Question 1 (b)
In any business organization, the work of a cash budget is to aid performance of the financial manager by helping him or her to ensure that there are available funds when needed and to ensure efficiency of any surplus funds in the organization. In reference to cash budgeting therefore, surplus is the fund that remains in a situation whereby income exceeds the organization’s expenditure (Moolman et al. 2007). Surplus in a business shows that the business is being run efficiently. In some few cases, budget surplus may arise as a result of underutilization of available funds in the organization. On the other hand, budget deficit is the fund that is required to be added in order to meet all the organization’s expenditures. It arises in a situation whereby organization’s spending exceeds its income.
Appropriate actions in reference to the budget surplus: the organization can use the budget surplus to repay its previous debts. The surplus can also be used to improve working condition in the organization, for example by raising workers’ salaries. However, once this action was instituted by the worker as a financial manager, he or she is obliged to maintain it, therefore the budget surplus must have been realized as a result of improved performance by employees translating into a continuous increase in the organization’s revenue in the unforeseeable future (Beranek 2008). Surplus can also be used to buy items that the organization has not been able to purchase previously.
Appropriate actions in reference to the budget deficit: the organization can borrow funds from other financial institutions, such as banks, in order to meet its obligations. Another way of dealing with budget deficit is by reducing the organization’s expenditure, for example by excluding matters that are not urgent within the financial year. The organization can also sell some of its assets or investments in order to meet short term obligations that cannot be financed by the budget.
Question 3 (a)
Basing evaluation of the companies on their net present values (NPV), the Ace Corporation should invest in project Beta, which has higher NPV of $43040, as compared to the project Alpha, whose NPV is $26190. The payback period of project Alpha is 2 years, whereas the payback period of project Beta is 3 years. Therefore, if Corporation is interested in recovering its initial investment within the shortest time possible, it should invest in the project Alpha.
Question 3 (b)
Net Present Value (NPV) is one of the methods that managers use to evaluate capital projects that the company wants to invest in. This method enables the managers to know whether a project will be able to add value to the firm. However, the method does not consider size of the project when calculating the Net Present Value. Payback period method is a method that determines the time taken by a project to earn back its initial investment. However, this method ignores the time value of money and thus does not reflect the real value of the project during the time the initial investment is repaid (Moolman et al. 2007). Therefore, it is recommendatory to the CEO of Ace Corporation to invest in project Beta, which has higher NPV and reflects the value of the project.
There are four basic financial statements that have to be prepared by any business organization in a financial year. These statements include: the income statement, balance sheet, statement of retained earnings and the statement of cash flows. The main purpose of all the financial statements, prepared by business organization, is basically to communicate to the investors, the government and most importantly to the owners of the overall performance of the business. The balance sheet reports financial position of a business entity at a particular period. The main purpose of the income statement is to measure financial performance of a business entity by comparing the revenue and expenses of the business. It determines whether the business made a loss or income during a particular accounting period. Statement of retained earnings gives a report on the way that an entity’s net income and its distribution of dividends affected its financial position during a particular financial period. Retained earnings are increased by the net profit earned in that financial year. On the other hand, dividends declared in a financial year reduce the retained earnings of the company. It therefore shows the relationship between the balance sheet and the income statement. Finally, the cash flows statement indicates the cash inflows and outflows of a business. The statement reports the causes of changes between the cash reported on the balance sheet at the end of the previous period and the cash that is reported on the balance sheet of the current period.
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The format of basic financial statements changes with the change in size of the business entity. Such changes may include amalgamation or merger of the business. When one entity is owned by another, the financial statement format changes in order to account for the two entities. In this case there will the reporting entity and the subsidiary. The statement should however show the accounting process for the two entities since the report has to be read to both the minor and the major owners of the company. On the other hand, when business entities are merged together, their controlling power is equal and format of financial statements should change to reflect the new business being formed.