Outcome 3 (chap 9)

Question 1

Define the term ‘budgeting’.

Answer 1

Budgeting is the process of predicting/estimating the financial consequences of future events.

Question 2

State two differences between the information presented in budgeted and actual reports.

Answer 2

• Budgets report future events rather than historical events; they focus on what might happen rather than what has already happened.
• As a consequence, budgets use estimates or predictions rather than actual, verifiable data.

Question 3

Explain what types of information are reported in a:

Answer 3

• Cash Budget – shows all expected cash receipts and payments, and thus the firm’s expected cash surplus or deficit for the budget period, and its expected bank balance at the end of the budget period
• Budgeted Income Statement – shows all expected revenues and expenses, and thus the firm’s expected Net Profit or Loss for the budget period

Question 4

Explain how budgets assist planning.

Answer 4

Budgeting assists planning by predicting what is likely to occur in the future. This allows the owner to prepare in advance so that possible problems may be managed, and possible opportunities may be taken.

Question 5

Explain how budgets assist decision-making.

Answer 5

Budgeting aids decision-making by providing a standard (a benchmark or yardstick) 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.

Question 6

Explain why budgeting is described as a ‘process’.

Answer 6

Information in a budget relies largely on what has happened before: what we expect to happen this year will depend on what has happened last year. In this way, budgeting is part of a continuous process.

Question 7

Describe the various stages in the budgeting process.

Answer 7

i Budgeted reports are prepared predicting what is likely to occur.
ii Actual reports are prepared to detail what has happened in the current period.
iii Variance reports are prepared to highlight differences/problem areas.
iv Decisions are made to improve business performance for the next period.

Question 8

Explain the role of historical data in the preparation of budgeted reports.

Answer 8

The information presented in the budgeted reports should be based on historical data, but allowances must be made for changes and the effect of new business decisions.

Question 9

Explain what is reported in a Cash Budget.

Answer 9

The Cash Budget should report all cash the business expects to receive and pay in the budget period, the expected cash surplus/deficit and the expected bank balance at the end of the budget period.

Question 10

List three typical cash receipts for a service firm

Answer 10

• Cash Fees/takings
• GST received
• GST refund
• Other revenue received (such as interest or commission revenue)
• Cash contributions by the owner
• Loans received
• Cash received from the sale of non-current assets.

Question 11

List three typical cash payments for a service firm.

Answer 11

• Expenses paid (such as wages, rent or advertising)
• GST paid
• GST settlement
• Cash drawings by the owner
• Loan repayments
• Cash paid for non-current assets.

Question 12

Explain how a Cash Budget can assist in planning.

Answer 12

The Cash Budget aids planning by allowing the owner to prepare in advance for an expected cash surplus or cash deficit. That is, the owner will be forewarned if the business is not generating enough cash, or if excess funds will be available, and will then be able to take steps to prepare for (or perhaps even prevent) that outcome.

Question 13

State three actions the owner could take to prepare for a budgeted cash deficit.

Answer 13

• Increasing advertising; changing prices; or offering other services in order to increase Cash Fees
• Making a cash capital contribution
• Reducing cash payments for expenses
• Deferring the purchase of non-current assets, or using credit facilities or a loan for their purchase
• Deferring loan repayments (on existing loans)
• Taking fewer cash drawings
• Organising (or extending) an overdraft facility

Question 14

State three actions the owner could take to use a budgeted cash surplus

Answer 14

• Purchase more or newer non-current assets
• Increase loan repayments
• Increase cash drawings
• Expand operating activities by increasing advertising, employing more staff, etc.

Question 15

Explain how a Cash Budget can aid decision-making.

Answer 15

A Cash Budget aids decision-making about the effectiveness of the firm’s cash management. A Cash Budget sets a standard (a target or benchmark) that can be used to assess actual cash receipts and payments. By comparing actual cash flows against the budgeted figures, the owner can identify problem areas (where performance was below expectation) and then act to correct the situation.

Question 16

Explain two reasons why budgets should be prepared more frequently than once per year.

Answer 16

More frequent budgets will be more accurate, and therefore more useful as benchmarks for comparison. In addition, they will allow for the earlier detection of problems, so that corrective action can be taken in a more timely fashion (and can perhaps stop a small problem from becoming large).

Question 17

Explain the relationship between the bank balance shown in Cash Budgets prepared over consecutive periods.

Answer 17

The bank balance at the end of the first month of consecutive periods will become the bank balance at the start of the second month; the closing bank balance of the second month will become the opening bank balance at the start of the third month, and so on.

Question 18

Explain how preparing Cash Budgets over consecutive periods can aid planning

Answer 18

Preparing Cash Budgets over consecutive periods allows the owner to assess when to undertake a particular cash activity (such as the purchase of a non-current asset or repayment of a loan). Armed with this information, the owner can decide to defer or bring forward the purchase of a non-current asset (or repayment of a loan), contribute additional funds of their own, or perhaps fund the purchase using a loan or other finance.

Question 19

Explain what is reported in a Budgeted Income Statement.

Answer 19

A Budgeted Income Statement reports the effect of expected revenues earned and expenses incurred for the budget period, and the resulting expected Net Profit or Loss.

Question 20

State three examples of:
• cash receipts that are not revenues
• cash payments that are not expenses

Answer 20

•	cash receipts that are not revenues
–	capital contribution
–	loan received
–	GST received
–	GST refund

•	cash payments that are not expenses
–	drawings
–	loan repayment
–	cash purchase of a non-current asset
–	GST paid
–	GST settlement.

Question 21

Explain how a Budgeted Income Statement can be used to assist planning

Answer 21

The Budgeted Income Statement aids planning by reporting expected revenues and expenses and thus indicating the firm’s future requirements relating to issues such as staffing (which may require hiring or firing), the acquisition of supplies or materials, or the need for advertising campaigns.

Question 22

Explain how a Budgeted Income Statement can be used to assist decision-making.

Answer 22

The Budgeted Income Statement assists decision-making by providing a standard against which actual trading performance can be measured, allowing problems to be identified and corrective action taken. This benchmark can also act as a target or goal to motivate staff and management.

Question 23

Explain what is shown in a variance report.

Answer 23

A variance report compares actual and budgeted figures, highlighting variances and identifying them as ‘favourable’ or ‘unfavourable’.

Question 24

Define the term ‘variance’.

Answer 24

A variance is the difference between an actual figure and a budgeted figure, expressed as ‘favourable’ or ‘unfavourable’.

Question 25

Explain when a variance in the Cash Budget Variance Report would be considered to be:
• favourable
• unfavourable

Answer 25

• favourable – a variance is favourable if it means cash will be higher than expected in the budget
• unfavourable – a variance is unfavourable if it means cash will be lower than expected in the budget.
 

Question 26

Cash Budget

Answer 26

an accounting report which predicts future cash receipts and payments, determines the expected cash surplus or deficit, and thus estimates the bank balance at the end of the budgeting period

Question 27

Budgeted Income Statement

Answer 27

An accounting report which predicts revenues earned and expenses incurred, and thus expected net profit, for the budgeted period

Question 28

Variance report

Answer 28

An accounting report that compares actual and budgeted figures, highlighting variances so that problems can be identified and corrective action taken

Question 29

Cash Budget Variance Report

Answer 29

An accounting report which compares actual and budgeted cash flows, highlighting variances so that problems can be identified and corrective action taken

Question 30

Income statement variance report

Answer 30

An accounting report that compares actual and budgeted revenues and expenses, and highlights variances so that problems can be identified and corrective action taken