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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

Managing Finance and Budgets

Lecture 2

Activities and Solutions

activity one
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?
activity one possible solution
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.
activity two
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?
activity two solutions
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.
activity three
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?
activity three solutions
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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