Adeyanju Akeem -ACA

22/08/2017

Cash Flow Budget

Liquidity and cash flows management are key factors in the successful operation of any organization and it is with good reason that the cash budget should receive close attention from both accountants and managers.

Cash budget shows the effects of budgeted activities (i.e. selling, buying, paying wages, investing in capital equipment and so on) on the cash flow of the organization. It predicts a company's ability to take in more money than it pays out. Managers monitor cash flow budgets to pinpoint shortfalls between expenses and sales. Cash budgeting is a continuous activity with budgets being rolled forward as time progresses. The budgets are usually subdivided into reasonably short periods (months or weeks). The cash budget serves the following purposes:
a) To determine the cash need of an organization.
b) To determine external financing required to meet up
anticipated activities.
c) It identifies excess or shortage of cash by time periods
d) It establishes a sound basis for continuous monitoring of
the cash position.
e) To determine how much that should be held in cash and
how much to be place in the bank
f) To determine whether organization’s should take away
investment opportunity.

Cash budget is usually prepared after taking into consideration anticipated inflows and the expected outflows.
The following are the expected sources of income (inflow) in cash budget:

a) Cash collected from creditors.
b) Capital introduced into the business.
c) Cash realized from the disposal of fixed asset.
d) Loan or overdraft.
e) Commissions, fines etc
f) Bank interest, dividends etc.

The outflows or expenditures include the following:
a) Payment for the purchase of raw materials
b) Payment of wages and salaries
c) Payment of administrative overheads.
d) Acquisition of fixed assets.
e) Payment of rent, tax interests, commissions, dividends etc.

22/08/2017

Flexible Budget

A flexible budget is a dynamic budget that is prepared for more than one level of activity with the objective of obtaining perfect performance evaluation report through the help of overhead costs behavior identification.

Flexible budget is defined as a budget which, by recognizing the difference in behavior between fixed and variable costs in relation to fluctuations in output, is designed to change appropriately with such fluctuations.

The above definition bring about the true features of flexible budget as the budget that provides the management with fluctuations that are expected either as a result of change in demand or other factors. Flexible budget therefore meet the requirements of what is happening at the moment by identifying the appropriate behavioural aspect of fixed and variable costs in cost estimation.

Characteristics of Flexible Budget

Flexible budget possesses the following characteristics :

a) It covers a range of activity
b) It is a dynamic budget
c) It explains the importance of cost behavior
d) It helps substantially in performance report evaluation
e) It can be used to determine selling price.

Steps involved in the determination of flexible budget

1) Ascertain the proper range of activity levels to be covered.
2) Segregate the cost into fixed and variable.
3) Find out the variable cost per unit of output.
4) Find out the total marginal cost of each level which is
equal to marginal cost per unit obtained in (3) above
multiplied by units expected.
5) Add the fixed cost to the result obtained in (4) above.
6) Add appropriate percentage of profit expected.
7) Add items (5) and (6) together in order to obtain the
selling price.
8) Selling price per unit equals item (7) above divided by
expected units.

22/08/2017

Operational Budgets
The operational budget covers revenues and expenses surrounding the day-to-day core business of a company. Revenues represent sales of products and services; expenses define the costs of goods sold as well as overhead and administrative costs directly related to producing goods and services. While budgeted annually, operating budgets are usually broken down into smaller reporting periods, such as weekly or monthly. Managers compare ongoing results to budget throughout the year, planning and adjusting for variations in revenue.
The following are the possible components of an operational budget:
a) Sales budget
b) Production budget
c) Production cost budget
- Direct materials budget
- Direct labour budget
- Production overhead budget
d) Cost of goods sold budget
e) Selling and administrative expenses budget etc.
f) Budgeted income statement

22/08/2017

NOTE ON MARKUP AND MARGIN

Margin is profit expressed as a percentage of sales while markup is profit expressed as a percentage of cost.
Margin =profit/Sales x100.
Markup = profit/Cost x100.

QUESTION
A company earned N250,000 profit from goods costing N1,250,000. What is the sales Margin?

SOLUTION
The question was asking for margin and sales was not given. All you need to do is to add profit to cost to derive sales i.e. 250,000+1,250,000 = 1,500,000

The divide profit by sales to derive the answer i.e. 250,000/1,500,000 x 100 =16.7%
Note further that a margin x Sales = Profit and Markup x Cost = profit

Therefore, margin goes with sales while markup goes with cost.
You might be faced with a question where margin and cost is given or markup and sales given with the requirement of profit derivation. All you need do is to convert from margin to markup and from markup to margin respectively.

To convert from margin to markup, deduct the numerator of the margin from its denominator while the numerator remains constant e.g. 20% margin = 20/100-20 = 20/80= 1/4 = 25% markup

And to convert from markup to margin, add the numerator of the markup to its denominator leaving the numerator constant e.g. 25% margin = 25/100+25 = 25/125 = 20% Margin

22/08/2017

Short Note On Subscription Account in Accounts of Non Profit Making Organisations

Subscription account is one account you can’t escape in the aforementioned topic and some students find it difficult understanding how to treat it.

Note that subscription in arrears/due/outstanding/accrued/owing (which ever used) is an asset to the organisation (usually club).

While subscription in advance/prepaid (whichever) is a liability to the organisation.

If you know fully well that all assets are to be debited and all liabilities are to be credited, the remaining lies in your interpretation of the question (English Language may be a factor here)

The questions will always give you opening and closing balances of both subscription in arrears and subscription in advance (all may not be given in all questions but treat anyone given the right way to get the desired result).

Open subscription account and follow the following steps:

- Place the opening balance of subscription in arrears on the debit side (asset)- Bal b/d
- Place the closing balance of subcription in arrears on the credit side (towards the lower part of the credit side-asset) i.e. Bal c/d
- Place the opening balance of subscription in advance on the credit side (liability) i.e. Bal b/d
- Place the closing balance of subscription in advance on the debit side (towards the lower part) i.e. Bal c/d.
- Go to the debit side of receipt and payment account to pick subscription received during theyear and drop it on the credit side of subscription account.
- Close the account. The credit side is expected to be greater than the debit side. The balancing figure is to be transferred to income and expenditure account.

Note further: Balance c/d on the credit side represents debit balance while balance c/d on the debit side represents credit balance.

Therefore, the closing balances in subscription account represents either asset (debit balance- sub in arrears) or liability (credit balance- subscription in advance).

The destination of all assets and liabilities is the statement of financial position (formerly known as balance sheet).

22/08/2017

Categories of Statement of cash flows

Operating activities
This is perhaps the key part of the statement of cash flows because it shows whether, and to what extent, companies can generate cash from their operations. It is these operating cash flows which must, in the end pay for all cash outflows relating to other activities, i.e. paying loan interest, dividends and so on.
Most of the components of cash flows from operating activities will be those items which determine the net profit or loss of the entity, i.e. they relate to the main revenue-producing activities of the entity. The following are examples of cash flows from operating activities.
(a) Cash receipts from the sale of goods and the rendering of services
(b) Cash receipts from royalties, fees, commissions and other revenue
(c) Cash payments to suppliers for goods and services
(d) Cash payments to and on behalf of employees
Certain items may be included in the net profit or loss for the period which do not relate to operational cash flows, for example the profit or loss on the sale of a piece of plant will be included in net profit or loss, but the cash flows will be classed as investing.

2. Investing activities
The cash flows classified under this heading show the extent of new investment in assets which will generate future profit and cash flows. Investing activities shows how a company has generated/ dispensed cash from/to its investment. The following are examples of cash flows arising from investing activities.
(a) Cash payments to acquire property, plant and equipment, intangibles and other non-current assets, including those relating to capitalized development costs and self-constructed property, plant and equipment
(b) Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets
(c) Cash payments to acquire shares or debentures of other entities
(d) Cash receipts from sales of shares or debentures of other entities
(e) Cash advances and loans made to other parties
(f) Cash receipts from the repayment of advances and loans made to other parties

3. Financing activities
This section of the statement of cash flows shows the share of cash which the entity's capital providers have claimed during the period. This is an indicator of likely future interest and dividend payments. The following are likely examples of cash flows which might arise under this heading.
(a) Cash proceeds from issuing shares
(b) Cash payments to owners to acquire or redeem the entity's shares
(c) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short or long term borrowings
(d) Principal repayments of amounts borrowed under finance leases
As for item (d). Where the reporting entity uses an asset held under a finance lease, the amounts to go in the statement of cash flows as financing activities are repayments of the principal (capital) rather than the interest. The interest paid will be shown under operating activities.

23/03/2017

09/02/2017

The way to success is never easy. Only those who refuse to give up will be able to push through.