Accounting: Chapter 4

The nature of business – the economic process \n businesses follow – is to:

The nature of business – the economic process \n businesses follow – is to:

(1) obtain capital \n (2) to make investments \n (3) to generate a positive future return

Corporate finance

informs capital acquisition/maintenance

Managerial accounting

Business Decisions

Financial accounting

measures the returns

Business budgets are formalized, _____________ \n plans

Quantitative

A __________ plan defines a broad set of goals for the organization and selects the primary \n approaches that the organization will take to \n achieve its mission

Strategic

Generally, they do not have specific ___________ targets

financial

What is the organization trying to achieve (i.e. its goals)? \n • Why does it want to achieve that goal? \n • How does it (broadly) intend to translate that goal into results?

The long-range plan details the major activities in the next 3-5 years needed to _________________________

Accomplish the goal

Annual budgets provide specific itemization of \n resources to be _____________________

Generated and Sold

Operating budget \n Cash budget

Reasons for having a budget:

To take the strategic and long-range plans and fill in the _________________ for the coming year needed to stay on track to achieve their targets

specific

Reasons for having a budget:

To force managers to _____________ (forward- \n looking)

Think Ahead

Reasons for having a budget:

To allow for effective ___________ (backward-looking)

Evaluation

Reasons for having a budget:

To be used as a tool of ________________ and \n coordination

Communication

The operating budget provides all the information necessary to prepare a budgeted ______________ statement

Income

Income Statement includes:

____________ projections

Revenue

\n Selling expenses \n Administrative expenses

Income Statement includes:

Cost-of-goods-sold projections, which include:

\n - The projected costs of materials, labor, and overhead for a manufacturing firm, or \n -The cost of ____________ for a merchandising firm

purchases

Income statement includes:

_____________ expenses (interest cost)

financing

It includes more detail than an income statement

The ___________________ budget consists of a \n compilation of the budgets for the various \n departments

organizational

Each department must compile its budget based on its specific ___________ costs and revenues (if applicable) \n

Employee POV: you’re accountable to the budget!

projected

Once specific items are identified, you evaluate:

Are the requests _____________? \n

Do the departments need all of the _________ they are requesting, or are they building “fat” into the budget? \n

If the budget is carried out as specified, will it result in a satisfactory outcome for the organization?

\n Will sales be high enough? \n

Will costs be low enough?

Reasonable;

Resources

Workload refers to the ___________ of goods or \n services the organization will provide

volume

There is inherent measurement ___________ in \n the world; flexible budgets provide a plan for \n varying workload levels that might happen

uncertainty

As volume goes up or down, ________ costs \n remain unchanged, but ___________ costs change in proportion to the volume change

fixed; variable

A flexible budget adjusts the operating budget for the changes in ____________

workload

The cash budget is a plan for expected cash \n ________ (inflows) and ____________ (outflows)

receipts; payments

It provides the information needed to know if there will be ________________ on hand at all times

adequate

Cash flow forecasting is complicated by the fact \n that collections and payments are not __________ throughout the year

constant

Monthly cash budgets assist in planning for short-term ______________ and ______ during the year

investments; loans

The first step in budget preparation is the \n completion of an __________________ statement

Environmental

What actions do we expect ___________ to take that might affect our sales or the price of our product?

\n Will _____________ be raising their prices? \n

Will new sources of raw materials become available? \n

Are there going to be significant shifts in consumer _____________? \n

Are new technologies available?

Competition;

Suppliers;

Demand

The next step is for top management to develop a

set of general objectives and policies

Before the actual budget can be developed, a set of ________________ must be adopted

Assumption

For example: \n

What will inflation be in the coming year? \n

How big a raise do we expect to give employees? \n

How much will we be raising our prices?

Specific, ______________ goals should be \n established

Measurable

For example: \n

Sales will increase 5% \n

Profits will increase 6%

\n A critical step in the budget process is the preparation of forecasts of what would happen under a variety of \n ___________.

alternatives

For example: \n

What if we raise our ________? \n

What if we import partially ______________ parts? \n

What if we ___________? \n

In all of these cases, how much will we sell, at what price, and at what cost?

Prices;

Assembled;

Automate

Forecasting is based on __________ patterns, but must be adjusted for any changes that may make the future __________ from the past, e.g. the future of the industry

Historical; Different