Chapter 17 budgeting

Question 1

what is budgeting

Answer 1

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

Question 2

what is budget

Answer 2

an accounting report that predicts/estimates the financial consequences of future events

Question 3

Budgeted vs Actual reports

Answer 3

budgets report future events rather then historical events, focusing on what will happen rather than what has already happened
budgets use predictions rather then actual, verifiable data

Question 4

Importance of budgeted sales

Answer 4

1-sales is the main revenue item in budgeted income statement and generates significant cash inflows for cash flow statement (cash sales, receipts from debtors)
2-level of sales will be crucial in estimating the expenses that vary with the number of units sold, and their corresponding cash outflow
3-level of sales will affect how much stock is purchased, which will in turn affect cash paid to creditors

Question 5

Purpose of budgeting

Answer 5

assist planing by predicting what is likely to occur in the future, allowing the owner to prepare so that possible problems may be managed, and possible opportunities may be taken
aids decision making by providing a standard against which actual performance can be measured

Question 6

Budgeted cash flow statement

Answer 6

an accounting report that attempts to predict all future cash inflows and cash outflows and thus the estimated bank balance at the end of the budget period

Question 7

how can the budgeted cash flow statement assist planning

Answer 7

should the budget predict an overall net decrease in cash position the owner might:
-defer purchase of NCA or use loan
-defer loan repayment
-take less cash drawings
-make a cash capital contribution
-organised/extend and overdraft facility
should the budget predict an overall net increase in cash position the owner might;
-purchase more/newer NCA
-increase loan repayment
-increase cash drawings
-expand trading activities by increasing advertising or employ more staff

Question 8

how can the budgeted cash flow statement assist decision making

Answer 8

• the effectiveness of advertising in generating cash sales
• debtor collection procedures
• creditors payment policies
• level of cash payments for expenses
• the adequacy of finance for purchase of NCA

Question 9

schedule of receipts debtors

Answer 9

a table used to calculate how much cash will be received from debtors in the budgeted period as a consequence of credit sales in the current and previous periods

Question 10

schedule of payments to creditors

Answer 10

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

Question 11

Budgeted income statement

Answer 11

an accounting report that shows expected future revenues earned and expenses incurred

Question 12

how does the budgeted income statement aid planning

Answer 12

indicates future requirements of the firm- staffing, stock levels, advertising

Question 13

How does the budgeted income statement aid decision making

Answer 13

acts as a standard against which trading performance can be measured, allowing problems to be identified and corrective action taken:

• level of sales
• mark up
• stock management
• expense control
• staff performance

Question 14

Budgeted balance sheet

Answer 14

an accounting report that predicts assets, liabilities and owners equity sometime in the future

Question 15

how does the budgeted balance sheet aid planning

Answer 15

• By detailing carrying value of NCA at some time in the future, it helps the owner prepare for their replacement
• when used in conjunction with the budgeted cash flow statement, it can also be used to plan for the repayment of loans and to set level of drawings for coming period

Question 16

how can the budgeted balance sheet aid decision making

Answer 16

setting a benchmark for indicators that assesses liquidity and stability

Question 17

Variance reports

Answer 17

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

Question 18

cash budget variance reports

Answer 18

an accounting report that compares actual and budgeted cash flows, highlighting variances

Question 19

variance

Answer 19

the difference between an actual figure and budgeted figure, expressed as favorable and unfavorable

Question 20

Income statement variance report

Answer 20

an accounting report that compares actual and budgeted revenues and expenses, and highlight variances

Question 21

uses of the cash budget variance report

Answer 21

Aids decision making;
the unfavorable variances should be investigated and their cause identified. this will allow the owner to take corrective action

Question 22

Use of the income statement variance report

Answer 22

unfavorable variances should be looked into and established why they occurred and how to fix them