Assignment Answers of Conventional Budgeting Advantages- BUSI685

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Solution to que stions
1. Income state me nts – compre he nsion to analysis an ide ntify stre ngths and we akne ss
Answe r: Income statement: It is a statement that shows expenses , losses , and gains. They are
applied to an accounting equation for ascertaining net profit or loss. They are important fo r
making decisions and for ascertaining financ ia l performance . Example : It includes cogs, sales,
expenses such as general expenses , mar keting expenses, etc.
I. Stre ngth: It gives detailed informatio n on revenues.
II. We akne ss: It can be based on various assumptions instead of facts.
2. Financial ratios: It is a tool that summarize s financ ia l statements and the health of the
company. These are applied by using values from financ ia l statements. It is important fo r
gaining insights into the liquid ity, profitability, and solvency position of the company. For
example, profit margin, current ratio, and debt ratio (Supriyanto & Darmawan, 2018) .
3. Inte rpre tation of ratios: Interpretatio n of ratios helps in interpreting raw data of a
company’s finances for getting input on overall performance. It is important for ev alua t in g
rates of return, growth, etc. Example : debt -equity ratio.
4. Inve ntory manage me nt: It is a process of storing using and selling the inventory of the
company. It is used by companies for identifying which and how much stock to order. It is
important f or tracking inventory from purchase to sale of goods. Example : raw materia ls
for chairs (Wild, 2017).
5. Ope rational analysis: It is a method used for examining the current performance of the
operational investme nt. It is applied against a set of parameters a nd goals of performa nc e .
It is important as it reveals strengths, weaknesses, and opportunities for improveme nt.
Example : operating cost.
6. Occupancy rate s: It is the ratio of space used to the total amount of availab le space.
I. How it ’s calculate d: It is cal culated by dividing the total number of rooms
occupied by the total rooms available. It is calculated in percentage. It is
important for analysts in understand ing changes in residentia l and commerc ia l
real estate markets. Example : build ing, hospital beds.
7. Billing and colle ction: Billing are the process of raising and sending invoic es to custome rs
and also requesting them to clear dues and collectio n is the process of chasing past dues
receivables on account of customers. Example : telephone billing, professi ona l billing.
8. Re ve nue cycle : It is a process of defining and mainta ining the processes that are used fo r
the completio n of the accounting process. It is applied for recording revenues generate d
from products provided by the company.
I. Re ve nue cycle compone n t: Components are collectio n manageme nt, credit
manageme nt, cash and accounts receivable manageme nt, and dispute and deductio n
manageme nt.
9. Payme nt de nials: It means any non -cash adjustment includ in g price adjustment or anothe r
adjustment other than a credi t-related reason that is made to the net value of suc h
10. Proje cting cash flows: It means the breakdown of money going out and coming into the
business. It includes the calculatio n of income and expenses and that informa tio n is used
for ascertai ning cash left after a specified period. It is important for the owners as it help s
in understand ing the cash position. Example : loans, grants, sales.
11. Cash flow e stimation: It is a process of predicting cash inflo ws and cash outflows a
business will have a t a given point in time. It is applied using discounted and non –
discounted cash flow methods. It is important as it helps in determining the econo mic
viability of the long -term investme nt.
12. M inimising/ re ducing financial risk: It is the process of minimisin g current and possib le
financ ia l risk for decreasing an organizatio n’s exposure to risk. It is important as it helps in
increased stability and also helps in taking correct business decisions. Example : default on
debt, delay in delivery.
13. Common risk asse ssme nt te chnique : It is a process of determining a qualitative and
quantitative estimate of risk in relation to a well -defined solutio n.
i. Importance : It is important as it is an integra l part of a health and safe ty
manageme nt plan. Example : What if anal ysis, fault tree analysis.
14. De bt contract: It is a contract in which an agreement is made to repay funds to a lende r.
A debt contract is important for borrowing money as they protect both lenders as well as
borrower. Example : mortgage, interest rates, loan amount (Debt Contract, 2022).
15. Call provisions: It is an embedded option in the contract of bond purchase that gives the
issuer of the bond the right to redeem the bond before the date of maturity. It is applied in
corporate and munic ipa l bonds. It is impo rtant for the bond issuer as they are allowed to
redeem the bond before the date of maturity.
16. Bond -rating: It is a scheme of letter -based credit scoring used for judging the quality and
creditworthine ss of bonds. It is important as the rating alerts investors to the stability and
quality of the bond. Example : AAA, BBB.
17. Budge t planning: It is the process used f or constructing a budget and then using it to
control the business operation. It helps in mitigating the risk. It is important for crea ting
stability. Example : planning for risks, costs, and revenues (Foster, 2017).
i. Budge t planning a dvantage s:
ï‚· Better deci sion -mak ing.
ï‚· Budget planning helps in making continuo us improve me nts and also helps in
anticipating problems.
ii. Budge t planning d isadvantage s:
ï‚· Lot of informa tio n is required for budget planning.
ï‚· The budget planning is not done accurately then it can lead t o incorrect decisio ns
and costs can also be increased.
18. Conve ntional budge ting: It is a process used for adding funds to the budget of the previo us
year for expanding or completing projects. It is important as it helps in making decisions.
Conve ntional Bud ge ting advantage s:
1) Helps in decision making.
2) Easy to use
Conve ntional Budge ting dis advantage s:
1. Chances of errors are high .
2. It is a very time -consuming process.
19. Ze ro -base d budge ting: It is a process used for allocating funds on the basis of effic ie nc y
and necessity. It starts with a zero -base. It is important as it helps in reducing costs by
cutting unnecessary costs (Ibrahim, 2019).
Advantage s:
ï‚· It helps in better cost control.
ï‚· This budget helps in elimina ting wastage and slack.
Disadvantage s:
ï‚· This budget is mai nly focused on short -term.
ï‚· It takes more time.
20. Top -down budge t: It is a process used by senior manage me nt for preparing a high -le v e l
budget based on the objectives of the business. It is important as it helps in saving time and
resources for lower manageme nt.
Advantage s:
ï‚· It helps in better financ ia l control.
ï‚· It is a faster budgeting process.
Disadvantage s:
ï‚· The forecasting is not done accurately.
ï‚· There arises a conflic t between lower -leve l managers and company executive s.
21. Bottom -up budge t: It is a form of financ ia l budgeting where each department of the
company is allowed to set its own budget. It is important for the employ ees as they fe e l
motivated to work hard since the input is given by them in the organiza tio n and then it is
valued by the manageme nt.
Advantage s:
ï‚· This budget is accurate as an organizatio n is aware of expenses and resources.
ï‚· This budgeting gives motivati o n to employees to work harder and meet the
objectives of the company.
Disadvantage s:
ï‚· The major disadvanta ge is lack of coordinatio n.
ï‚· Another disadvanta ge is overbudgeting .
22. Variance re port: It is a document in which the budgeted financ ia l outcome is compare d
with the actual financ ia l outcome. It is applied for analysing the differe nce in actual and
budgeted performance. It is important as it helps in mainta ining control over the expense s
of the project by monitoring actual and planned costs. Example : materia l price and usage
variance (Liu, 2022).
Debt Contract Wefunder (2022). Av ailable at: -and –
contracts/304887 -what -s-the -difference -between -debt -and -equity -based -contracts
(Accessed: 29 April 2022).
Foster, T. A. (2017). Budget planning, budget control, business age, and financial performance
in small businesses (Doctoral dissertatio n, Walden University).
Ibrahim, M. M. (2019). Designing zero -based budgeting for public organizatio ns. Problems
and Perspectiv es in Management , 17 (2).
Liu, Z. (2022). Variance Analysis of Variable Manufacturing Expenses under Standard Cost
Method. Forest Chemicals Rev iew , 827 -837.
Supriyanto, J., & Darmawan, A. (2018). The effect of financ ia l ratio on financ ia l distress in
predicting bankruptcy. Journal of Applied Managerial Accounting , 2(1), 110 -120.
Wild, T. (2017). Best practice in inv entory management . Routledge.


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