MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING AND REPORTING: BUDGET

Question 7

Budgets are used for such purposes as control, resources allocation, performance evaluation, planning, motivation, communication, and co-ordination. In an organization control is exercised through taking corrective action from the deviation of the performance from the budgeted one. Budgets help the organization to allocate scarce resources among different needs in an organization (Kemp, 2003). Budgeted provides projections against which the performance of the organization is evaluated. Coordination of efforts within the organization is paramount to its success, and the budget helps to focus all the units in an organization to a common goal by providing metrics, and targets that will lead to overall success. In the planning function budget helps the management to know the amount of resources that will be required by each unit and plan for any expected expenditure in the future, and communicate this to all the concerned stakeholders.

Question 8

A cash budget helps the organization to estimate the amount of income that the business will get during the coming months and the amount that will be paid. This is vital for simplifying tax planning especially in the situation where the company is required to submit regular income tax returns and make the estimated tax payments. A cash budget enables the business to estimate the amount of money that will be made in particular period making tax filing easy. Cash budget helps in the preparation of important financial documents such as balance sheet. Having a proforma balance sheet is a requirement before one gets financing. Cash budget helps to manage expenses and come up with a strategy for reducing costs, where the cash budget puts the organization in a better position to manage its expenses (Swain & Reed, 2010). Organization can focus on its bottom line using the cash budget where review of cash budgets enables executive team members to focus on the business resources.

Having too little cash puts an organization in a liquidity problem where its ability to meet its short-term obligations becomes difficult. This can affect the relationship of the organization with the customers and the suppliers where it is not able to pay the suppliers in time. Having too much cash means that the organization is underinvestment (Nelson, 2005). Too much cash exposes the company to such risks…………….