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Contents

Question 1.

a) Cash budget

b) Sources of fund.

Debt Capital

External Source: Debt Financing: Merits.

External Source: Debt: Shortcomings.

Question 2.

a) Variance analysis.

b) Interpretation of variance analysis.

Reference.

Accounting for Managers - Question 1

a) Cash Budget

Cash Budget

Cash Budget

July

Aug

Sep

Oct

Nov

Dec

Total

Opening Cash Balance

10000

4500

-4800

-32300

-79300

40900

-61000

               

Cash Inflows:

             

Total Cash Collections

167500

215500

297500

395000

443000

352000

1870500

               

Total Cash Available

177500

220000

292700

362700

363700

392900

1809500

               

Cash Outflows:

             

Total Cash Payments

133000

184800

252000

322000

282800

179200

1353800

Selling, General & Administrative Expenses

40000

40000

40000

40000

40000

40000

240000

Taxation Expense

 

33000

   

33000

66000

Capital Expenditure

     

80000

   

80000

               

Total Cash Outflow

173000

224800

325000

442000

322800

252200

1739800

               

Closing Cash Balance

4500

-4800

-32300

-79300

40900

140700

69700

b) Sources of Fund

Every business entity including companies requires funds to perform its business operations, to expand their businesses into new locations or markets, to overcome the competition or to invest in research & development (RND). Like any other company, both the selected companies also have limited sources to raise to raise capital funding or external funding. The various sources are:-

  • Retained Earnings
  • Debt Capital
  • Equity Capital

Debt Capital

Like any other entity, companies also can borrow money in the form of private bank loans or issue of debentures, corporate bonds or other debt securities to public. Using debt issues a huge number of investors can become the lenders to the company. The most important drawback of debt capital is the fixed payments (interest) to the lenders.

External Source: Debt Financing: Merits

  1. With debt financing the ownership rights remains intact and a limited number of people has the controlling powers:
  2. The Taxation Agencies offers various deductions upon the financing cost.
  3. The costs of financing (or interest rates) are comparatively lower than the cost of equity.

External Source: Debt: Shortcomings

  1. The major shortcoming of debt financing is that the company has to make fixed periodical repayments to the lender irrespective of profits or losses in the company.
  2. The lender in order to guarantee the repayment of loan from the company requires some collateral security.
  3. The ability to repay the loans highly impacts the credit rating of the company.
  4. The company is required to have large pool of liquid funds like cash or equivalents.

Accounting for Managers - Question 2

a) Variance Analysis

Particulars

Budgeted

Actual

Variance $

Variance %

Sale

800

760

-40

-5%

Price

40

40

0

0%

Revenue

32000

30400

-1600

-5%

Supplies

1600

2000

400

25%

Labor

16000

16000

0

0%

Variable Utilities

1600

1520

-80

-5%

Fixed OH

9000

9000

0

0%

Profit / (Loss)

3800

1880

-1920

-51%

b) Interpretation of Variance Analysis

The actual to budget variance analysis is very important during the financial planning of a business. It is a process by which the budget of a company gets compared to the actual outcomes and later interpretation of the reasons for the variance is conducted.

When budgeted figures are compared to the actual figures numbers, and the differences are called as variance. It is calculated for revenue, labor, materials, and variable expenses. However, management pays attention to variances that are significant. Generally, analysis of these variances is conducted to identify any problem in order to fix them or to improve the overall performance of the company. This is an unfavorable situation

As per the above variance analysis of ABC Pty Ltd, the actual sales revenue is less by 5% than expected (budget), the main reason is that the company was not able to sale its services as per expectations (800 WCD) and could sale only 760 WCDs

Despite of lower sales volume, the cost of supplies increased by $400, this is also an unfavorable situation

The variable utilities witness a little decrement in the actual figures ($ 1520) as compared to the budgeted figures ($ 1600). The main reason is that the actual sales remain lower than the budgeted sales and variable expenses are directly depended on the sales volume. This cannot consider being a favorable situation.

Overall the overall profit of the company gets reduced considerably.

Reference for Sales Budget and Actual Sales Analysis

Coleman, S., Cotei, C. and Farhat, J. 2016. The debt-equity financing decisions of US startup firms. Journal of Economics and Finance, 40(1), pp.105-126.

Schwienbacher, A., Baker, T. and Welter, F. 2015. Financing the business. The Routledge companion to entrepreneurship, pp.193-206.

Yazdanfar, D. and Öhman, P. 2015. Debt financing and firm performance: an empirical study based on Swedish data. The Journal of Risk Finance, 16(1), pp.102-118.

Chiu, C.H., Choi, T.M., Dai, X., Shen, B. and Zheng, J.H., 2018. Optimal advertising budget allocation in luxury fashion markets with social influences: a mean‐variance analysis. Production and Operations Management, 27(8), pp.1611-1629.

Saputra, M.D. and Putrayasa, M.A., 2018, May. Analysis of sales budget and actual sales at CV Sumberjaya. In Proceedings (Vol. 1, No. 1, pp. 141-146).

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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