1. Block 3 Section 4 Bringing information to life Prepared by Hanady A. Osman

2. H. A. Osman 2 Budgets Budgets (Pg. 98 Binder)  A budget is a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows.  A budget provides a focus for the organization, aids the co-ordination of activities, and facilities control.

3. H. A. Osman 3 Example of a Budget control report for a profit centre Example of a Budget control report for a profit centre (Pg. 99 Binder)

4. H. A. Osman 4 Uses of budgets Uses of budgets (pg. 235 Text)  They tend to promote forward thinking and the possible identification of short- term problems.  They can be used to help co-ordination between various sections of the business.  They can motivate managers to better performance.  They can provide a basis for a system of control

5. H. A. Osman 5 Example 9.1 Example of a Cash Budget Example 9.1 Example of a Cash Budget (Pg. 237/238 Atrill & McLaney) Suppliers Ltd is a wholesale business. The budgeted profit and loss account for the next six months is as follows JanFebMarAprMayJune Sales 5255 605553 Cost of goods sold 3031 353132 Salaries and wages 10 Electricity 554333 Depreciation 333333 Other overheads 222222 Total expenses 505150534950 Net profit 245763

6. H. A. Osman 6 The business allows all of its customers one month's credit (that is, goods sold in January will be paid for in February). Sales during December had been £60,000. The business plans to maintain stocks at their existing level until sometime in March, when they are to be reduced by £5,000. Stocks will remain at this lower level indefinitely. Stock purchases are made on one month's credit December purchases were £30,000). Salaries, wages and 'other overheat paid in the month concerned. Electricity is paid quarterly in arrears in March and June. The business plans to buy and pay for a new delivery van in March This will cost a total of £15,000, but an existing van will be traded in for f as part of the deal. The business expects to start January with £12,000 in cash Show the cash budget for the six months ending in June

7. H. A. Osman 7 Solution Cash budget for the six months ending 30 June JanFebMarAprMayJune Receipts 605255 6055 Payments 30 31263531 Salaries and wages 10 Electricity 14 Other overheads 222222 Van Purchase 11 Total payment 42 68384752 Cash surplus 1810(13)17133 Cash balance 304027445760

8. H. A. Osman 8 Financial Performance Statements Financial Performance Statements (Pg.106/107 Binder) Balance Sheet: Is a financial position statement shows how an organization is performing in a stated period of time (e.g. for the year ending July 2005). ASSETS = CAPITAL + LIABILITIES

9. H. A. Osman 9 Balance Sheet Format Balance Sheet Format (Pg. 32 Atrill & McLaney)  Assets :  Assets : A summary listing of items owned or controlled by the organization.  Liabilities/Claims :  Liabilities/Claims : Amount owned by the organization.  Capital/Owners Equity:  Capital/Owners Equity: The difference between the Assets and Liabilities.

10. H. A. Osman 10 Balance Sheet Format Balance Sheet Format (Pg. 32 Atrill & McLaney) FA + CA = C + LTL + CL FA + (CA-CL) – LTL = C

11. H. A. Osman 11 ASSETS FIXED ASSETS CURRENT ASSETS Freehold premises Plants & machinery Office equipment Cash at bank Short-term investments Debtors Fixtures & fittings Motor Vehicles Patents Classifications of Assets Classifications of Assets (Pg. 28-30 Atrill & McLaney) Stock of work-in- progress Accounts Receivables

12. H. A. Osman 12 Liabilities LONG TERM LIABILITIES CURRENT LIABILITIES Long term mortgages Debentures Trade creditors Accounts payable Long term loans Classifications of Liabilities Classifications of Liabilities (Pg. 30 Atrill & McLaney) Bank overdrafts

13. H. A. Osman 13 XYZ Manufacturing Balance sheet as at 31 December 2000 $ $ Fixed assets Freehold premises45,000 Plant & machinery30,000 Motor vans19,000 94,000 Current assets Stock-in-trade23,000 Trade debtors 18,000 Cash at bank 12,000 53,000 147,000 $ Capital Opening balance 50,000 Add profit 14,000 64,000 Less drawings 4,000 60,000 Long-term liabilities Loan50,000 Current liabilities Trade creditors 37,000 147,000 Balance Sheet Format Balance Sheet Format (Pg. 31 Atrill & McLaney)

14. H. A. Osman 14 Interpreting the balance sheet Interpreting the balance sheet (Pg. 41-42 Text) The following aspects of financial position can be examined;  The liquidity of the business.  The mix of assets held by the business.  The financial structure of the business.

15. H. A. Osman 15 Cost Based Technical Information (Pg. 113 Binder) COSTING Costs represent the resources that have to be sacrificed to achieve a business objective. Costs classifications;  Fixed Costs:  Fixed Costs: those that stay fixed when changes occur to the volume of activity, and  Variable Costs:  Variable Costs: those that vary according to the volume of activity.

16. H. A. Osman 16 Examples of fixed and variable costs at a hairdressing salon Fixed costs  Rent  Insurance  Cleaning costs  Staff Salaries Variable costs  Lotions and other materials used  Laundry costs to wash towels used to dry the hair of customers

17. H. A. Osman 17 Cost Analysis Cost Analysis (Pg. 114 Binder) Activity 4.8

18. H. A. Osman 18 Graphical representation of Costs (Pg. 182-184 Atrill & McLaney) Fixed Costs Cost ($) Volume of activity (unit of output) F 0 Variable Costs Cost ($) Volume of activity (unit of output) 0

19. H. A. Osman 19 Cost ($) Volume of activity (unit of output) F 0 Fixed Costs Variable Costs Graphical representation of Total Cost (Pg. 182-184 Atrill & McLaney)

20. H. A. Osman 20 Cost ($) Volume of activity (unit of output) F 0 Total Costs Fixed Costs Variable Costs Graphical representation of Total Cost (Pg. 182-184 Atrill & McLaney)

21. H. A. Osman 21 Sales Revenue is equal to the units sold multiplied by the selling price per unit Cost ($) Volume of activity (unit of output) 0 Total sales revenue Graphical representation of Total Sales Revenue Graphical representation of Total Sales Revenue (Pg. 182-184 Atrill & McLaney)

22. H. A. Osman 22 Break-even chart (Pg. 187 Atrill & McLaney) Cost ($) Volume of activity (unit of output) F 0 Total Costs Fixed Costs Variable Costs Break-Even point Total sales revenue

23. H. A. Osman 23 Break-even point-formula (Pg. 187/188 Atrill & McLaney) Total revenues = Total Costs Total revenues= FC + TVC (b x Sales per unit) = FC + (b x variable cost per unit) (b x Sales per unit)-(b x variable cost per unit)= FC b x (Sales per unit-variable cost per unit)= FC Therefore: Fixed Costs b = Sales per unit-variable cost per unit

24. H. A. Osman 24 Full costing (Pg. 116 Binder & Pg. 208 Atrill & McLaney) Where units of output are not identical, we normally separate costs into two categories;  Direct costs:  Direct costs: These are costs that can be identified with specific cost units.  Indirect costs (or overheads):  Indirect costs (or overheads): These are all other costs. That is cannot be directly measured in respect of each particular unit of output.

25. H. A. Osman 25 Job costing (Pg. 207 Atrill & McLaney) The term job costing is used to describe the full cost per unit of output (job) where the units of output differ. Direct costs Of the unit Full cost of the unit Fair share of Indirect costs (overheads)

26. H. A. Osman 26 Uses of full cost information Uses of full cost information (pg. 225 Text)  For pricing purposes: Full costs are used as the basis of pricing. Here the full cost is deduced and a percentage is added on the profit.  For income measurement purposes: To measure business’s income it is necessary to match expenses with the revenues realized in the same accounting period.

27. H. A. Osman 27 Measuring & reporting financial performance (Pg. 47 Atrill & McLaney) The purpose of the profit and loss account- or income statement is to measure and report how much profit (wealth) the business has generated over a period. Profit (loss) for the period Total revenue for the period less Total expenses incurred in generating the revenue =

28. H. A. Osman 28 Hi-Price Stores Trading and profit and loss account for the year ending 31 October 2000 Sales Less Cost of Sakes Gross profit Add interest received from investment Less Salaries and wages Rent and rates Heat and light Telephone and postage Insurance Motor vehicle running expenses Loan interest Depreciation – fixtures and fittings Depreciation – motor van Net profit £ 24,500 14,200 7,500 1,200 1,000 3,400 1,100 1,000 600 £ 232,000 154,000 78,000 2,000 80,000 54,500 25,500 Profit & Loss Account Format Profit & Loss Account Format (Pg. 31 Atrill & McLaney)

29. H. A. Osman 29 Some concept used in the P/L account (Pg. 47-60 Atrill & McLaney)  Revenue/Sales  Cost of sales  Gross profit  Expenses  Depreciation  Net profit