Vocabulary
Receivables - paying expenses such as bills, wages and contractors
Payables - sending invoices to people who owe you money and making sure they get paid
Risk - the uncertainty associated with future business operations
Returns - money received from the investment
Sales forecast - predicted growth, market share and sales of product
Marketing strategy - promotion, price and distribution of a product
Environment Management system - a structured system to help organisations reduce their
environmental impact.
Cash buffers - extra cash on hand that is above the projected short-run cash payments
Credit/trade credit - purchase inventory on credit, and they pay it back within a given time
period
Line of credit - an amount of pre-arranged money a business can borrow with
predetermined interest rates and payment period.
Private placements - securities sold to private individuals or groups (investors)
Public offerings - issuing bonds or shares to the public investors through securities firm or
investment banks
Relevant range - a range of activities where there are fixed costs
Budget - a report thats gives the financial description of a particular business activity for the
budgeting period
Management by exception - when budgeting, managers look at areas with the biggest
difference for the most positive change
Accounts receivable - money owed to a business that is not yet paid
Accounts payable - money the business owes that is not yet paid, a short-term liability
Credit purchase - when consumers purchase a good on credit cards
Credit sales - purchases that are made that will be paid in later days
Projected Balance sheet - a statement that summarises the assets, liabilities and owners
equity of a business at the end of a budget period
Just-in-time inventory - businesses order inventory as the order is placed and they need it
immediately
Stockout - a business doesn't have enough inventory, which needs to be
expressed-shipped or risk alienating customers.
Assets - resources owned and controlled by business
Liabilities - amounts owed by businesses to external entities, like a loan
Equity - amount of owner investment into capital and past profits
Cost report - a report showing the budgeted and allocated expenses on a table
Capital - funds a business use to run and expand their operation
Solvency - a businesses long-term ability to pay off debt
Unlimited liability - owners must pay off the debts incurred by the business, including
utilising personal assets
Limited liability - owners are not needed to pay off the debt incurred by the businesses
Limited life - businesses have a limited life when it is directly linked to the owners
Unlimited life - the business can run even when the owners have changed through a board
of directors
Agent - a person who has authority to act on behalf of the owners to make business
choices, typically in partnerships
Partnership agreements - a contract partners sign that clearly outlines the equity,
investments by the partners and other conditions for the partnership
Introduction
Factors Affecting the Complexity of a Changing Business
Environment
Factors of a changing business environment
1.​ Information explosion → more information is available, so managers need to select
good information and react to it
2.​ Technology → it has changed how business is conducted and the manufacturing
process of products
3.​ Globalisation → allows business to access new markets, but require to adjust to
different languages, customs and global issues like the COVID-19 pandemic
4.​ Increasing regulations (from globalisation) → they need to follow different laws for
different products
5.​ Conducting business is changing → ecommerce is rising, and business owners need
to be able to adjust to it
6.​ Climate change → business need to monitor their environmental harm and mitigate
it, especially with a rising consumer preference for eco-friendly goods
7.​ Evolving forms of business → different types of business organisations have
emerged
The three characteristics needed to be a successful business person is:
1.​ Adaptability to change
a.​ They see change as an opportunity and react to it
b.​ Able to see new perspectives and take feedback
2.​ Understand the language of business
a.​ To ensure they know business terms like depreciation and solvency
b.​ For example, certified public accountants help with tax, while bookkeepers
manage payables and receivables
Business enterprise categories
The economic system in Australia operates under private enterprise, where it is owned by
people over the public sector (government).
Service business
A service business provides services or activities that are beneficial for the consumers, such
as the expertise of a hairdresser to cut your hair (over you doing it) or the experience of a
consultant when tackling business problems.
Merchandising business
Merchandising businesses sells merchandise and products to their consumers. This includes
wholesalers, whose primary consumers are retailers and commercial users. For example, a
specialist plumbing store might sell specific equipment that plumbers know how and when to
use for their consumers. This also includes retailers who sell to regular people or the final
consumers their products, like the supermarket, convenience store and shoe shops.
Manufacturing business
Manufacturing businesses produce the product that can be sold to consumers, either directly
or through a merchandising business. For example, this could be a manufacturing company
who produces plumbing pipes and their consumers are the retailers and wholesalers who
then sell the same pipes to their respective consumers.
Distinction between the business types
However, the line between the three business types can get blurred, when some (larger
companies usually) have a mixture of the different business types. For example, Apple
manufacturer their phone (manufacturer) and sells to JB-HI-FI (retailers) and their Apple
store (retailers). Moreover, consumers can service their products and get support through
their Genius Bar (service).
Entrepreneurship and sources of capital
Capital is necessary for a business to run and expand their operations.
Entrepreneurship
Businesses primary objective is to make profit, which rewards the owners as it proves their
idea, willingness to take risk as well as a proper use of capital to create a successful
business. The owner is called an entrepreneur.
Sources of capital
A business can get it’s capital from the owners who pay up-front investments to establish the
business. They hope the business will be able to earn back the investment and associated
opportunity cost (like interest on a high yields savings account) with extra profit. For
example, this would be the owner buying the coffee machines and tables and chairs for their
new cafe.
Businesses can also get capital through borrowing money from creditors or lenders, such as
the bank. This often occurs when the owner’s investment and existing profits are not enough
to finance the businesses growth. This is risky as businesses need to pay the debt off, often
with interest. Thus, businesses need to aim to have solvency too along with profit motivation.
Business structures
Businesses follow certain structures and undertake legal forms, often based on size and
capital requirement, which have different laws for different structures. The structures are sole
proprietorship, partnerships and companies.
Sole proprietorship
Businesses owned by one person, who invests in the capital, are sole proprietors. They
control all the decisions the business makes and are often selling merchandise or offering a
service.
The owners have unlimited liability of the debts and the profits are taxed on the owners own
individual income in the section ‘other sources of income’. Moreover, since the business is
directly linked to the owner, it has a limited life, where if the owner decides to sell the
business, the new owners need to consider if they want to continue the business as a sole
proprietorship or as another structure.
Partnerships
Partnerships are businesses that are owned by two or more people, who act as agents and
cna make significant business choices on behalf of each other. The partners all invest capital
into the business. Partners are recommended to sign partnership agreements that clearly
outline the nature of the business, the amount of capital invested by each partner, the share
of returns and conditions of admission and withdrawal of a partner and how assets will be
distributed if the partnership is terminated.
Since partnerships are directly linked to the partners, the business has a limited life, where
the partnership terminates when a partner joins or leaves. The partners also assume
unlimited liability of the business, where the debts are shared across the partners and they
may need to use personal assets to repay the debts (but not their personal residence and
other assets under bankruptcy laws). Moreover, if a partner uses their personal assets to pay
off a business debt, then the other partners need to repay that partner.
In partnerships, any assets that a partner invests in or purchases belongs to all the partners
under joint ownership. For example, if you open a cafe using your own house as the
location, then your house no longer belongs to you, but rather shared across the partners.
Partners also need to decide how they split the income generated by the company and list it
on the partnership agreement as part of owner’s equity, which are often based on how much
capital the partner invests in and the dollar value of their time invested into the business.
Companies
A company or corporation is a separate legal entity that is independent of the owners and it
is run by a board of directors. This separation allows the business to survive after the owners
change, causing it to have a continuous lifespan. Moreover, companies have transferable
ownerships units, often through the form of stocks, which attracts a diverse range of
investors and reward the shareholders for their capital investment through dividends
repayments. This causes companies to have limited liability due to the easy transfership of
ownership, which may make it harder for smaller companies to gain capital and investors.
Companies also need to pay income tax on their taxable income, currently at 30%. The
income shareholders earn must also be reported and
The regulatory environment
There are many regulations businesses needs to follow, such as taxation laws,
environmental laws, employee work condition laws as well as the international laws if they
operate internationally.
The accounting system
Accounting systems records the information about the business so they can prepare for
financial statements. This has two branches, that being financial accounting and
management accounting.
Management accounting
Management accounting are for internal users such as managers to request tailored
information on certain departments, operations, products and hour worked by employees in
the units they want it in, such as dollar value, units, hours worked or products manufactured.
The managers need the information to evaluate their next choices as a response to the
changing conditions.
Financial accounting
Financial accounting creates information that follows the Generally Accepted Accounting
Principles (GAAP) for external users to understand the businesses financial position.
Management activities
Managers run the businesses by setting goals, making decisions and make sure resources
are going to places that will help businesses reach their goals. This involves planning,
operating and evaluating.
Planning:
The plan establishes the business goals and the ways of achieving the goals. Managers
need to identify the resources needed to achieve these goals and create benchmarks to
measure the businesses actual performance against these goals.
For large companies, managers need to make sure their goals are accessible by everyone in
the departments, such as having multiple language, currencies, markets and legal systems
to make sure everyone is on the same page.
Operating:
Managers need to make daily choices to make sure the business engages in a conduct that
reaches their goals. Managers use data to make choices on aspects like when to add or
drop products, inventory level and advertisement level prepared by accountants. The
managers make these choices by evaluating the businesses progress to their goals, and
implement the choices in hopes it helps align the business trajectory to reach the goals.
Evaluating:
Managers need to evaluate the businesses performance against their standards or
benchmarks, where the differences provide feedback on issues that they need to address
and prevent in future plans. As part of this, managers need to be aware of the cultural
impacts when evaluating as it can affect the operation in different countries.
Accounting support for management activities
The accounting system identifies, records, measures, summarises and communicates
economic information about the business to users. For management accounting, the users
are internal users, such as managers, individuals or teams who use the information for
planning, operating and evaluating their operations.
Internal users undergo planning through a budget, operating through a cost analysis and
evaluating through a cost report for products and services.
Budgets
Budgets quantify a manager’s plans and shows the impact of their plans on the business
position. They will evaluate the result to see the various aspects of the business that
followed the plan.
Cost analysis
Cost analysis or cost accounting evaluates costs of a specific product or service before
making decisions about the products. This is to see which products are profitable, and which
ones cost more to create than sell, and they would consider to remove the unprofitable
products.
Cost reports of product and services
A cost report shows the total actual cost for a given month, which may deviate from the
budgeted amount.
Accounting support for external decision making
Financial accounting identifies, measures, records, summarises and communicates business
data for external users, like banks or investors. These data aid the external users to make
decisions, such as whether a bank will loan money to the business, or investors will provide
capital for the company.
They must follow the Generally Accepted Accounting Principles (GAAP) which provide a
strict structure for the accountants to ensure they follow and provide all the minimum data
necessary.
Basic financial statements
Businesses operate to achieve goals, and to do so, they need to achieve their primary
objectives to make a profit and remain solvent.
Financial statements are accounting reports that summarises the businesses financial
information. There are three main ones, the income statement, the balance sheet and cash
flow statement. Some supporting financial statements are statements in changes to owner’s
equity.
Income Statement
Income statements, or profit and loss statements, summarises the results of a business
operating in a specific time period, and the businesses profit for the period. The statement
would show revenue, expenses like operating expenses, income taxes, wages, cost of
products, rent etc.
Statement of changes in Owners Equity
This statement shows the changes in owners equity, such as disinvesting into the business,
reinvesting into the business, additional contribution to the company.
Balance Sheet
Balance sheets summarises a businesses financial operations on a given day, typically on
the last day of a financial period. This includes assets like capital, inventory and money
owed to the business, liabilities like debt, outstanding expenses and money owed by the
business, owners equity like the owner’s investment into and out of the business.
Cash flow statements
Cash flow statements summarises cash receipts, cash payments and net change in cash for
a given period of time.
Ethics in Business and Accounting
Ethics are important in accounting to make sure the reports paint an accurate picture of the
business and ensure users can make an accurate evaluation of the company for the next
decisions they take.
Professional organisations code of ethics
The International Federation for Accountants (IFAC) establishes the code of ethics for
accountants to follow internationally, such as objectivity, professional competency,
confidentiality, fees and commissions and resolution of ethical issues. While these are the
international minimum, they expect each nation to implement a national code of ethics to
cater for cultural differences, language and legal structures.
Ethics at a business level
Businesses now need to consider ethics when organising their operations to please the
rising demand for ethical practises.
Many people expect businesses to be sustainable, which causes an economic cost that
accountants need to consider when creating their statements and reports. WHile it is more
expensive to be environmentally conscious, the rising demand for products that value
sustainability often justifies the extra purchase. For example, it might cost more to use
domestic resources like australian-grown cocoa beans but it ensures there is no modern
slavery and exploitation which people may use to justify purchasing a more expensive
product.
Accountants in a changing society
Accountants now need to be able to make judgement, have knowledge, critically analyse
and problem solve, communication, teamwork and self manage for the current economy.
They need:
●​ Knowledge
●​ Judgement
●​ Communication skills
●​ Teamwork skills
●​ Self-management skills
●​ Critical thinking
Cost-volume-profit analysis
Planning a new business
It is a continuous process that describes the business goals and methods of achieving it.
It involves:
1.​ Business description
2.​ Marketing plan
3.​ Operating plan
4.​ Environmental management plan
5.​ Financial plan
The main purposes are to:
1.​ Visuales and organise business operations
a.​ Able to identify areas to improve
b.​ Utilise new perspectives to solve operational inefficiencies
2.​ Acts as a benchmark for future performance measure
3.​ Use it to obtain financial capital and loans
a.​ Might be part of the application process for loans
b.​ Evaluates risk and returns associated with the business
Description of a business
It explains the organisation of the business, the product and services they provide and the
important individuals in the business like investors and managers, their current and potential
customers, location and objectives.
The Marketing Plan
The marketing plan details how you will sell the products, the potential influences and the
response to market conditions. This is important for investors, as it shapes the success of
the business if it is implemented well.
This plan includes the evidence of demand for a product, market research, current and
expected competition in the market, sales forecast, marketing strategy and can help inspire
other business operations like purchasing inventory.
Operating Plan
This plan details the relationships between suppliers, other businesses and customers, as
well as how they plan to improve and develop their products or services. The other
influences that can impact a business would be detailed here, such as concerns of special
interest groups, regulations, need for patents and trademarks and impact of international
trade.
Environmental management plan and sustainability
As businesses are expected to manage and reflect on their impact on living and non-living
natural systems, in which they can employ an environmental management accounting
system to increase efficient use of materials and reduce environmental impact by utilising
cost and financial accounting data.
This is difficult to implement due to the unclear regulations, have hidden costs and need a
constant development of tools to measure their environmental impact.
Public sector reporting provides some structure and guidelines to ensure consumers are
aware of each businesses environmental impact. An example of this is the environment
management system.
Financial Plan
This plan identifies a businesses capital requirements and sources of capital, as well as
describing the businesses projected financial performance, and start-up costs for new
businesses. They also need to make sure they include GST if they pass the guidelines.
Acquiring capital
Managers and owners need to identify what capital the business needs and how much of it
is needed. As these are projections, it is important for businesses to have cash buffers to
react to unforeseen circumstances. For example, identify they need a store, so they do
some appraisals of potential store locations, then they would analyse the business’s
projected cash payments and receipt then determine whether they need to borrow money to
invest in the capital and available funding.
Sources of capital
Organisations need to be able to identify ways to acquire the capital.
Short-term capital need to be repaid in a year ir less. It can be acquired through credit or
trade credit and take loans or lines of credit. Short term liability is liabilities that will be paid
off in a year, this also includes line of credits unless specified.
Long-term capital need to be paid to creditors, or returned to investors, for more than a year.
It can be acquired from the owners or a bank loan. If the business needs cannot be financed
by the owners or the bank, managers can also consider private placements and public
offerings. This includes owners assets and any long-term debts.
Projected Financial Performance
This includes the expected sales and purchase of inventory and expenses, as well as cash
receipts and payments.
CVP planning
CVP analysis shows how profits are influenced by alternative sales volume, selling prices
and costs associated to produce a product. Businesses use these to understand the impact
of their changes on the business and determine whether it is worth it or not.
Cost behaviour
Cost analysis considers the activity level of a business and their associated cost.
Fixed cost are constant for the time period and doesn’t change with different volume of
goods produced in the relevant range. This can be manager wages, rent and bills for a time
period. The costs can change for the next time period, such as renting a new location.
Variable cost change for the amount of volume produced and it is constant per unit
produced. It increases in proportion to volume increases. For example, a variable cost could
be materials, as it can be to bulk buy materials once you produce enough units.
Total costs are the sum of fixed and variable costs.
Profit calculations
Profit = revenues - expenses
= (sale price - variable cost)x - fixed cost
This can be graphed out, where the difference between total cost and total revenue above
the break-even point is a profit, and below the break-even point is a loss.
Contribution margin
Contribution margin = sale price - variable cost
This difference will contribute to cover the fixed cost, and any point above the breakeven
point is where the contribution margin covers the fixed cost so the business can begin to
make a profit.
Contribution margin per unit = (sales price- variable cost)/ no. of units
Using CVP analysis
As CVP analysis shows the impact of alternative plans on profit, it allows managers to make
decisions, as well as allowing investors to analyse the risk associated with investing in a
company.
Estimating profit at a given sales volume
Profit = (selling price of good - variable cost per unit)* unit sold - total fixed cost
Finding break-even point
Breakeven point = fixed cost/(selling price per unit - total variable cost per unit)
​
​
= fixed cost/ (contribution margin per unit)
Finding unit sales volume to achieve a target profit
Unit sales volume = (total fixed cost + desired profit)/contribution margin per unit
Using CVP analysis for ‘what if’ scenarios
CVP analysis can help see the impact of different operating choices on profits, such as
increasing prices of a good or producing a premium line. However, the analysis doesn’t
consider the effect the choices might have on consumers and the economics behind it, such
as reducing demand when prices increase.
No business plan !?
When there isn’t a sound business plan, companies may rush into markets and fail to
consider the economic stance of their company and the long-term health of the company.
This can include selling products below break-even point to attract customers, but doing so
in an unsustainable way, spending money on advertisements or investing in industries with
high start-up cost.
Budgeting
Budgets help businesses measure out when the business receives and loses cash and
manage their resources.
Why budget?
Budgeting is a tool for businesses to use to achieve their strategies and objectives.
It also provides:
-​ Discipline and order to the planning process
-​ Need to consider the impact of operational choices which budgeting provides
some order and detail into it
-​ Recognise and avoid potential operating problems
-​ Businesses can uncover operational problems, inconsistencies or omissions
of their plans before they occur
-​ For example, a florist might want to buy more flowers before valentines day,
but they realise their current inventory won’t be sufficient so they order more
in advance
-​ Quantify plans
-​ It expresses the objectives and goals in numbers
-​ This includes the resources needed to use for it’s planned sales and
purchasing activities
-​ Create a benchmark to evaluate performance
-​ Utilise management by exception to identify the areas that have a major
difference between projected and budgeted results
-​ Able to evaluate how efficiently they used resources and areas to improve on
-​ Able to find areas to make changes
Operating cycles
Business quantifies plans in relation to the operating cycle, which changes depending on
retail, service or manufacturing businesses.
Retail operating cycles
This refers to the average time it takes for retail stores to pay for inventory that are made on
charge accounts, sell the goods to consumers and collect cash from consumers. When
purchasing inventory, it also turns up as a credit purchase that results in accounts payable.
Sales to the customers are credit sales, which result in accounts receivable.
Service operating cycle
This refers to the average time a service business takes to acquire cash to buy supplies and
services, sell the services to a customer and receive payment for the services. This cycle is
much longer than retail operating cycles as the job may take a long time to complete so
some companies might collect periodic payment for completing a section of work.
The budget as a framework for planning
Budgets help organise the different aspects of the business. The master budget is a
structure that organises everything in the budgeting process. The master budget is usually
for a year or more in the future, breaking it down into the budget period (usually a quarter)
and having monthly budgets associated with it.
It involves:
1.​ Goals to be met
2.​ Activities to be performed
3.​ Resources to be used
4.​ Expected financial results
Retail master budgets have:
1.​ Sales budget
2.​ Purchase budget
3.​ Selling expense budget
4.​ General administrative expense budget
5.​ Cash budget/ projected cash flow budget
6.​ Projected income statement
7.​ Projected balance sheet
Services master budgets have:
1.​ Sales budget
2.​ Expense budgets [merges selling, general administrative expenses]
3.​ Cash budget/projected cash flow budget
4.​ Projected income statement
5.​ Projected balance sheet
Manufacturing master budgets have:
1.​ Sales budget
2.​ Purchase budget
3.​ Selling expense budget
4.​ General administrative expense budget
5.​ Cash budget/projected cash flow budget
6.​ Projected income statement
7.​ Projected balance sheets
8.​ Direct material purchase budget
9.​ Direct labour budget
10.​Cost of goods sold budget
Sales budget
This budget impacts all the other budgets, so it is the cornerstone of the budgeting process.
The sales budget includes the estimated units sold, which can be influenced by market
research or economic conditions, expected revenue and the expected cash collected as it
may stagger for credit customers. Businesses need to consider who to offer credit purchases
to, as they want reliable customers who will pay their bill in a reasonable time, as well as
being aware on how the payments will be made.
This is similar for both retail and service industries, however, services will budget for the
selling of their service over units of products.
Seasonal sales
Some business have certain times of the year with more or less demand, and they need to
recognise it and react accordingly. For example, a ski shop would have most demand during
the winter months, and the month leading to winter, and little to no demand during summer.
The retail business purchase budget
Purchase budgets show the amount of inventory needed each month to prepare for the
predicted sales from the sales budget and keep inventory at the desired level.
Retail businesses need to know how much stock they should have in their inventories to
make sure they have enough for business operations, while not too much for inefficient use
of investments. Too much inventory also opens risk of theft, obsolete products and more
insurance and tax on inventory and reach the physical limit of the storage areas. Businesses
can mitigate this by implementing just-in-time inventory and avoid stockouts due to their
costly nature.
For businesses that purchases inventories from overseas countries, they need to adjust to
the changing currencies and shipping times.
The retail business’s selling expense budget
The selling expense budget shows the expenses and related cash payments associated with
the planned selling activities, like salespeople commissions and salaries, shop rent and
advertising. Accountants need to review past data if it is available and consider the fixed
costs like rent and advertising and the variable costs like salespeople commissions. They
need to find patterns in behaviour to predict the selling patterns to create a budget.
Businesses also need to differentiate between selling expenses like rent with general and
administrative expenses.
The budget includes a schedule of estimated payments for these expenses.
The retail business’s general and administrative budget
The general and administrative budget is the expenses and related cash payments that are
for expected activities not related to selling a good. This can include the administrative staff,
rent of the office and consulting charges.
To create one, people need to review past budgets if possible, identify the variables as fixed
or variable and adjust the variables for the current plan. There needs to be a schedule of
budgeted cash payments for each month.
The service business’s expense budget
Service businesses prepare an operating expense budget that can vary between each
business. Service businesses don’t measure their volume of activities by units, like a retail
business, but rather through ways like number of hours worked by employees since service
industries are labour intensive. Service companies do have similar fixed expenses like a
retail business such as rent and advertising. Since environmental impact is a rising value for
consumers, businesses might try to use accounting to cover costs of the environmental
impact, like carbon offsets.
Cash management and the cash budget
Cash management is important as businesses need to have enough cash to pay for planned
operational activities, a cash buffer without having too much cash on hand.
Without enough cash to pay for business activities businesses won't be able to pay off their
bills and expenses, and eventually be forced to close their business. Businesses need to
have both long-term and short-term financing sources, such as line of credit at a bank to
borrow money, and make sure they pay their debts.
Cash buffers are good to react to any unforeseen circumstances, such as increased cost of
products or broken machinery.
Having too much cash on hand reflects an ineffective use of resources and not used
productively, where the business should be continuously re-investing into the company to
increase efficiency and profits.
The retail business’s cash budget
The cash budget shows the business’s expected cash receipts and payments and it’s effects
on the cash balance. It helps businesses manage their cash buffer, prevent shortages and
surpluses, as well as help external users like banks to evaluate the business’s likelihood to
repay debts.
There are three sections to the budget, and they are the:
1.​ Operating activities section
-​ Summarises cash receipts and cash payments in an operating cycle
-​ It shows the net cash inflows (cash payments < cash receipts) and outflows
(cash payments > cash receipts)
2.​ Investing activities section
-​ The expected cash payments and receipts from investment
-​ Businesses usually have policies surrounding investment
3.​ Financing activities section
-​ Cash payments and receipts from planned financial activities such as
repaying loans and investments
The service business’s cash budget
The cash budget is similar, except service business source their information from the sales
budget and the operating expense budget.
The projected income statement
The projected income statement is a summary of the expected revenue and expenses for
the budget period. It is NOT the same as the cash budget, as it is the predicted money spent
and gained, while cash budget is the actual cash receipts and payments. For example, if
salaries are on a fortnightly cycle, the first week, the salaries would be on the projected
income statement as they have not paid the workers yet, but the second week, the salaries
will be recorded on the cash budget as it has been paid, and therefore a cash payments.
The projected balance sheet
This sheet shows the assets, liabilities and equity on a specific date which would be
matched to the projected income statement at the end of the budgeting period.
Master budgets to evaluate business performance
Budgets need to be evaluated to see how well different divisions, departments and teams
perform, in which it can act as a motivational tool for workers to achieve the aims of the
business, however, it is hard to execute the motivational aspect well. Managers need to be
able to see where things went wrong, and take corrective actions over time.
Finding differences between budgeted and actual amounts
Managers need to find the cause of the differences to decide which action they should take
for future budgeting periods. By presenting data in a cost report, or other methods,
managers can clearly see the differences between budgeted and actual amounts to use
critical thinking to evaluate the causes of the difference and react accordingly.
Learning why the differences occurred
Identifying the problem comes from noticing the difference between budgeted and actual
amounts. Then, managers need to critical think to find the causes behind it, looking at the
external and internal factors to see if future operations and budgets needs to be adjusted.
These differences can be both good and bad, where the difference could be a surplus or a
deficit and different actions are needed.
For example, if the budgeted expense for electricity bill is lower because of a 10% discount
for businesses, then the budget should reflect that for the next budgeting period. However, if
it was due to the excessive use of electricity as the lights remain on during closed times,
then the manager can adjust the operations to make sure the lights are turned off, and thus
saving electricity costs.
Questions to ask consultation
When does rent go into cash budget vs general and administrative budget
-​ Sales
-​ Inventory budget **
-​ Cash budget, sales budget and inventory budget
-​ Cash collection and inventory styled question
Tax system for companies
“ If some, or all, of the after-tax income of the company is distributed to shareholders as
dividends, the shareholders may be taxed on this personal income, but only pay tax on that
portion of their income in tax brackets higher than the 30 per cent corporation tax already
paid.”
-​ Don’t have to worry about that
-​ It is in taxation
Is the budget from the unit questions ok (format wise)
Notes:
In exam, don’t care about the method of finding the answers
-​ Just show formula, no need to write out what it is
If just ask:
Collect cash
-​ Cash sales in the month → cannot forget
-​ Credit sales will take most of th etime due to the percentages associated
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Two major questions: ‘in the following months’ (need to find the credit sales in
the month before and the cash collected in x month)
‘Only x% of credit sales can be collected, (100-x)% will be bad debts”. If you
have a credit sale, multiply the credit sale *95%
The question only will change variable cost if it mentions it
Per unit is fixed,