of cash budgets?
- Cash receipts section
- Cash disbursements section
- Financing section
Cash receipts section (Cash Budget)
Includes:
- cash sales and collections on credit sales
- expected interest and dividend receipts
- proceeds from planned sales of investments, plant assets, and capital stock
Cash disbursements section (Cash Budget)
Includes:
- expected cash payments for DM, DL
- taxes
- dividends
- plant assets
Financing section (Cash Budget)
Includes:
- expected borrowings and repayments of borrowed funds plus interest
Why are cash budgets beneficial to organizations?
- They contribute to more effective cash management
- They show the need for additional financing before the actual need arises
- Indicates when excess cash will be available
How does budgeting for Not-for-Profit (NFP) entities differ from for-profit entities?
NFPs still benefit from budgeting since their motive is to maximize the benefit of their services. Budget information is gathered to assist in decisions regarding what programs and expenditures the entity will undertake
What problems arise a multinational company’s budgeting process?
- fluctuations in foreign currency exchange rates
- high inflation rates
- local economic conditions and governmental policies
Static Budget
Prepared only for the planned/budgeted level of activity
What is the major disadvantage of using static budget?
While static budgets are good for planning, they can be inadequate for control if the actual level of activity during the period differs significantly from the budgeted level
Flexible Budget
Takes into account changes in revenues and costs expected to occur as a consequence of changes in actual activity
