Business Finance - Desklib

This article covers topics related to Business Finance such as Cash Budget, Cash vs Profits, Expenditure, Dividend, and more. It also includes definitions of terms like Asset, Liabilities, Ordinary Shares, Preference Shares, and more. The article provides insights and solutions to assignments and essays related to Business Finance.

Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1.1.........................................................................................................................................3
Construct cash budget for Surya Trading for the period ending on 31 December, 2022.......3
TASK 2.1.........................................................................................................................................4
A. In your view, are cash and profits same? Suggest any business transactions that do not
involve an immediate movement of cash?.............................................................................4
B. Distinguish between...........................................................................................................6
C. Define the following terms:...............................................................................................8
REFERENCES..............................................................................................................................11

INTRODUCTION
TASK 1.1
Construct cash budget for Surya Trading for the period ending on 31 December, 2022.

TASK 2.1
A. In your view, are cash and profits same? Suggest any business transactions that do not involve
an immediate movement of cash?
No, cash and profits in terms of accounting are not same. They are distinct from each
other in many ways.
Cash: In terms of economics, it is hard cash in physical and tangible form of currency, for
instance, paper money and coins. In case of auditing and financial accounting, cash lies in
category of current assets consisting of currency or identical currency that can be acquired
instantly or in near future (Appiah‐Otoo, and Song, 2020). It can be both negative and positive.
Positive flow of cash indicated that organisation has more cash inflow as compared to its cash
outflows. Negative cash flow represents that enterprise has more outflow of cash in comparison
to cash inflow. Cash flow is categorised into three parts namely, operating cash flow, investing
cash flow and financing cash flow.
Profits: In accounting, it is the difference between the revenue received by an entity from its
output and cost incurred on inputs. It is a measurement of profits of organisation which is
owner’s leading concern in the process of income origination of market production. The
apportionment of profits to stakeholders and owners of business takes place in form of payment
through dividends or reinvestment in entity (Zhou, and Li, 2019). It can also be represented as
positive or negative number. When profit is negative it is termed as loss and recorded on the
credit side of Profit and loss account. Profits is of two types namely gross profits and net profits.
Difference between Cash and Profits
 Profits represents the amount which have been left after deducting all expenses or after
payment of all expenses of the organisation while cash specifies inflow and outflow of
cash in enterprise.
 Profits represents the instant success of the business. On the other hand, cash flow is a
more absolute means of determining the long term financial stability of the organisation.
 Payment made to creditors and payment received from debtors does not effects the profits
of an organisation. Cash, on the contrary, is effected by the payments of the bills and
actual money received by the company in its bank account.

 Profit is shown on the debit side of the Profit and Loss account and also added to the
capital of company on liabilities side of balance sheet whereas cash is recorded on the
asset side balance sheet of an entity.
Business transactions that does not have an instant involvement of cash
Transactions in which there is no immediate or instant exchange or involvement of cash
at the time of occurrence of transactions are termed as credit transactions. Pitting it another way
it means that in case of these transactions cash is paid or received but at some future date. In
current situation of business world goods are being purchased or sold on credit basis that is
without immediate involvement of the cash. Payment made in case of credit transactions are
settled at a future date. Events which includes the words “on credit or account” are considered as
credit transactions.

B. Distinguish between
a) Capital Expenditure and revenue expenditure
Capital expenditure is the amount of money which a firm uses to acquire assets or to upgrade
quality of present ones. These expenses are incurred for long term and are capitalised and
recorded in firm's cash flow statement. These expenses are non-recurrent in nature. The yield of
these expenses is not limited to a year and is usually long term in nature (Anagol, and Pareek,
2019). On the contrary, revenue expenditure is that money which is spent by entities in order to
meet its day to day operations. These expense are incurred for a shorter duration confined to an
accounting year and are not capitalised. It is stated in Income statement and are recurring in
nature.
b) Expenses and Drawings
Expense refers to day to day running costs incurred in an enterprise such as rent, heat and light,
insurance, wages etc. These expenses are debited from gross profit in Profit and Loss account.
On the other hand, drawings are the term used for amount withdrawn from business for owner's
own use (Hussain, 2018, June). Although it is different from wages as owner is not an employee
of concern and they can withdraw amount of their choice. These withdrawals are deducted from
owner’s capital in balance sheet of organisation.
c) Gross profit and Net profit
Gross profit is the amount business made during a period after deducting cost of goods sold. Cost
of goods sold consists of materials purchases, labour expenses incurred, etc. All sales in an
accounting period are considered while calculating total sales. On the other side of the coin, net
profit is the total amount earned from revenue after excluding cost of goods sold and other
operating expenses. It is also referred as bottom line because it is recorded at bottom of income
statement. It can be obtained after excluding all expenses incurred in that particular period.
d) Cash Budget and Cash Flow Statement
Cash budget is a detailed plan revealing how cash resources will be acquired and used over a
specific period. It represents expected cash inflow and cash outflow. It is easy to understand. It
constitutes minimum cash balance which a firm must have to meet its cash needs. It is commonly
prepared for a shorter time span, namely, daily, weekly, monthly, half-yearly etc. While, cash

Flow Statement is a comprehensive study or representation showing how cash resources are
obtained and utilised over a particular time period. It is a predominant external statement which
consists of the sources of cash and represents cash utilisation. It is prepared for a long period,
generally yearly (Exposito, and Sanchis-Llopis, 2018).
e) Accruals and Prepayments
Accrued Expense are related to current period that have not yet been expensed and did not
materialize in balance of expense. This expense is recognised in profit and loss account and is
shown in balance sheet of company in liabilities side. On the other side, prepayments are
expenses incurred during current period but related to next accounting year. Consequently, these
expenses are deducted from expenses balance shown in Income statement. It is shown in balance
sheet as an asset of Company.

C. Define the following terms:
a) Asset: It is a measure which have an economic value that a sole trader and firm owns or
rule with expectation that it will furnish a forthcoming advantage. These are recorded in
an organisation's balance sheet on the debit side and are acquired or generated to uplift a
concern worth or benefit firm's functioning. It can create cash flow, cut down expenses,
or upgrade sales. Assets are classified into five categories wiz., tangible, intangible,
financial, fixed and current assets (Nicoletti, 2018).
b) Liabilities: It is that amount which a persons or company has to repay. These are
discharged over time through the reallocation of economic benefits consisting of funds,
commodities, or services. These are reported on credit side of balance sheet. It includes
debt, creditors, security interest, deferred revenues, bonds, warranties, and outstanding
expenses. It is non depreciable in nature. It is responsible for cash outflows from the
business. Bank overdrafts, lease and short term loans are some examples of liabilities.
c) Ordinary Shares: These shares are also known as common shares and are considered as
a stock sold on public exchange. Each and every share of prescribed stock provides its
owner or holder the right to vote at a stakeholder's meeting in an organisation. Although,
the holders of these shares are not guaranteed a dividend just like holders of preference
shares. Shareholders of ordinary shares will receive dividend after payment of dividend
to preference shareholders.
d) Preference Shares: These are generally known as preferred stock. These are those shares
of an entity on which dividends are paid before paying dividend on ordinary shares. In
case of liquidation of a company, stakeholders of preference shares are entitled to receive
dividends before shareholders of equity shares. In most cases preference shares have a
fixed dividend in comparison to ordinary shares. Their shareholders do not exercise
voting rights in shareholders meeting of the organisation.
e) Dividend: It is a allocation of profits of an organisation to its preferential and equity
shareholders. When an entity earns a surplus, it becomes capable of paying a portion of
its profit as dividend to stockholder of the company. It is generally apportioned quarterly
and can be paid out in the form of cash or invested in additional stock. Stockholders of
companies which regular pay off its dividend, are entitled to receive their proportions till

the date they hold their investment in the company but before date of the declaration of
ex-dividend. (Bakhadirov, Pashayev, and Farooq, 2020).
f) Stock Exchange: It is an exchange where a stock trader can buy and sell securities. It is
also termed as securities exchange or bourse. It includes shares of stocks, bonds and other
financial instruments. It also renders facilities for issuing and redemption of securities.
Initial public offering or IPO of stocks and bonds is furnished in primary market and
subsequently trading is done in the secondary market. There are different kinds of
equities in which an individual can invests like blue chips, penny stocks.
g) Venture Capital: It is a type of personal equity and fund that is provided by investors to
start-up companies and mid cap businesses that are expected to have a potential to exist
in the long term. It usually obtained from well-established investors, investing and other
financial establishments. Although it is not always represented in economic terms, it can
also be processed in the form of technical and managerial proficiency. It is usually
assigned to small organisations which have capability of extraordinary growth.
h) Budget: An evaluation of incomes to be earned and expenses to be incurred in a
particular future time period is referred to as budget. It is generally organised and
reassessed periodically. It can be prepared for individuals, group of individuals, an entity,
a regulating government. It is a financial plan prepared for a particular period of time. It
involves estimated sales volume and revenue from such sales, costs and expenses to be
incurred, cash inflows and outflows and assets and liabilities.
i) Capital Income: An income which is derived from the capital or wealth instead of
production process of an organisation is referred to as capital income. It consists of stock
dividends and capital gains. It arises from passage of time of an asset not from utilisation
of an asset (Colaco, 2022).
j) Company: A legal entity which represents an association of people irrespective of fact
that they are natural, legal or combination of both. The members of company work on a
common purpose to achieve a particular and determined goal. Liability of members of
company is limited. It is an artificial person created by law with a perpetual succession
and having a common seal on its name. It may be arranged in different ways of taxation
and financial obligation purposes based on corporate law of its authority.

REFERENCES
Books and Journals
Mansour, K. and Sayed, E., 2022. The Effect of Corporate Social Responsibility on Debt
Finance: The Moderating Effect of Accounting Conservatism. Journal of Accounting,
Business & Management, 29(1).
Appiah‐Otoo, I. and Song, N., 2020. Finance‐growth nexus: New insight from
Ghana. International Journal of Finance & Economics.
Zhou, K. and Li, Y., 2019. Carbon finance and carbon market in China: Progress and
challenges. Journal of Cleaner Production, 214. pp.536-549.
Anagol, S. and Pareek, A., 2019. Should business groups be in finance? Evidence from Indian
mutual funds. Journal of Development Economics, 139. pp.229-248.
Hussain, S., 2018, June. Ownership structure of family business groups of Pakistan.
In Proceedings of Economics and Finance Conferences (No. 7108626). International
Institute of Social and Economic Sciences.
Exposito, A. and Sanchis-Llopis, J.A., 2018. Innovation and business performance for Spanish
SMEs: New evidence from a multi-dimensional approach. International Small Business
Journal, 36(8). pp.911-931.
Nicoletti, B., 2018. Fintech and procurement finance 4.0. In Procurement Finance (pp. 155-248).
Palgrave Macmillan, Cham.
Bakhadirov, M., Pashayev, Z. and Farooq, O., 2020. Effect of location on access to finance:
international evidence on the moderating role of employee training. Review of
Behavioral Finance.
Colaco, H.M., 2022. Ethical and professional standards of the CFA¬ Æ Program and finance-
related university education. In Embedding Sustainability, Corporate Social
Responsibility and Ethics in Business Education (pp. 133-143). Edward Elgar
Publishing.