Remember to create your ow n

personalised Study Plan

When you have completed this chapter, you should be able to:

Asset s

Equi t y

Li abi l i t i es

Asset s (at t h e en d
of t h e peri od)

Equi t y (am oun t at t h e st ar t of t h e peri od

pro t (or l oss) f or t h e peri od)
Li abi l i t i es (at t h e en d of t h e peri od)

Asset s

Li abi l i t i es

Equi t y

Hint

at a particular point in time

changes over a period

arising from

normal

The direct met hod

The indirect met hod

Financial Accounting and Reporting

A Guide through IFRS 2009
Insights into IFRS

When you have completed this chapter, you should be able to:

Tot al sal es reven ue

Tot al sal es reven ue

Tot al cost

Fi x ed cost

Tot al v ari abl e cost

Fi x ed cost
Sal es reven ue per un i t

Vari abl e cost per un i t

Tot al sal es reven ue

Fi x ed cost

Tot al vari abl e cost

Target pro t

Hint

When you have completed this chapter, you should be able to:

(a) Di rect l abour h our basi s

(b) M ach i n e h our basi s

When you have completed this chapter, you should be able to:

Can you think of any reason why most businesses prepare detailed budgets for the
forthcoming year, rather than for a shorter or longer period?

Which method of budgeting do you think is likely to be more costly and which method
is likely to be more beneficial for forward planning?

Can you think of any ways in which a manufacturers short-term shortage of production
facilities might be overcome?

The third on the above list of the uses of budgets (motivation) implies that managers are
set stated tasks. Do you think there is a danger that requiring managers to work towards
such predetermined targets will stifle their skill, flair and enthusiasm?

The fourth on the above list of the uses of budgets (control) implies that current
management performance is compared with some yardstick. What is wrong with comparing actual performance with past performance, or the performance of others, in an
effort to exercise control?

Source

Source

Contemporary Management Accounting Practices in UK Manufacturing

Source

An Empirical Investigation of the Evolution of Management Accounting Practices

Source

Perfect How You Project

Source
Practices in UK SMEs

Financial Management and Working Capital

Can you think of any disadvantages of using ZBB?

Source

An Empirical Investigation of the Evolution of Management Accounting Practices

1
2
3
4
5
6

Jan
000

Feb
000

Mar
000

Apr
000

May
000

June
000

Jan
000

Feb
000

Mar
000

Apr
000

May
000

June
000

Receipts
Payments

Looking at the cash budget of Vierra Popova Ltd, what conclusions do you draw and
what possible course of action do you recommend regarding the cash balance over the
period concerned?

Vierra Popova Ltd (Example 9.1) now wishes to prepare its cash budget for the second
six months of the year. The budgeted income statements for each month of the second
half of the year are as follows:
July
000

Aug
000

Sept
000

Oct
000

Nov
000

Dec
000

The business will continue to allow all of its customers one months credit.
It plans to increase inventories from the 30 June level by 1,000 each month until, and
including, September. During the following three months, inventories levels will be
decreased by 1,000 each month.
Inventories purchases, which had been made on one months credit until the June
payment, will, starting with the purchases made in June, be made on two months credit.
Salaries, wages and other overheads will continue to be paid in the month concerned. Electricity is paid quarterly in arrears in September and December.
At the end of December, the business intends to pay off part of some borrowings.
This payment is to be such that it will leave the business with a cash balance of 5,000
with which to start next year.
Prepare the cash budget for the six months ending in December. (Remember that any
information you need that relates to the first six months of the year, including the cash
balance that is expected to be brought forward on 1 July, is given in Example 9.1.)

July
000
Receipts
Payments

Aug
000

Sept
000

Oct
000

Nov
000

Dec
000

Jan
000

Feb
000

Mar
000

Apr
000

May
000

June
000

Jan
000

Feb
000

Mar
000

Apr
000

May
000

June
000

Jan
000

Feb
000

Mar
000

Apr
000

May
000

June
000

Have a go at preparing the trade receivables budget for Vierra Popova Ltd for the six
months from July to December (see Activity 9.8 and Example 9.2).

July
000

Aug
000

Sept
000

Oct
000

Nov
000

Dec
000

Have a go at preparing the trade payables budget for Vierra Popova Ltd for the six
months from July to December (see Activity 9.8 and Example 9.2). (Hint: Remember that
the trade payables payment period alters from the June purchases onwards.)

July
000

Aug
000

Sept
000

Production
units

Oct
000

Nov
000

Sales
units

Dec
000

Required:

The answer to this question can be found at the back of the book, in Appendix B.

Source

Budget

Actual

Can you see any problems in comparing the various items (sales, raw materials and so
on) for the budget and the actual performance of Baxter Ltd in order to draw conclusions as to which aspects were out of control?

Flexed budget

Original budget

Flexed budget

Actual

What will be the loss of profit arising from the sales volume shortfall, assuming that
everything except sales volume was as planned?

Compare the sales revenue, raw materials and labour values between the flexed budget
and the actual results and reconcile the original budget and the actual profit for Baxter
Ltd. Remember that the sales volume variance is also part of the difference.

If you were the chief executive of Baxter Ltd, what attitude would you take to the
overall variance between the budgeted profit and the actual one?
How would you react to the five individual variances that are the outcome of the
analysis shown in the solution to Activity 9.13?

What Next?

BA at the controls

Sources

Source
Accounting Practices

An Empirical Investigation of the Evolution of Management

variance

Required:

Sales units

Required:

Expense

Expense

Required:

Assets
Share capital

2
3

7
8

Required:

May
000

Notes:
1
2
3
4

5
6
7

June
000

July
000

Aug
000

Sept
000

Oct
000

Nov
000

Required

not

When you have completed this chapter, you should be able to:

ARR

Average an n ual operat i n g pro t

Average i n vest m en t t o earn t h at pro t

100%

Hint

Hint

PV of t h e cash ow of year n

act ual cash ow of year n di vi ded by (1

r) n

maximum

Hint

1
1

Hint

When you have completed this chapter, you should be able to:

Hint

Income statement for the year ended 31 December last year

Statement of financial position as at 31 December last year

Income statement for the year ended 31 December last year

Statement of financial position as at 31 December last year

Sparkrite Ltd
Income statements for years ended 30 September last year and this year

Statements of financial position as at 30 September last year and this year

+
+

+
+
+

+
+

+
+

=
=

=
=
=
=
=
=

+
+

Issue equity shares

Make other borrowings

+
+
Chase trade receivables

Reduce inventories

and

Job costing

Process costing

Batch costing

Opt i on 1

Opt i on 2

Opt i on 3

Pl ayer opt i on

Gr oun d i m provem en t opt i on

Risk

Matching

Cost

Flexibility

Taking up rights issue

Selling the rights

Doing nothing

Appendix E: Present value t able

Present value of 1, that is, 1/(1 + r)n

where r = discount rate
n = number of periods until payment
Discount rates (r)
Periods
(n)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0.990
0.980
0.971
0.961
0.951
0.942
0.933
0.923
0.914
0.905
0.896
0.887
0.879
0.870
0.861

0.980
0.961
0.942
0.924
0.906
0.888
0.871
0.853
0.837
0.820
0.804
0.788
0.773
0.758
0.743

0.971
0.943
0.915
0.888
0.863
0.837
0.813
0.789
0.766
0.744
0.722
0.701
0.681
0.661
0.642

0.962
0.925
0.889
0.855
0.822
0.790
0.760
0.731
0.703
0.676
0.650
0.625
0.601
0.577
0.555

0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557
0.530
0.505
0.481

0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497
0.469
0.442
0.417

0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444
0.415
0.388
0.362

0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397
0.368
0.340
0.315

0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356
0.326
0.299
0.275

0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319
0.290
0.263
0.239

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Discount rates (r)

Periods
(n)

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286
0.258
0.232
0.209

0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257
0.229
0.205
0.183

0.885
0.783
0.693
0.613
0.543
0.480
0.425
0.376
0.333
0.295
0.261
0.231
0.204
0.181
0.160

0.877
0.769
0.675
0.592
0.519
0.456
0.400
0.351
0.308
0.270
0.237
0.208
0.182
0.160
0.140

0.870
0.756
0.658
0.572
0.497
0.432
0.376
0.327
0.284
0.247
0.215
0.187
0.163
0.141
0.123

0.862
0.743
0.641
0.552
0.476
0.410
0.354
0.305
0.263
0.227
0.195
0.168
0.145
0.125
0.108

0.855
0.731
0.624
0.534
0.456
0.390
0.333
0.285
0.243
0.208
0.178
0.152
0.130
0.111
0.095

0.847
0.718
0.609
0.516
0.437
0.370
0.314
0.266
0.225
0.191
0.162
0.137
0.116
0.099
0.084

0.840
0.706
0.593
0.499
0.419
0.352
0.296
0.249
0.209
0.176
0.148
0.124
0.104
0.088
0.074

0.833
0.694
0.579
0.482
0.402
0.335
0.279
0.233
0.194
0.162
0.135
0.112
0.093
0.078
0.065

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Appendix E

Discount rates (r)

Periods
(n)

21%

22%

23%

24%

25%

26%

27%

28%

29%

30%

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

0.826
0.683
0.564
0.467
0.386
0.319
0.263
0.218
0.180
0.149
0.123
0.102
0.084
0.069
0.057

0.820
0.672
0.551
0.451
0.370
0.303
0.249
0.204
0.167
0.137
0.112
0.092
0.075
0.062
0.051

0.813
0.661
0.537
0.437
0.355
0.289
0.235
0.191
0.155
0.126
0.103
0.083
0.068
0.055
0.045

0.806
0.650
0.524
0.423
0.341
0.275
0.222
0.179
0.144
0.116
0.094
0.076
0.061
0.049
0.040

0.800
0.640
0.512
0.410
0.328
0.262
0.210
0.168
0.134
0.107
0.086
0.069
0.055
0.044
0.035

0.794
0.630
0.500
0.397
0.315
0.250
0.198
0.157
0.125
0.099
0.079
0.062
0.050
0.039
0.031

0.787
0.620
0.488
0.384
0.303
0.238
0.188
0.148
0.116
0.092
0.072
0.057
0.045
0.035
0.028

0.781
0.610
0.477
0.373
0.291
0.277
0.178
0.139
0.108
0.085
0.066
0.052
0.040
0.032
0.025

0.775
0.601
0.466
0.361
0.280
0.217
0.168
0.130
0.101
0.078
0.061
0.047
0.037
0.028
0.022

0.769
0.592
0.455
0.350
0.269
0.207
0.159
0.123
0.094
0.073
0.056
0.043
0.033
0.025
0.020

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15