accounting - topic 3

role of financial instiutions

financial institutions accept deposits which provide funds for loans and they also provide services including business advice, financial planning, investment management, arrange leases for non-current assets, insurance products and trade in shares and exchange currencies

short term finance

cash management trusts, money market and term deposits

long term finance

shares, debentures, unsecured notes, trusts and term deposits

cash management trusts

where small amounts from a range of investors are grouped and the money invested in short term money market securities, this product is usually offered though merchant banks, banks and broking firms

money market

short term money market cater to borrowers who require money for a short period of time

short term - term deposits

putting money into a bank or other financial institution and investing it for a short period of time

shares

equity financing includes capital contributions by the owner, the taking on of a partner and in the case of companies, the issue of shares

debentures

loan securities issued by public companies to the general public in exchange for cash, the loan security must be repaid at a fixed time in the future, interest at fixed rates is paid at set times and the debentures are secured with a floating or specific charge over the companys assets

unsecured notes

issued by public companies and are very similar to debentures except that there is not fixed of specific security over any of the companys assets, they are usually issued for shorter periods of time

trusts

a legal arrangement where a party (trustee) holds and manages assets on behalf of another party (beneficiary), often used for long-term financial planning because they provide flexibility, control and protection for assets over time

long term - term deposits

putting money into a bank or other financial institution and investing it for a long period of time (over 12 months) as it earns a higher rate of interest than a standard savings accounting

management of business finance with short and long term perspectives

short term financing: used for temporary cash shortfalls from normal trading/operating activities + long term financing: used for funding of the purchase of assets that are used to generate returns over a long period of time

other types of finance

bank overdraft, term loan from bank or other financial institution, issue of debentures or other loan securities, leasing, hire purchase, supplier finance etc.

components of the master budget

operating, capital expenditure and financial budgets

the master budget

integrates all business budgets to provide a complete overview of planned activities and changes, it covers a 12 month period and forecasts results from strategic plans, it helps assess liquidity and profitability showing expected business outcomes

operating budget

provides all the information to prepare a budgeted income statement including revenue projections, costs of goods sold projections and estimated selling and distribution, general and admin, financial expenses and seperate budgets for different business functions are combined to form the overall operating budget and projected profit

financial budget

includes the cash budget, projected cash flows and a budgeted balance sheet

capital expenditure budget

reviews and plans the capital expenditure a business needs to achieve its goal it includes replacements and upgrades to non-current assets like buildings, equipment and vehicles and it may also include costs associated with business expansion and launch of new products

budget

a proposal or plan for future financial activities within the business and they are prepared to plan, control and coordinate activities and they perform this role by providing a plan, income statement budget and improving control over business activities

cash budget

a forecast of estimated receipts, payments and the resultant cash position for a period of time

controlling cash importance for a business viability

helps manage cash flow by forecasting receipts and payments, ensuring a business can meet short term debts and maintain liquidity

reasons for a cash budget

commitments are due, excess funds, debt collect policy, seasonal fluctuations, shortages of fund and control

reasons for CB - commitments are due

enables management to see when commitments are due to make sure money is available, its important to meet commitments due to if debts arent paid the business will gain a poor reputation

reasons for CB - excess funds

shows when excess funds are available, it can be invested to earn interest but sometimes its left in current or cheque account meaning it cant earn interest

reasons for CB - debt collect policy

reveal weakness in the debt collect policy, it is found that the average collection period for an account receivable to pay is 3 months and normal terms of credit are 30 days

reasons for CB - seasonal fluctuation

adjustments for seasonal fluctuations are made, they occur in industries where sales for a period are slow like an umbrella in summer and the business makes allowances for that period

reasons for CB - shortage of funds

reveals periods of time where shortage of funds may occur, allowing businesses to plan for loans or overdraft while minimizing interest costs and financial institutions use it to assess a businesses ability to repay borrowed funds

reasons for CB - control

allow and assist with control over a business, investigation into the difference between actual and budgeted figures should reveal why the differences occurs and how to correct them

cash and accrual accounting

cash budget is based on cash accounting and income statement budget is based on accrual accounting

purpose of income statement budget

allows users of the reports to anticipate the income, expenses and resultant profit/loss over a budgeted period and if projected profits fall short of goals, management can adjust strategies to increase income or control expenses

cash

based on cash receipts and payments in a period, cashflows included even if it relates to a different period, does not include balance day adjustments and reports do not include items that are not cash flows such as discount or credit sales

accrual

based on income earned and expenses incurred, only includes items that are recognised in the current period, balance day adjustments are needed to ensure items reflect business activities and reports include adjusted cash and non cash items

items not in cash budget

depreciation, doubtful debts, bad debts, credit purchases/sales, discount income/expenses etc.

comment on cash budget performance report

comment on the overall change between actual and budgeted figures, the change can be due to the significant changes in items in receipts then payments, the change needs investigating and a plan developed to rectify the problem