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the decision makers can determine the contribution margin per unit
of product by subtracting the estimated variable costs per unit from
the products estimated selling price. Then they can substitute the
contribution margin and the estimated fixed costs into the equation
and solve for the necessary sales volume.
6 How can decision makers predict the sales volume necessary to achieve
a target profit?
Predicting the sales volume necessary to achieve a target profit is
not very different from predicting the sales volume necessary for
estimated revenues to cover estimated costs. The only difference is
that the decision makers must modify the break-even equation by
adding the desired profit to the estimated fixed costs. Then, after
substituting the contribution margin and the estimated fixed costs
plus the desired profit into the equation, they can solve for the
necessary sales volume.
7 How can decision makers use accounting information to evaluate
alternative plans?
Decision makers can determine how changes in costs and revenues
affect the business profit. Based on accounting information alone,
the alternative that leads to the highest profit will be the best
solution. However, decision makers should also consider the nonfinancial effects that their decisions may have.
determine what other questions you have that might lead you to learn
more about the issues.
1 How does a budget contribute to helping a business achieve its goals?
A budget helps a business by giving a financial description of the
activities planned by the business to help it achieve its goals. It also
helps by adding order to the planning process, by providing an
opportunity to recognise and avoid potential operating problems, by
quantifying plans and by creating a benchmark for evaluating the
business performance.
2 Do the activities of a business have a logical order that drives the
organisation of a budget?
Yes, the operating activities of the business make up what is called
the business operating cycle. A business operating cycle is the
average time it takes the business to use cash to buy goods and
services, to sell these goods to or perform services for customers,
and to collect cash from these customers. The order of activities,
and the cash receipts and payments associated with these activities,
influence how a business organises its budget.
3 What is the structure of the budgeting process, and how does a
business begin that process?
The master budget is the overall structure used for the financial
description of a business plans. It consists of a set of budgets
describing planned business activities, the cash receipts or
payments that should result from these activities, and the business
projected financial statements (what the financial statements should
look like if the planned activities occur). The budgeting process
begins with the sales budget because product or service sales affect
all other business activities. By gathering various types of
information, such as past sales data, knowledge about customer
needs, industry trends, economic forecasts and new technological
developments, a business estimates the amount of inventory (or
employee time) to be sold (used) in each budget period. Cash
collections from sales are planned by examining the business creditgranting policies. Cash payments for expenses are planned by
examining the business payment policies.
4 What are the similarities and differences between a retail business
master budget and a service business master budget?
For a retail business, the master budget usually includes a sales
budget, a purchases budget, a selling expenses budget, a general
and administrative expenses budget, a cash budget and a projected
income statement (some businesses may also include a projected
4 What is bank reconciliation, and what are the causes of the difference
between a business cash balance in its accounting records and its cash
balance on its bank statement?
A bank reconciliation is an analysis that a business uses to resolve
the difference between the cash balance in its accounting records
and the cash balance reported by the bank on its bank statement.
The causes of the difference are deposits in transit, outstanding
cheques, deposits made directly by the bank, charges made directly
by the bank and errors.
5 How can managers control accounts receivable in a business?
Managers can control accounts receivable by evaluating a
customers ability to pay before extending credit, monitoring the
accounts receivable balance of each customer, and monitoring the
total accounts receivable balance.
6 How can managers control inventory in a business?
Managers can control inventory by establishing policies for ordering
and accepting inventory, establishing physical controls over
inventory being held for sale, and taking a periodic physical count of
the inventory.
7 How can managers control accounts payable in a business?
Managers can control accounts payable by coordinating and
monitoring credit purchases, making payments at the appropriate
time, and monitoring the total accounts payable balance.
determine what other questions you have that might lead you to learn
more about the issues.
1 Why is a business balance sheet important?
A business balance sheet is important because this statement
provides internal and external users with information to help
evaluate the business ability to achieve its primary goals of earning
a satisfactory profit and remaining solvent. A balance sheet provides
information about a business economic resources and the claims on
those resources (its financial position) on a specific date.
2 What do users need to know about a business classified balance sheet?
Users need to know that a business classified balance sheet shows
important subtotals, in related groupings, for the assets, liabilities
and owners equity of the business. The groupings include current
assets and non-current assets, as well as current liabilities and noncurrent liabilities. Current assets are cash and other assets that a
business expects to convert into cash, sell or use up within one year.
Current assets include cash, marketable securities, receivables,
inventory and prepaid items. Non-current assets are assets other
than current assets; these include items such as long-term
investments, as well as property and equipment. Current liabilities
are obligations that a business expects to pay within one year by
using current assets. Current liabilities include accounts payable and
salaries payable, unearned revenues and short-term notes (and
interest) payable. Non-current liabilities are obligations that a
business does not expect to pay within the next year; these include
items such as longterm notes payable, mortgages payable and
bonds payable.
3 What is a business liquidity, and how do users evaluate it?
A business liquidity is a measure of how quickly it can convert its
current assets into cash to pay its current liabilities as they become
due. Users evaluate a business liquidity by studying its working
capital (current assets minus current liabilities), current ratio (current
assets divided by current liabilities) and quick (acid-test) ratio (quick
assets divided by current liabilities).
4 What is a business financial flexibility, and how do users evaluate it?
A business financial flexibility is its ability to adapt to change.
Measures of a business financial flexibility are used to assess
whether the business can increase or reduce its operating activities
as needed. Users study a business current ratio and quick ratio to
evaluate its short-term financial flexibility. They study a business
debt ratio (total liabilities divided by total assets) to evaluate its
long-term financial flexibility.