# CASH BUDGETS AND RELATED TOPICS

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1 CASH BUDGETS AND RELATED TOPICS Article relevant to Formation 2 Management Accounting Author: Neil Hayden, current Examiner. In projected cash flow statements the information can be presented in a variety of ways. It is very important to ensure that you understand the information supplied and are capable of using it correctly. Otherwise it is easy to lose marks due to making incorrect assumptions or failing to state why you have made a particular assumption which may have a valid reason where there may be a lack of clarity in the information supplied. In cash flow questions potential problem areas are as follows: Treatment of VAT When preparing a projected cash budget all figures must include VAT. When preparing a projected trading and profit and loss account all figures are exclusive of VAT. Example relating to sales: Sales (before20% VAT) 20,000 In the cash budget the figure would be 20,000 *120% ( 24,000) or 20,000*120/100 (same result 24,000) In the trading and profit and loss account the figure would be 20,000 VAT should never appear in a trading and profit and loss account. Sales (inclusive of 20% VAT) 96,000: In the cash budget you would use (no change) In the trading and profit and loss account you would use the pre VAT figure 96,000*100/120 = 80,000 The same rules apply for purchases, expenses, sale and purchases of fixed assets: Opening debtors and creditors: These are always inclusive of VAT. CASH DISCOUNTS AND APPORTIONMENTS If cash payments or receipts are spread over a period remember that any discount will only apply to the amount paid or received in the month of the payment or receipt. Sales before 20% VAT 20,000. Receipts are as follows:

2 Month of sale (month 1) 20%: Following month (month 2) 70% less 5% discount. Two months after (month 3) 10% Step 1: Increase sale to VAT inclusive amount 20,000*120% (120/100) = 24,000 Step 2: Apportion as follows: Month * 20% = 2. 24,000*70%*95% = 4,800 15,960 Note (1) *10% = 2,400 Note 1: 5% discount means you receive (100% 5%) of the money which is 95% You get the same result if you use 24,000 * 70/100 * 95/100 If there is no reference to VAT then use the actual figures given or state any assumption which you make. CALCULATING SALES PURCHASES AND EXPENSES: In some examples you may have to calculate the sales purchases and expenses before you can start the cash flow. You may be given specifications and required to apply these before the actual results are known. An example would be as follows: Bill started a new project on the 1/1/2005. STANDARD SPECIFICATIONS. Selling price 450 per unit. Materials: Purchase price 5 per kilogram. Input per unit of finished production 5.2 Kilograms. Normal wastage.2 Kilograms: Standard usage 5 Kilograms. Labour: Rate 15 per hour. Input per completed unit 10.2 hours. Loss due to downtime etc. 0.2 hours: Standard rate 10 hours per completed units: Variable overheads: Based on labour hours. The rate charged is 12 per input hour. Fixed overheads: Based on labour hours: The rate charged is 10 per input hour. DETAILS: Purchases Produced Sold 540 kilograms 100 units 90 units THERE WERE NO VARIANCES FOR THE PERIOD: Closing stocks of raw material are valued at actual cost price. Closing stocks of finished goods are valued at standard cost price.

3 What additional information can we deduce from the above information? 1. When there is no variance then the actual and standard cost will be identical. Example: Material: Actual cost of a completed unit is 5.2 kg at 5 per kg = 26 Standard cost per kilogram is 5 * input (5.2)/ output (5) = 5.2: Standard cost per completed unit it is 5* 5.2 = 26 Labour: Actual cost per completed unit is 15* input hours 10.2 = 153. Standard cost per hour. 15* 10.2/10 = Standards cost per completed unit 15.3* 10 = 153. Variable overheads: Actual cost per completed unit is 12* 10.2 = Standard cost per hour is 12*10.2/10 = Standard cost per completed unit is 12.24* 10 = Fixed overheads Actual cost per completed unit is 10* 10.2= 102. Standard cost per hour is 10*10.2/10 = 10.2 Standards cost per completed unit is 10.2 * 10 = Calculate closing stocks Material: Purchased 540 kilograms: Produced 100 units (standard output) * 5.2 kg (actual input per completed unit) = 520 kg. Closing stock is 20 kg at 5 per kg = 100 Finished goods: Produced 100 units. Sold 90 units: Closing stock 10 is units at ( = per unit) = 4,032 Discounts When valuing stock you ignore discount unless you are specifically told to allow for it. There are two types of discount: CASH DISCOUNT We have dealt with this earlier. Remember it is based on the cash received or paid in the month in which the discount is allowed or received: BULK DISCOUNT:

4 This is a deduction from the cost price for purchases in excess of a specified quantity. It is not dependant on when the payment is made. The net amount is shown in the trading and profit and loss account and there is no separate calculation for discount. EXAMPLE: Tom and Mary each purchased 10,000 units at 10 per unit. Tom received 5% cash discount as the payment was made the following month. Mary received a bulk discount of 5% (on the 10,000 units) because the purchase was over 9,000 units. She paid in the following month. Ignore VAT Entries in the cash flow statement. Tom 100,000*95% = 95,000, Mary 95,000: No difference Entries in the trading and profit and loss account Tom. Purchases 100,000: Discount received 5,000: (Two separate entries) Mary. Purchases 95,000: There is no other entry. If a question does not indicate whether the bulk discount is allowed on the entire purchase or only on the amount in excess of the specified minimum then make your own assumption and state which assumption you have made. General notes relating to the trading profit and loss accounts. All amounts are shown before VAT in the trading and profit and loss account. If a cash discount is involved show the gross amount with the discount as a separate item. If a bulk discount is involved show the net amount and otherwise ignore the discount. Show the actual pre VAT sales, purchases, expenses for the period. Ignore any apportionments which are made for cash receipts or cash payments purposes. If the accounts are for a period of months( say 4 months) total up the actual pre VAT sales for the period. The same applies for purchases and expenses: Example: Joe prepared a projected cash budget and trading profit and loss account for the six months ending on the 30 th June In May he is to sell goods for 120,000 inclusive of 20% VAT. Cash is to be received as follows. Month 1(May) 20%: Month 2 60% less 4% discount: Month 3 20%. Entries in cash flow: May. 24,000: June 72,000*96%. The rest is outside the period. Trading and profit and loss account: 120,000*100/120= 100,000 (Pre VAT sales). The full amount before VAT is included because the sale will be in the period and it does not matter when the cash will be received. Discount allowed 4% 72,000 = 2,880. Closing stocks

5 Remember to deduct the closing stock of material from purchases, and the closing stock of finished goods from the cost of sales (purchases, plus labour, plus manufacturing overheads). If overheads are not classified you can treat them all as manufacturing overheads. Fixed assets The purchase or sale of fixed assets is never included in a profit and loss account. These are balance sheet items. Depreciation: Depreciation charged for the period is included in the profit and loss.total depreciation to date (opening balance plus depreciation charged for the period) is included in the balance sheet.

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