Financial Reporting System
A financial reporting system refers to a set of principles used in accounting to gather, summarize and present information on various transactions and events within a specified fiscal year of a firm to the users. The systems help the companies to come up with a report that they present to their stakeholders regarding the financial and accounting performance at the end of the year. The system also assists firms to enhance efficiency and effectiveness in the preparation of accurate and reliable financial reports (Stephen, 1985).
Components of a financial reporting system
A financial reporting system has various components that collaborate in ensuring its effectiveness and efficiency. Firstly, it contains rules and procedures that need to be followed. A financial reporting system works under specified rules and procedures in fostering its effectiveness. Such rules and regulations are set internationally an outstanding example being the International Financial Reporting Systems (IFRS). Compliance with the rules and procedures lead to the development of effective reports (Stephen, 1985).
Secondly, data is another component of a financial reporting system. The system uses information from various financial bases. The system summarizes, analyzes, interprets and reports such information to the users for their consumption. Finally, the people using the reports make the other component of a financial reporting system. The financial reporting system focuses on providing financial information to the users. Some of the users may include the shareholders, customers, government, creditors, management and supplier among many others. The system also uses various individuals who work together to come up with a reliable financial report. Some of this people may include financial analysts, data analysts, and managers among others.
Budget Cycle and Process
Budget cycle refers to the process taken by a budget from its generation to its evaluation. A budget takes four phases that include preparation, approval, execution and evaluation (MacEachen, 1982).
Budget preparation
Budget preparation is the first step in the business which involves coming up with estimates. The start involves the determination of what is required by a firm within a specified period. The next step involves the preparation of the estimates of the determined components providing their costs. The estimates rely on past information and the anticipation in future. Decision making is vital in this step where various stakeholders play a role in providing best ideas on what to adopt and what to drop. The firm also considers the availability of resources during the generation of a budget.
Budget Approval
After the generation of a budget by various stakeholders, the management looks at the estimates and compares it with past budget to check whether there is any correlation to avoid a budget that will eventually mess the organization up. The generated budget is thus a budget to further debate by the management. Priorities are given to various components of the budget after which the budget is approved to allow for its execution.
Budget Execution
After the approval of the budget, various departments receive theirs upon which they also do a review to determine whether it is viable depending on the availability of the resources. If not contented, the departments can request for more funds. Execution also involves the transfer of the estimated funds to various departments to allow for their implementation. The departments perform their operations as per the budgets. As part of the execution process, the department takes the initiative to prepare both in-year and end year reports on the use of the allocated budgets.
Budget Evaluation
Budget evaluation is the final stage in the budget process. It involves auditing the budget accounts to determine to which extent the departments worked within the budget limits. The audit provides a report on the spending by departments upon which the management takes action.
Management use of Activities based Budgeting instead of Operating budget
Activities based budgeting is more effective than an operating budget. The reason behind this argument is that it estimates costs on an activity instead of modifying the last year’s budget. Management can use activities based budgeting by determining various projects it requires executing in a fiscal year then allocating resources. The budget estimates of the project are subject to the priority of each activity. The activities are weighed and ranked according to their urgency and importance. The most urgent and important activities are thus budgeted for to take part in a given period (Klammer et al, 1997).
Similarities and Differences between Operating and activity based budgets
An operating budget refers to firm’s estimates for a future period in which the estimate borrows the last fiscal year’s budget and makes few adjustments depending on economic conditions and firm’s growth expectations. On the other hand, the activities based budget refers to a budget that estimates costs regarding specific activities. This implies that it focuses on opportunities and allocates resources to each activity. Both types of budget depend on the past data to come up with an estimate. Besides, they are both future-oriented in that they focus on future estimates in an organization. Furthermore, both activities based and operation budgets take care of the underlying economic conditions and the availability of resources by the firm.
On the other hand, the two budgets differ significantly in their preparation and execution. It is worth noting that operational budget follows the previous budget and makes a few adjustments on the same. However, activities based budget involves coming up with an estimate for specific activities implying that it does not duplicate the past budget since such activity may be lacking in the last budget. In preparing activities based budget, the company chooses various activities that the company needs to pursue and come up with budgets for each activity.
5 Basic Budget Guidelines
A budget requires following several guidelines to foster its efficiency and effectiveness. Firstly, it important for ICBI to consider the projects or the activities it wants to pursue during the preparation of its budget. Definition of a project is one of the most important guidelines that an organization needs to consider. It gives an organization the basis for developing the budget. Additionally, it is important for the company to consider the availability of its resources. A budget is prepared to depend on the resources available (Wiseman, 2010).
Besides, the company needs to factor out economic situation underlying the industry. Before making the final budget, it is important for a company to consider some of the constraints such as economic conditions that may affect its execution. It is a better way of ensuring effectiveness in the budget generation. Furthermore, a budget requires proper implementation and close monitoring. ICBI require proper execution of the budget and monitoring of the process to ensure that the budget moves as per the plans. Monitoring also helps in identifying any anomalies that occur thus taking the corrective action.
References
Klammer, T. P., Ansari, S. L., & Bell, J. (1997). Activity-based budgeting. Burr Ridge, IL: Irwin McGraw-Hill.
MacEachen, A. J. (1982). The Budget process: A paper on budget secrecy and proposals for broader consultation. Ottowa: Dept. of Finance, Canada.
Stephen, E. M. (1985). A financial reporting system.
Wiseman, B. (2010). Budgeting. New York, NY: Weigl.
