Budgeting and Financial Indicators Flashcards
(29 cards)
Use of Variance Reports
is an Accounting report that compares actual and budgeted figures, highlighting variances so that problems can be identified and corrective action can be taken.
used in planning the next budget, so that it is more accurate. (The unfavourable variances should be investigated, and their cause identified. This will allow the owner to take corrective action.)
Trends for Cash Flow Variances
Favourable: Higher than expected cash inflows or lower than expected cash outflows.
Unfavourable: Lower than expected cash inflows or higher than expected cash outflows.
Trends for Income Statement Variances
Favourable: Higher than expected revenues or lower than expected expenses.
Unfavourable: Lower than expected revenues or higher than expected expenses.
Use of budgeted Cash Flow Statement
The budgeted cash flow can help the owner prepare for a budgeted increase/decrease in cash.
Use excess cash to:
make loan repayments
increase cash drawings
purchase more assets
pay additional expenses such as wages, advertising
Cash deficit:
defer loan repayments
reduce cash drawings
make a capital contribution
organise an overdraft or loan
in terms of decision making:
Debt collection
Level of drawings
Budgeted Cash Flow Statement
A report that 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
Limitations of analysis budgeted accounting reports
Budgeted reports report future events rather than historical events. As a consequence budgets use estimates or predictions rather than actual verifiable data.
Profitability
The ability of a business to earn profit measured by comparing profit to a base, such as assets, sales or owners equity.
That is, its ability to earn revenue, and
Its ability to control expenses
indicators involve: ROI, ROA, NPM, GPM
Liquidity
is the ability of a business to meet its short term debts as they fall due.
indicators involved: WCR, QAR, CFC
Stability
the ability of the business to meets its debt and continue its operation in the long term.
indicators involved: Debt ratio
ROI
net profit/average capital x 100
profitability indicator that assess how effectively the business has used it’s owner’s capital to earn a profit.
ROA
net profit/average total assets x 100
profitability indicator which assess how effectively the firm has used its assets to earn a profit.
earned a return of x% on their investment in assets.
Higher ROA = earning more profit per dollar of asset controlled
Decreased ROA = increase in assets with smaller increase in net profit
expense control
refers to the firm’s ability to manage its expenses so that they either decrease, or, increase no faster than sales revenue.
financial indicators: NPM and GPM
NPM
net profit/net sales x 100
profitability indicator that measures the percentage of Sales revenue that is retained as Net Profit and assess the firm’s expense control.
GPM
gross profit/net sales x 100
profitability indicator which assess the average mark-up by determining the percentage of sales retained as gross profit.
- Assess expense control specifically as it relates to inventory and Cost of Goods Sold.
- As such can indicate the adequacy of the firm’s average mark-up on goods sold in a particular period.
Strategies to improve profitability
increasing revenue:
Adjust selling price
Advertising strategies
Change the Inventory mix
Non-current assets
expense control:
Relationship with supplier…
Staff management
Non-current assets
Asset Turnover
net sales/average total assets.
efficiency indicator which assesses how productively the business has used its assets to ear revenue.
how many times the value of assets can be earned as revenue in a given reporting period
difference between roa and ato
similarity between ATO and ROA reflects the fact that they both assess a firms ability to use their assets, the only difference is that ROA relates to profit while ATO relates to revenue.
Theoretically, an increase in ATO should increase ROA but it is not always the case.
The only difference is the difference between net profit and revenues, being expenses. If they move in different directions it is because of a change in expense control.
Working Capital Ratio
current assets/current liabilities
liquidity indicator which asseses the ability of the business to meet its short term debts by measuring the ratio of current assets to current liabilities.
WCR RATIO MEANING
less than 1:1 may struggle to pay back short term debts as they fall due
more than 1:1 is favourable but indicates the firm may not be using its assets effectively as they are idle.
bank - excess cash used to retire debt or expand operations
inventory - excess inventory is susceptible to damage and storage costs
AR - indicate mismanagement and higher likelihood of bad debts
QAR
current assets - inventory/prepaid assets?current liabilities
liquidity indicator that assesses the firm’s ability to meet immediate short term debts strait away if they fall due.
Inventory and prepaid expenses
recognises not all current assets are able to be converted into cash as readily as each other
inventory - no guarantee that inventory can be sold and converted into cash
prepaid expenses - cannot be liquidated or converted back into cash.
Cash Flow Cover
net cash flows from operations/average current liabilities
liquidity indicator that measures the number of times net cash flows from operating activities is able to cover the current liabilities of the business.
Debt Ratio/Gearing
total liabilities/total assets x 100
Debt Ratio stability indicator that measures the percentage of the firm’s assets which are financed by liabilities
Measures the extent the business relies on debts compared to capital to purchase assets.
Low debt ratio
means the firm s not very reliant on borrowed funds and has a low risk of not being able to pay off their debts. Can result in a lower ROI. Low risk achieves low return.
