D196 Unit 4 & 5

What is one major reason some well-known retailers (like Sears and Toys "R" Us) went bankrupt?

Poor cash flow management.

What is the purpose of managing accounts receivable and payable?

To ensure the timing of cash inflows and outflows aligns with business needs.

What does an aging report show?

The age of each outstanding uncollected receivable.

Why should cash flow budgets look several months ahead?

To anticipate periods of cash deficit or surplus and plan borrowing or repayment.

What is a cash budget?

A tool used to plan cash needs by forecasting cash inflows and outflows.

What are the principal sources of cash inflows?

Cash sales and collection of credit sales (accounts receivable).

Factors affecting pattern of collections on receivables

Industry type, firm size, and the firm's credit policies.

What is the purpose of a cash disbursement budget?

To forecast all expected cash outflows over a specific period.

Why is estimating the timing of cash outlays important?

For effective cash control and to be ready in the case of needing assets to be liquid as quick as possible.

How long can a cash disbursement budget cover?

From a few months to several years.

Master budget

An integrated set of detailed budgets outlining a company's overall operations and financial plans, typically for one year.

What does the budgeting process begin with?

A sales budget, estimating revenues or product sales.

Why is the sales forecast critical to the master budget?

All other budgets (production, purchasing, labor, etc.) are based on the sales budget.

Production budget formula

Sales budget + Ending Finished Goods Inventory − Beginning Finished Goods Inventory = Production Budget.

What is included in the production budget?

Budgets for direct materials, direct labor, and manufacturing overhead.

Pro forma financial statements

A budgeted income statement and balance sheet made after cash inflows and outflows are known.

What factors influence sales projections?

External variables (e.g., economy, customer preferences, weather) and internal variables (e.g., pricing, advertising).

Direct materials production budget formula

Production budget × direct materials per unit = direct materials production budget.

Direct materials purchases budget formula

Direct Materials Budget + Ending Direct Materials Inventory − Beginning Direct Materials Inventory = Direct Materials Purchases Budget

Fixed Costs

Costs that remain constant.

Variable Costs

Costs that change with sales or production levels.

How is cash collected from customers calculated?

(Current Revenue × Collection Rate) + Previous Period Collections

How are cash payments to suppliers calculated?

(Current Purchases × Payment Rate) + Previous Period Payments

What should be added back when computing budgeted cash outflows?

Non-cash expenses, like depreciation, should be added back.

Purpose of Performance Measurement in Business Segments

To evaluate the results of managers & make adjustments as necessary.

What is a segment in business?

A relatively independent part of a company, such as a division, product line, or region.

What is a responsibility center?

Any organizational unit (segment) where a manager is held accountable for performance.

What is a cost center?

A unit where the manager is responsible only for controlling costs, not revenues or assets.

What is a profit center?

A unit where the manager is only responsible for both revenues and costs.

What is an investment center?

A unit where the manager controls revenues, costs, and assets, including investment decisions.

Segment Margin Statement

A profit and loss statement that identifies costs directly chargeable to a segment and further divides them into variable and fixed cost behavior patterns.

Direct Costs

Costs that a segment manager can control (controllable costs).

Indirect Costs

Costs that a segment manager cannot control and thus are their performance is not tied to them.

Segment Margin

The difference between segment revenue and direct segment costs; a measure of the segment's contribution to cover indirect fixed costs and provide costs; in effect, the operating profit created by the segment.

Segment Margin Ratio

The segment margin divided by the segment's net sales revenue; a measure of the efficiency of the segment's operating performance and, therefore, its profitability.

Why use segment margin ratios?

They allow for a fair comparison of profitability across segments by showing relationships, not just total dollars.

What should performance evaluations be based on?

Should be based on multiple periods, trends, and comparisons to similar units—not just one month.

What is a decentralized company?

A company where most decisions are made by mid-level or lower-level managers, rather than being made centrally by the head of the company.

What is involved in the selling and administrative expense budget?

It includes all planned non-production expenditures (supplies used by the office staff, salaries of office management, depreciation of administrative buildings).