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Managing Finance and Budgets

Managing Finance and Budgets. Lecture 2 Activities and Solutions. Activity One. Discuss the following: Why does an increase in cash in the bank during a particular accounting period not necessarily mean that the organisation has made a profit?

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Managing Finance and Budgets

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  1. Managing Finance and Budgets Lecture 2 Activities and Solutions

  2. Activity One Discuss the following: • Why does an increase in cash in the bank during a particular accounting period not necessarily mean that the organisation has made a profit? • Why is it important to distinguish between capital and revenue expenditure? • Why is it important to differentiate between indirect and direct costs?

  3. Activity One – Possible Solution • Increase in cash in the bank could be the result of: a loan, payment of a previous debt, selling off an asset, even selling goods at a loss! None of these incurs profit. • Capital expenditure buys things still owned by the company. Revenue expenditure ‘disappears’. • Indirect costs need to be paid even if you don’t sell anything; in difficult times overheads need to be cut.

  4. Activity Two Discuss the following: • How far does the balance sheet tell us about how much an organisation is worth? • What is the main difference between Fixed and Current Assets? • Why is money input into the organisation by shareholders shown as a liability?

  5. Activity Two - Solutions • The final amount on either side of the balance tells us how much a company is currently valued at. • Current Assets – we could get the money almost immediately with minimum fuss. Fixed assets would take some time and be very disruptive. • The share capital is an amount invested in the company by shareholders, and so is owed to them.

  6. Activity Three Discuss the following: • “Accounting is a science - given a single organisation over the same period two accountants will always come up with exactly the same profit or loss results unless they make a factual mistake” • Give reasons why you agree or disagree?

  7. Activity Three - Solutions • “Accounting is a science - given a single organisation over the same period two accountants will always come up with exactly the same profit or loss results unless they make a factual mistake” I would disagree. • At a simplistic level, the figures for Gross profit and Net profit depend on how you classify direct and indirect costs. Some items could be in either category • At a wider level, recent events (ENRON, Xerox) have shown that some previously well-thought of accountants have been ‘creative’ in the way that they produce accounts, and that there is disagreement and disquiet with the way that the figures have been presented.

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