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?

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

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

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

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

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

“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.