Unit 4 AOS 2 Accounting

Budgeting

the process of predicting/estimating the financial consequences of future events. This process is continuous. Important to make a plan and to control future expenses

Budget

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

Cash budget

simply a budgeted CFS. It looks at the future cash inflows and outflows. The actual bank balance at the start of the period and the expected bank balance at the end of the period​

Budgeted Income Statement

all the expected future revenues and expenses, and the expected Gross Profit, Adjusted Gross Profit and Net Profit​

Budgeted Balance Sheet

shows all the expected As, Ls and OEs at some point in the future

Purpose of budgeting

Aids decision making by providing a benchmark for assessment of actual performance so that problems can be identified and correct action taken​

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Aids planning by predicting what is likely to occur in the future. Allows the owner to prepare so that possible problems can be managed and possible opportunities may be takes

Consecutive budgets

Shows the effect of monthly/yearly variations​

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Allows owners to identify monthly and even seasonal trends, and can be useful identifying when to undertake a particular cash activity​

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More frequent budgets are more useful. But can take more time and money

Schedule of collections/receipts

a table used by businesses that sell on credit to predict cash inflows from accounts receivable

Schedule of payments

a table used by businesses that purchase inventory on credit to help predict cash outflows to accounts payable

Variance reports

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

Variance

The difference between actual and budgeted figures, usually described as favourable or unfavourable

Favourable variance

A difference between actual and budgeted results which is good news. E.g. higher than budgeted revenue or higher than budgeted cash inflows

Unfavourable variance

A variance in which the actual result for a particular item is worse than that estimated in a budget. Eg. more expenses than budgeted or more cash outflows than budgeted

Cash Flow Statement Variance Report

An accounting report that compares actual and budgeted cash flows, highlighting variances as favourable or unfavourable depending on their effect on budgeted cash on hand

Variance income statement

An accounting report that compares actual and budgeted revenues and expenses, highlighting variances as favourable or unfavourable depending on their effect on budgeted profit.

Possible limitations with budgets

Yearly budgets may not identify seasonal trends, may not provide enough detail, may be difficult to predict future economic situation, indicators can use historic or static data at times which may not show speed or current situation

Discuss task word

Include 'two sides'. i.e. advantages and disadvantages

Evaluate task word

Include 'two sides' and a final judgement. i.e. advantages and disadvantages and a final statement of decision

Profit vs cash questions

Define profit and cash and include examples. Profit is found by calculating revenues minus expenses in a period. Cash is the total of the bank account. The total cash inflows minus cash outflows. For example credit sales may be greater than accounts receivable and show an increased Income Statement as credit sales are not found in the Cash Flow Statement

Qualitative characteristics

TURFCV

Accounting assumptions

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Relevance

Relevant information is capable of making a difference to the decisions made by users. Relevance requires financial information to be related to an economic decision. Information is relevant to a decision if it helps users to form predictions about the outcomes of past, present or future events, and/or con rms or changes their previousevaluations by providing suitable feedback.

Timeliness

Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Having information available sooner, rather than later, can enhance its capacity to influence decisions, and a lack of timeliness can rob information of its potential usefulness. Generally, the older the information, the less useful it is.

Faithful representation

The information reported must be a faithful representation of the real-world economic event it represents. The user is assured that the information presented is complete, free from material error and neutral (without bias).

Comparability

Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items. Information about an entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.

Verifiability

Verifiability means the ability to ensure that different knowledgeable and independent observers can reach a consensus (arrive at the same conclusion) that a particular depiction of an event is faithfully represented. Verifiability is maintained by retention of source documents used to record the transaction and checked through auditing. The purpose of verifiability is to hold the accounting professional accountable for their work.

Understandability

Understandability requires financial information to be comprehensible to users with reasonable knowledge of business and economic activities. To be understandable, information should be presented clearly and concisely.

Entity assumption

The records of assets, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities. A separate set of accounting records is maintained foreach entity, and the financial statements prepared provide information on that entity only.

Accrual assumption

Under the accrual basis of accounting, revenue is recognised in the period in which the expected in inflow of economic benefits can be measured in a faithful and verifiable manner, that is, revenue is recognised when it is earned. Expenses are recognised when the consumption of goods and services can be measured, that is, expenses are recognised when they are incurred. Accrual basis profit for an accounting period is determined by subtractingexpenses incurred for a period from revenue earned in that same period.

Going concern

Financial reports are prepared on the assumption that the existing entity will continue to operate into the future. It is assumed that the entity will not be wound up in the near future but will continue its activities.

Period assumption

Reports are prepared for a particular period of time, such as a month or a year, in order to obtain comparability of results. Profit determination involves a process of recognising the revenue for a period and deducting the expenses incurred for that same period. A distinction can be made between assets, which will provide bene t to futurereporting periods, and expenses that are totally consumed within one reporting period.

Benchmarks

Past periods, budgets, industry averages (similar firms)

Faster/slower financial indicator trends

ATO, CFC, APTO, ITO, ARTO

Increase/decrease financial indicator trends

Debt ratio, ROA, ROI, NPM, GPM, WCR, QAR

Asset turnover (ATO)

an efficiency indicator that measures how productively a business has used its assets to earn revenue

Accounts payable turnover

an efficiency indicator that measures the average number of days it takes for a business to pay its accounts payable

Accounts receivable turnover

an efficiency indicator that measures the average number of days it takes for a business to receive cash from its accounts receivable

Debt ratio

a stability indicator that measures the percentage of a firm's assets that are financed by liabilities.

Cash Flow Cover

a liquidity indicator that measures the number of times net cash flows from operations is able to cover average current liabilities

Gross Profit Margin

a profitability indicator that measures the average mark-up by calculating the percentage of Sales revenue that is retained as Gross Profit.

Inventory Turnover

the average number of days it takes for a business to sell its inventory or convert its inventory into sales

Net Profit Margin

a profitability indicator that measures expense control by calculating the percentage of Sales revenue that is retained as Net Profit

Return on Owner's Investment

a profitability indicator that measures how effectively a business has used the owner's capital to earn profit

Return on Assets

a profitability indicator that indicates how effectively a business has used its assets to earn a profit.