Long Type Questions - Business Arithmetic, Entrepreneurship, Class 12 | Additional Study Material for Commerce PDF Download

Q1. How to develop a cash flow projection ? (5 marks)
Ans.
(i) Based on the business characteristics, frequency and period is to be divided.
(ii) A format is developed with items appropriate for the business, which will be used for developing the projection.
(iii) A projected cash flow begins with the existed cash balance for the business. It then lists the sources of inflow and the anticipated payment dates.
(iv) The statement then looks at forth coming expenditure. Some of this will be a fixed, regular sum such as st aff cost. There will be some variable costs also.
(v) Adding all outflows then enables to arrive at the surplus or deficit for the period. This, when combined with the opening balance, leads to deriving the closing balance which becomes opening balance for the next period.

Q2. What is budgeting process ? (TBQ) (6 marks)
Ans. Budgeting is a collecting process in which operating units prepare their plans in conformity with corporate goals. Unit managers prepare projections of sale, operating cost, overhead costs and capital requirements. They calculate operating profits and returns on the investment they intend to use. Budget itself is the projection of these values for the next calendar or fiscal year. Each unit presents its plans and budget to a reviewing upper management panel and may make changes which results from instructions or negotations with the higher level. Approved budgets then become the road-map for operations in the coming year. At year-end managers are judged by their performance against the budget.

Q3. What are the benefits of budgeting ? (6 marks)
Ans.
(i) To coordinate all activities of business.
(ii) To act as guide for managerial decisions.
(iii) To plan and control income and expenditure so that maximum profitability is achieved.
(iv) To direct capital expenditure so that, maximum profitability is achieved.
(v) To ensure that sufficient working capital is available for the efficient operation of the business.
(vi) To provide yardstick against which actual results can be compared.
(vii) To show the management, areas where action is needed to remedy the situation.

Q4. Explain the two dominant forms of budgeting process. (TBQ) (6 marks)
Ans. The two dominant forms of budgeting processes are traditional and zero -based. Business planning is usually a combination of the two. Traditional budgeting is based on a review of historical performance and then the projection of such findings to the future with modifications. If inflation is high, for instance, cost trends of the last several years are projected forward but with adjustments both for inflation and for projected growth or decline in business activity. Historical sales patterns, using established trends in sales growth, are projected; new sales from planned new product introductions are then added. Zero-based budgeting is the creation of a completely new budget from the ground up–as if no history existed. When using this method, the operations must justify and document every item of expenditure and income as new.

Q5. Explain the types of budgets for small businesses. (6 marks)
Ans.
(i) Operational budget : It forecasts and tries to pretty closely predict yearly revenue and expenses for a business. This budget scan be updated with actual figures on a monthly basis and then can be revised for the year, if needed.
(ii) Cash flow budget : It details the amount of cash collected and paid out. This is generally tallied on a monthly basis.
(iii) Capital budget : This budget helps to figure out how much money is needed to place new equipments or procedures to launch new products or increase production or services. The budget estimates the value of capital, purchases needed for business to grow and increase revenues.

Q6. State the features of a cash flow statement. (6 marks)
Ans.
(i) It is prepared for a given period.
(ii) It is derived from balance sheet and income statement.
(iii) It shows comparitive statement.
(iv) It is vertically drawn.
(v) It shows cash from operating, investing and financing activities.
(vi) It is signed by the person who prepared it .
(vii) It provides a usual guide to the manner in which the requirement of cash will arise and how the requirement will be met.
(viii) It guides project implementing body about the prospects of success of the project.
(ix) It provides time flow of inflows and outflows of cash. It is normally prepared on annual basis. If the investment in project is very high, it may be prepared on a monthly basis.
(x) It indicates critical situations of cash flows and enables the analyst to take remedial actions immediately.

Q7. How is cash flow statement important ? (6 marks)
Ans.
(i) Useful for short-term financial planning : A cash flow statement provides information for planning short term financial needs of the firm. Since it provides information regarding sources and utilization of cash during a period, it becomes easier for managers to assess whether it will have sufficient cash to meet day to day expenses and pay the creditors in time.
(ii) Useful in preparing cash budget : A cash flow statement prepared for the future period is helpful in preparing a cash budget. It informs managers about the surplus and defict period of cash i.e., in which month the receipt of cash will be excess and in which month payment of cash will exceed receipt.
(iii) Comparision with cash budget : A cash budget is prepared at the commencement of the year whereas a cash flow statement is prepared at the end of the year. A comparison between the two helps in ascertaining the extent to which the financial resources of the firm have been generated and used according to the plan. Causes of difference can be analysed and proper measures may be taken.
(iv) Study of the trend of cash receipts and payments : A cash flow statement reveals the speed at which the cash is being generated from debtors, stock and other current assets and the speed at which the current liabilities are being paid. It enables the management to assess the true position of cash in future.
(v) Explains the deviations of cash from earnings : A firm may earn huge profit yet it may have scarcity of cash and when it suffer losses, it may still have plenty of cash.
(vi) Helpful in ascertaining cash flow from various activities seperately : A cash flow statement helps to know cash from operating, investing and financing activities separately. It indicates how much cash has been generated or used in these activities.
(vii) Helpful in making dividend decisions : The management takes the help of cash flow statement to ascertain the position of cash generated from operating activities, which can be used for payment of dividend.
(viii) Useful to outsiders : Cash flow statement helps the investors, debentureholders, bankers, lenders, suppliers, etc. to analyse the financial position of the enterprise.

Q8. Classify budgets as per their functions. (6 marks)
Ans.
(i) Sales Budget : This budget forecasts total expected sales.
(ii) Selling and Distribution Cost Budget : This gives expected cost of selling and distribution.
(iii) Production Budget : This gives standard or expected units of production in a year.
(iv) Production Cost Budget : This gives expected cost of production.
(v) Purchase Budget : This gives purchase to be planned. It is made based on production requirement.
(vi) Personnel Budget : This estimates the number of employees required.
(vii) Cash Budget : This is the most important budget as it gives expected inflow and outflow of cash based on various expenditure and revenue budgets.
(viii) Master Budget : This is also called Profit Plan. It includes all the budgets and it estimates profit or loss of the firm.

Q9. Differentiate between Cash Flow Projection and Cash Flow Statement. (6 marks)
Ans.

Q10. Identify, giving reasons, whether the following items are inflows/outflow :
(i) Raw material,
(ii) Depreciation,
(iii) Machinery purchased,
(iv) Loan from bank,
(v) Equity shares issued,
(vi) Excise duty paid,
(vii) Profit on sale of asset,
(viii) Interest received on investments.
(6 marks)
Ans.