Question

Describe the following terms: a. Types of Budgets including Zero based budgeting b. Cash flows. c. Profit and loss statements d. Balance Sheet

Answer 1

SOLUTION :

a. Types of budget :

A budget is a plan for a future period of time, expressed in specific terms viz. money, cost, output etc. Budgets are broadly classified in to :

(i) Fixed Budget : It is also known as static budget. Here, the budget is not changed even if there is a change in activity. It helps to control costs.

(ii) Flexible Budget : It changes in accordance with the change in activity levels. Expenses are classified in to fixed, semi variable and variable, in flexible budget.

(iii) Sales Budget : It determines the saes revenue to be achieved within a particular period or campaign.

(iv) Production Budget : It shows the quantity of output to be produced within a particular period of time

(v) Zero Based Budgeting : This type of budget technique emphasizes on the accountability of each and every expense. Every expense is analyzed and documented in order to bring the cost to minimum or in some cases, nil.

b. Cash Flows :

Cash flows (inflow/outflow) are the ways in which cash or cash equivalents have come in and/or gone out of a business. For example, purchasing goods for cash creates cash outflow and cash sales creates cash inflows. These various ways are comprehensively presented through a document called Cash Flow Statement, which classifies the cash flows from or for Operating, Investing and Financing activities. It usually concludes a set of financial statements preceded by profit and loss statement and balance sheet.

c. Profit & Loss Statement :

This statement shows the operational profit or loss of an entity for a given accounting year. It gives details about revenue from operations, cost of goods sold, administrative expenses, financial expenses, amortization expenses, tax expenses, various appropriations and then, the profit attributable to stock holders. It is the first part of financial statements.

d. Balance Sheet :

Balance Sheet is the document that talks about the financial position of the entity. on any given date in the accounting year. It shows the assets possessed and liabilities owed by the entity. Assets and Liabilities should match each other. All major decisions taken by stakeholders about the corporation is based on its balance sheet. It is the second part of financial statements.