Manage Budgets And Financial Plans
Provide answers to all of the questions below:
- Explain the basic principle of double entry bookkeeping.
Bookkeeping is based on two basic principles. One is that every debit must have an equal credit. The second, that all accounts must balance, follows from the first. A chronological record of all transactions is kept in a journal used to track all bookkeeping entries.
Every business transaction causes at least two changes in the financial position of a business concern at the same time – hence, both the changes must be recorded in the books of accounts. This concept is explained on Analysis of Business Transaction page. Otherwise, the books of accounts will remain incomplete and the result ascertained therefore will be inaccurate. For example, we buy machinery for $100,000. Obviously, it is a business transaction. It has brought two changes – machinery increases by $100,000 and cash decreases by an equal amount. While recording this transaction in the books of accounts, both the changes must be recorded. In accounting language these two changes are termed as “a debit change” and “a credit change” The detail about these terms is given under the topic account. Thus we see that for every transaction there will be two entries – one debit entry and another credit entry. For each debit there will be a corresponding credit entry of an equal amount. Conversely, for every credit entry there will be a corresponding debit entry of an equal amount. So, the system under which both the changes in a transaction are recorded together – one change is debited, while the other change is credited with an equal amount – is known as double entry system.
- Describe the principle of cash accounting and one advantage and one disadvantage of this method of accounting.
The accepted cash accounting definition is an accounting method wherein sales are recorded at the time of payment and expenses are recorded at the time they are paid. Only when cash actually changes hands is the payment or expense recorded; this is in contrast to accrual basis accounting, which records credits when they are earned, rather than received, and debits when they are owed, rather than when they are actually paid.
- Shows Cash Flow:The cash method most resembles a cash flow statement. It provides an accurate picture of how much cash your business actually has on-hand.
- Single-Entry System:While the simplicity of the single-entry system needed for the cash method is an advantage, it is also a disadvantage. The accrual method necessitates the use of a double-entry system, which is based on accounting equations. This system provides far greater control of transaction posting, and reduces the chance of errors.
- Describe the principle of accrual accounting and one advantage and one disadvantage of cash accounting
Required under the Generally Accepted Accounting Principles (GAAP), accrual basis accounting is an approach that attempts to simulate the economic reality of the activities of a business, rather than simply recording transactions as they take place. This method is a given for a large company, but for a small one, it may not be that beneficial. To determine whether accrual basis accounting is appropriate for your business or not, it is best to understand the advantages and disadvantages that come with it.
It allows for easy planning: One process that will become easier with accrual basis accounting is planning, especially that it allows you to account for all of your expenses and revenue within the right period. This entails that you will be able to create budgets for your expenses and predict sales, which is essential to inventories, staffing and other areas of operation. Aside from easier planning, this accounting method can help with reducing your tax burden by issuing invoices at the start and the end of the year.
Restrictions: According to the IRS, you cannot use the cash method if your business maintains inventory, is a corporation, or has gross receipts in excess of five million dollars per year. These are the general rules, but there are exceptions — so if you feel that your business falls into one of these categories, you should consult a professional.
- Explain the two accounting principles on which the calculation and reporting of deprecation is based.
The calculation and reporting of depreciation is based upon two accounting principles:
- Cost principle: This principle requires that the Depreciation Expense reported on the income statement, and the asset amount that is reported on the balance sheet, should be based on the historical (original) cost of the asset. (The amounts should not be based on the cost to replace the asset, or on the current market value of the asset, etc.)
- Matching principle:This principle requires that the asset’s cost be allocated to Depreciation Expense over the life of the asset. In effect the cost of the asset is divided up with some of the cost being reported on each of the income statements issued during the life of the asset. By assigning a portion of the asset’s cost to various income statements, the accountant is matching a portion of the asset’s cost with each period in which the asset is used. Hopefully this also means that the asset’s cost is being matched with the revenues earned by using the asset.
- Identify and explain three key features of A New Tax System (GST) Act 1999.
- Identify and then explain the four main taxation and superannuation obligations for a business. Briefly discuss each obligation.
- According to GST legislation, list four items that do not attract GST.
- Explain the process by which a business reports GST to the Australian tax office.
The GST reporting method you use is based on your business’s GST turnover and other reporting requirements:
-If your GST turnover is less than $10 million
-you generally report GST using the default Simpler BAS reporting method
-if your aggregated turnover is greater than $10 million, or you make input taxed supplies as your main business or enterprise activity, you have the option to use either Simpler BAS or the GST full reporting method
-if you pay GST instalments quarterly and report annually, you may use the GST instalment method.
On your annual GST return, you must report the following GST information:
-G1 Total sales
-1A GST on sales
-1B GST on purchases
-1H GST instalment amounts reported in your quarterly instalment notices for the period shown on the annual GST return.
- What is the penalty rate to be applied if a supplier does not provide an ABN?
When a payer makes payments to suppliers for goods or services to the business, those suppliers generally need to quote an Australian business number (ABN). They can quote their ABN on an invoice, or some other document that relates to the goods and services they provide.
If a supplier does not provide its ABN, the payer may need to withhold an amount from the payment for that supply – this is referred to as ‘no ABN withholding’. Certain suppliers are not required to quote an ABN to a payer. In these cases, the suppliers can use the form to justify the payer not withholding from the payment to the supplier.
- A non-profit organisation needs to register for GST after it has a turnover of more than how much?
Your GST turnover meets the registration turnover threshold if your current GST turnover or your projected GST turnover threshold is at or above the turnover threshold.
Your current GST turnover is the value of all the supplies (sales) you make during the current month and the previous 11 months. Your projected GST turnover is the value of all of your sales you make during the current month and the next 11 months.
Both the current and projected GST turnover is based on your gross income, excluding all of the following:
sales that are input taxed sales
sales not connected with an enterprise that you carry on
sales that are not made for consideration (unless the sales made to associates).
A gift made to you is not considered payment for a sale and is not subject to GST. The value of a gift is also excluded when calculating your GST turnover.
If you are not registered for GST, you will need to calculate your current GST turnover and your projected GST turnover each month to identify if you are required to be registered for GST purposes, ie when either of these turnovers are $150,000 or more.
Generally, you must register for GST within 21 days if either GST turnover meets or exceeds the GST turnover threshold of $150,000.
- List the key information that must be included on a tax invoice for sales of $1,000 or more.
Tax invoices for sales of $1,000 or more need to show the buyer’s identity or ABN.
If your tax invoices meet the requirements for sales of $1,000 or more, you can also use them for sales of lesser amounts.
- that the document is intended to be a tax invoice
- the seller’s identity
- the seller’s Australian business number (ABN)
- the date the invoice was issued
- a brief description of the items sold, including the quantity (if applicable) and the price
- the GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, such as a statement which says ‘ Total price includes GST’
- the extent to which each sale on the invoice is a taxable sale (that is, the extent to which each sale includes GST).
- Identify and explain three types of financial statements and their purpose.
Financial statements provide a picture of the performance, financial position, and cash flows of a business. These documents are used by the investment community, lenders, creditors, and management to evaluate an entity. There are four main types of financial statements, which are as follows:
Income statement: This report reveals the financial performance of an organization for the entire reporting period. It begins with sales, and then subtracts out all expenses incurred during the period to arrive at a net profit or loss. An earnings per share figure may also be added if the financial statements are being issued by a publicly-held company. This is usually considered the most important financial statement, since it describes performance.
Balance sheet: This report shows the financial position of a business as of the report date (so it covers a specific point in time). The information is aggregated into the general classifications of assets, liabilities, and equity. Line items within the asset and liability classification are presented in their order of liquidity, so that the most liquid items are stated first. This is a key document, and so is included in most issuances of the financial statements.
Statement of cash flows: This report reveals the cash inflows and outflows experienced by an organization during the reporting period. These cash flows are broken down into three classifications, which are operating activities, investing activities, and financing activities. This document can be difficult to assemble, and so is more commonly issued only to outside parties.
- Describe the type of entity that is required to have financial reports audited.
Certain types of entities must have their financial reports audited by a registered company auditor.
A company (other than a small proprietary company), registered scheme (managed investment scheme) or disclosing entity (a body that holds enhanced disclosure securities) must have its annual financial report audited and obtain an auditor’s report.
However a proprietary company may be exempt from having its financial report audited (see Regulatory Guide 115 and CO 98/1417Audit Relief for Proprietary Companies) or may otherwise be eligible for audit relief.
A disclosing entity must have its interim financial report reviewed and obtain a registered company auditor’s review report.
- Explain the purpose of a financial audit and auditor’s report.
The purpose of an audit is for an independent third party to examine the financial statements of an entity. This examination is an objective evaluation of the statements, which results in an audit opinion regarding whether the statements have been presented fairly and in accordance with the applicable accounting framework (such as GAAP or IFRS). This opinion greatly enhances the credibility of the financial statements with users, such as lenders, creditors, and investors. Based on this opinion, users of the financial statements are more likely to provide credit and funding to a business, possibly resulting in a reduced cost of capital for the entity.
An auditor’s report is a written letter attached to a company’s financial statements that express its opinion on a company’s compliance with standard accounting practices. The auditor’s report is required to be filed with a public company’s financial statements when reporting earnings to the Securities and Exchange Commission (SEC). However, an auditor’s report is not an evaluation of whether a company is a good investment. Also, the audit report is not an analysis of the company’s earnings performance for the period. Instead, the report is merely a measure of the reliability of the financial statements.
- Describe why companies may choose to develop budgets.
Budgeting is the basis for all business success. It helps with both planning and control of the finances of the business. If there is no control over spending, planning is futile and if there is no planning there are no business objectives to achieve.
A budget is a plan to:
- control the finances of the business
- ensure that the business can fund its current commitments
- enable the business to meet it objectives and make confident financial decisions; and
- make sure that the business has money for future projects.
The benefits of budgeting should never be underestimated when running a business:
- budgeting estimates revenue, plans expenditure and restricts any spending that is not part of the plan
- budgeting ensures that money is allocated to those things that support the strategic objectives of the business
- a well communicated budget helps everyone understand the priorities of the business
- the process of creating a budget provides opportunities to involve staff, resulting in them sharing the organisation’s vision; and
- engaging the team in reviewing and comparing the budget with actuals can provide information that highlights the strengths and weaknesses of the business.
If you’re running your business without a proper budget you may find you’re actually just running around in circles and not meeting your long-term goals. By taking the time now to set a budget, you will free up time in the future and give yourself the best chance of achieving the rewards you want for your hard work.
- Explain the main steps in the budgeting process.
Are economic troubles causing you to consider your personal financial situation? You may be worried about losing your job or how much debt you have. Avoid a potential personal financial crisis; get back to basics with a budget you can stick to. Here’s how to start:
Goals for your money will help you make smart spending choices. Ask yourself: What do I want my finances to look like in one year? Decide what’s important to you and start there.
You probably know how much you earn each month – but do you also know where it all goes? Find out by tracking what you’re spending. Spend as you normally would, but for a few weeks, jot down every cent you spend. It’s easy and you might be amazed by what you find out.
Ask yourself: Do I want this or do I need it? Will spending this money get me closer to my financial goals or further away? Can I live without it? Set clear priorities for yourself and the decisions become easier to make.
Make sure that you are not spending more than you make. Balance your budget to accommodate everything you need to pay for. One easy way to do this is with our free, easy-to-use budget calculator spreadsheet and worksheet that’s built for Canadians.
Match your spending to when you receive your income. Decide ahead of time what you’ll use each pay cheque for. Ask yourself: Have I allocated money for my necessities (housing, food, utilities, transportation, etc.)? Have I put money aside for my debt payments, unexpected expenses, savings and the fun stuff? This will protect you from going into debt further because you won’t rely on credit to pay for your living expenses.
You know that things will “just come up” – school expenses, new shoes or an annual membership. Set money aside to pay for these expenses so you can afford them without going into debt.
- List 5 ways to improve cash inflow and give examples.
1 – Regular financial reviews
Having detailed and up-to-date knowledge of your financial performance is critical. If financial management isn’t your strength, engage a strong finance team to advise you, and ensure they maintain a steady focus on cash flow and profitability rather than growth rate.
Your schedule should include a monthly analysis of your financial statements, looking not just at your current financial status, especially your free cash flow, but also at past performance (your trends and trajectory, particularly your profitability ratios and return on capital employed (ROCE)) and at forecasts for the immediate and longer-term future.
Regularly drill down and examine the financial performance of each of your product or service lines and sales channels, as well as your stock levels, debtors and assets.
This information will help you to make informed strategic decisions about your operations, and enable you to identify potential issues in time to take corrective action to protect your cash flow. For example:
- Organising short-term finance to cover working capital shortages
- Matching the timing of expenditure to income if you have fluctuating income (by delaying discretionary purchases or negotiating with creditors)
- Adjusting your stock policy if you’re tying up cash in excess inventory (be wary, for example, of buying extra stock to take advantage of vendor discounts or rebates, as savings can quickly be lost to storage costs)
- Tightening up your credit terms or collection policies if too much cash is tied up in bad debts, and imposing purchase restrictions until debts are cleared, or even ending relationships with clients that have a poor payment record.
2 – Regular strategic reviews
Unfortunately, for many businesses, a strategic plan is something that’s created once then either forgotten or followed rigidly without review. As a result, precious cash gets tied up in obsolete stock, irrelevant marketing campaigns, bad debts and unnecessary assets.
To stay competitive and keep your cash flowing freely you need to regularly re-examine every aspect of your business to make sure that your:
- Product lines or services still meet your customers’ needs
- Sales channels are aligned with your customers’ preferences
- Marketing initiatives are successfully attracting new customers
- Technology and equipment are appropriate for your needs (it can be tricky to find the balance between staying efficiently up-to-date and not wasting cash on unnecessary upgrades).
Being willing to change direction and redefine your strategy – including making tough decisions on the future of product lines, sales channels, marketing strategies and assets that are draining your cash flow – is critical to long-term success.
3 – Cautious growth
One of the main reasons companies run out of cash is that they grow too fast.
The risk is that in order to meet the demands of new customers or clients, you’ll have to invest heavily in infrastructure, materials or labour. That up-front investment can wipe out your working capital reserves and leave you dangerously exposed until you receive the funds from the extra sales.
If you don’t have the cash to meet your financial obligations in the meantime, your business may not survive to reap the benefits of that sales growth.
Focus instead on steady, cautious growth that won’t exhaust your cash reserves or stretch your resources to the point where your service levels (and reputation) will suffer. And be very wary of funding growth with borrowings, especially when interest rates are rising.
4 – Prudent borrowing
Loan repayments can be a major drain on your cash reserves, and unless you’ve locked in fixed interest rates you’re always at risk from rate increases that can play havoc with your forecasts and quickly deplete your cash reserves.
The most important measure you can take to minimise your cost of borrowing is to make sure the term of your loans match your business needs:
- Never use short-term facilities like an overdraft or credit card to finance the purchase of long-term assets. Not only will you pay higher interest rates and charges, you also run the serious risk of having the facility withdrawn before the asset is paid off – leaving you with an instant cash flow crisis.
- Avoid using long-term funding to boost your working capital. Many long-term loans have penalties for early repayment, which can leave you locked into paying for finance you no longer need. Instead, opt for at-call finance to smooth out fluctuations in your cash flow, so that you’ll only pay interest on funds when you need to draw on the facility.
- Shop around for business finance, especially if you need a fast cash injection – the ‘fintech’ alternative loan market is booming in Australia, offering a competitive source of funding for businesses of all sizes. Be aware, though, that alternative lenders aren’t regulated in the same way that Australian banks are, and some may seek to impose restrictive loan conditions in order to reduce their risk.
5 – Putting your cash to work
While most cash flow improvement measures focus on finding ways to increase cash reserves, it’s actually possible to have too much cash, earning negligible interest and leaving you with poor ROCE.
If you do happen to have large cash reserves – more than you need to meet your working capital needs, fund your loan obligations and cover an extended downturn in sales – you may want to consider reinvesting those funds in your business.
One way you can use excess funds to improve cash flow is to repay loans (if you can do so without incurring penalties) since the interest you earn on your savings will never match the amount you’re paying on your borrowings.
- Explain the use of electronic spreadsheets in developing budgets and give two of their key features.
An electronic spreadsheet can be used to automatically perform numerical calculations. Spreadsheet programs are usually set up in the form of a table with rows and columns. Each row and column intersects to form a cell in which data may be stored. These data may be a text label, a number, or a formula that combines data from other cells.
In security management spreadsheets are of immense value in preparing and tracking budgets, calculating expenses, estimating job costs, and conducting other numerical analyses. Data entries can be easily changed to analyze their effect. Another useful feature of most spreadsheet programs is the ability to graphically display results. Different types of graphs and charts can be used to visually display fluctuations and trends in the relationships between different variables within a spreadsheet. Spreadsheets are also a useful tool to keep track of expense and income.
There are many features of an electronic spread sheet that makes it really significant.
*The sheet helps to organize and assess different types of information with ease.
*The sheet can be used to generate various kinds of reports for communication within departments.
*The sheet is a vital tool for data management activities like data entry, data sorting, and data extraction.
*The sheet can calculate mathematical formulae based on content entered in other cells.
*The sheet offers functionality, portability, and flexible customization to a great extent.
*The sheet enhances productivity by reducing time spent on everyday accounting tasks.
- Explain three key principles relating to the management of a chart of accounts.
- Explain the purpose of a profit and loss statement and give two of its key features.
The P&L statement answers a very specific question: Is the company profitable? While accountants use the P&L statement to help gauge the accuracy of financial transactions and investors use the P&L statement to judge a company’s health, the company itself can review its own statement for productive purposes. Closely monitoring financial statements highlights where revenue is strong and where expenses are incurred efficiently, and the opposite is true as well. For example, a company might notice increasing sales but decreasing profits and search for new solutions to reduce costs of operation.
Interest expense is one of the core expenses found in the income statement. A company must finance its assets either through debt or equity. With the former, the company will necessarily incur an expense related to the cost of borrowing. Understanding a company’s interest expense helps to understand its capital structure and financial performance.
Tax accounting is one of the largest subsets or specializations within the field of accounting. In terms of corporate finance, there are several objectives when it comes to accounting for income taxes and optimizing a company’s valuation.
Net income is the amount of accounting profit a company has left over after paying off all its expenses. Net income is found by taking sales revenue and subtracting COGS, SG&A, depreciation, and amortization, interest expense, taxes and any other expenses.