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- Has an unlimited life Use the following format to indicate with a "yes" or "no" whether or not a characteristic applies to each type of business organization.
- Trade receivables occur when two companies trade or exchange notes receivables. Other receivables include nontrade receivables such as loans to company officers. Both accounts receivable and notes receivable represent claims that are expected to be...
- B Questions 1. Why It Matters; 6. Current liabilities: Liabilities that are expected to be paid within a year or … More. Chapter 9. Find posts on Accounting Questions and Answers. Search for: Recent Posts. Accounting Questions Video: Apply accounting equation to determine total revenues. View Chapter 9 Quiz - principlesofaccounting. Chapter 9: Long Learn vocabulary, terms, and more with flashcards, games, and other study tools. Identify the different types of receivables. Explain how companies recognize accounts receivable.
- Distinguish between the methods Net income does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, net income appears in ….
- A comprehensive plan is developed for all revenue and expenditures. Discretionary, engineered and committed costs. All revenue and expenditures for any company. Appropriation Budgets The oldest type of budget is referred to as an appropriation budget. Appropriation budgets place a maximum limit on certain discretionary expenditures and may be either incremental, priority incremental, or zero based. Incremental budgets are essentially last year's budget amount plus an increment, i. Priority incremental budgets also involve an increase, but require managers to prioritize, or rank discretionary activities in terms of their importance to the organization.
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The idea is for the manager to indicate which activities would be changed if the budget were increased or decreased. Zero based budgeting was popular for a while around the time of Jimmy Carter's Presidency, but was dropped by most users because it was too expensive and time consuming. When it was popular, a more typical approach was to justify the last twenty percent of the budget, i. From a control perspective, appropriation budgets are effective in limiting the amount of an expenditure, but create a behavioral bias to spend to the limit.- Establishing a maximum amount for an expenditure encourages spending to the limit because spending below the limit implies that something less than the maximum appropriation was needed. Spending below the limit might result in a budget cut in future periods. Since nearly every manager views a budget reduction in their discretionary costs as undesirable, there are frequently crash efforts at the end of a budget period to spend up to the limit.
- See Supplemental Exhibit. Flexible Budgets The flexible budget was introduced in Chapter 4. The constant "a" represents a static amount for fixed costs and the constant "b" represents the rate of change in Y expected for a unit change in the independent variable X. The expression " bX" is the flexible part of the budget cost function. The flexible budget technique is used for planning and monitoring all types of costs. The static amount "a" includes both discretionary and committed costs, while the flexible part "bX" includes various types of engineered costs. The flexible characteristic of the technique enables the flexible budget to play a key role in both financial planning and performance evaluation.
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The planning dimension is emphasized in this chapter and the performance evaluation aspect is given considerable attention in Chapters 10 and Capital Budgets Capital budgets represent the major planning device for new investments. Discounted cash flow techniques such as net present value and the internal rate of return are used to evaluate potential investments.- Capital budgets are part of a somewhat more encapsulating concept referred to as investment management. Investment management involves the planning and decision process for the acquisition and utilization of all of the organization's resources, including human resources as well as technology, equipment and facilities. The concept of investment management includes the discounted cash flow methods, but is more comprehensive in that the organization's portfolio of interrelated investments is considered as well as the projected effects of not investing.
- Master Budgets The fourth type of budget is referred to as the master budget or financial plan. The master budget is the primary financial planning mechanism for an organization and also provides the foundation for a traditional financial control system. More specifically, it is a comprehensive integrated financial plan developed for a specific period of time, e.
- This is a much broader concept than the first three types of budgeting. The master budget includes many appropriation budgets typically in the administrative and service areas as well as flexible budgets, a capital budget and much more. A diagram illustrating the various parts of a master budget is presented in Exhibit The master budget has two major parts including the operating budget and the financial budget See Exhibit The operating budget begins with the sales budget and ends with the budgeted income statement. The financial budget includes the capital budget as well as a cash budget, and a budgeted balance sheet. The main focus of this chapter is on the various parts of the operating budget and the cash budget.
- The budgeted balance sheet is covered briefly, but not emphasized. A detailed discussion of capital budgeting and investment management is provided in Chapter 18 after some other prerequisite concepts are introduced. In the next section, we consider the purposes, benefits, limitations and assumptions of the master budget. Consider the following: Integrates and Coordinates The master budget is the major planning device for an organization.
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Thus, it is used to integrate and coordinate the activities of the various functional areas within the organization. For example, a comprehensive plan helps ensure that all the needed inputs equipment, materials, labor, supplies, etc. It also helps insure that manufacturing is planning to produce the same mix of products that marketing is planning to sell. The idea is that the products should be pulled through the system on the basis of the sales budget, rather than produced speculatively and pushed on the sales force. As discussed in Chapter 8, excess inventory and other resources hide problems and add unnecessary costs. The integrative nature of the budget provides a way to implement the lean enterprise concepts of just-in-time and the theory of constraints where the emphasis is placed on the performance of the total system organization rather than the various subsystems or functional areas.- This communication tends to be good for morale and enhance jobs satisfaction. People need to know how their efforts add value to the organization and its' products and services. The behavioral aspects of budgeting are extremely important. Promotes Continuous Improvement The planning process encourages management to consider alternatives that might improve customer value and reduce costs. Recall that "Plan" is the first step in the Shewhart-Deming plan- do-check-action continuous improvement cycle discussed in Chapter 8. The financial plan and subsequent financial performance measurements reflect the financial expectations and consequences of those efforts. Guides Performance The master budget also provides a guide for accomplishing the objectives included in the plan.
- The budget becomes the basis for the acquisition and utilization of the various resources needed to implement the plan. In a JIT environment, the budget can also serve as a guide to vendors. We will develop this idea in considerable detail in the following chapter. Performance evaluation and control is a very powerful and very controversial aspect of budgeting. These problems involve uncertainty, behavioral bias and costs. Uncertainty Budgeting includes a considerable amount of forecasting and this activity involves a considerable amount of uncertainty. Uncertainty affects both sides of the financial performance dichotomy, see Exhibit but uncertainty on the revenue side presents a more serious limitation for planning. The sales budget is frequently based on a forecast supported by a variety of assumptions about the economy, the actions of the federal reserve board and congress in implementing monetary and fiscal policy, and the actions of competitors, suppliers, and customers.
- The uncertainty associated with sales forecasting creates a greater problem than uncertainty on the cost side because the other parts of the budget see Exhibit are derived from the sales forecast. This forces management to constantly monitor and analyze changes in the economic environment. From the planning perspective, the inability to accurately forecast the future reduces the usefulness of the original budget estimates for materials requirements planning MRP and planning for other resource needs. Uncertainty on the cost side tends to be less of a problem because management has more influence over the quantities of resources consumed than over the quantities of their own products purchased by customers. From a performance evaluation and control perspective, uncertainty on both sides of the financial performance dichotomy is not as much of a problem because flexible budgets are used to fine tune the original budget to reflect expectations at the current level of activity.
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The manner in which flexible budgets are used for performance evaluation is given considerable attention in Chapter 10 and Chapter Behavioral Bias A second problem involves a variety of behavioral conflicts that are created when the budget is used as a control device. To be effective, the budget must be used by the managers it is designed to help. Thus, it must be acceptable to all levels of management. The behavioral literature on budgeting supports the view that the budget should reflect what is most likely to occur under efficient operating conditions. If a budget is to be used as an effective planning and monitoring device, it should encourage a high level of performance and efficiency, but at the same time, it should be fair and obtainable. If the budget is viewed by managers as unfair, too optimistic it may intimidate rather than motivate. One way to gain acceptance is referred to as participative rather than imposed budgeting.- The idea is to include all levels of management in the budget preparation process. Of course this process must be coordinated by a budget director to ensure that a fair budget is obtained that will help achieve the goals of the total organization. Another way to reduce the behavioral bias against budgeting is to recognize the concepts of variation and interdependence when using the budget to evaluate performance. Recall from our discussion of the statistical control concept in Chapter 3 that there is variation in all performance and most of this variation is caused by the system , i. The concept of interdependence refers to the fact that the various segments of a company are part of a system.
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Inevitably, these segments, or subsystems influence each other. Failure to adequately recognize the interdependencies within an organization tends to cause behavioral conflicts and motivate participants to optimize the performance of the various segments subsystems rather than to optimize the performance of the overall system. Finally, the behavioral conflicts associated with budgeting are reduced by using flexible budgets when evaluating performance.- We will return to these ideas below and again in Chapter Costs A third problem or limitation is that budgeting requires a considerable amount of time and effort. Many companies maintain a twelve month budget on a continuous basis by adding a future month as the current month expires. Many small, potentially profitable firms, do not plan effectively and eventually fail as a result. Cash flow problems are common, e. Many of these problems can be avoided by preparing a cash budget on a regular basis. These assumptions facilitate the planning process by removing many of the economic complexities. The overall effects of these simplifications are illustrated graphically in Exhibit Instead of planning on the basis of the more complicated non-linear model on the left, the master budget is very similar to the more easily understood linear model on the right.
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