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Assignment of tasks

In the enterprise in the example given the existing bank loan is planned to be increased by the amount of 150,000 at the beginning of the business year. The interest rate for the additional loan is 5 % annually and is debited against the existing bank account.

On the next page, opening balance sheet, as well as profit plan, finance plan and budgeted balance sheet of the enterprise are presented before taking the above described business activity into consideration.

Please, present in what way the increase of the loan and the interest payment for this additional loan affect profit plan, finance plan and budgeted balance sheet of the enterprise.

Basic Data

Figure 27: Financing | Basic Data

Answer Form

Figure 28: Financing | Answer Form

Answer Key Step 1/4

Figure 29: Financing | Answer Key Step 1/4

The planned increase of the loan by 150,000 has an improving effect on the liquidity in the finance plan of the enterprise.

Together with the depreciation of 90,000 which is incorporated into the finance plan with a positive mathematical sign, the increase of the loan (based on a planned profit or loss of 0 in the profit plan which is the basis for the finance plan) so leads to a surplus of cash of 240,000 as result of the finance plan.

The raising of the loan rises the bank loan in the budgeted balance sheet of the enterprise, the depreciation of 90,000 which has already been stated in the basic data, reduces the fixed assets.

The surplus of cash of 240,000 in the finance plan increases the balance of the bank account in the budgeted balance sheet.

Answer Key Step 2-4/4

Figure 30: Financing | Answer Key Step 2-4/4

Subsequently the steps 2 to 4 arise in an automatic order:

The interest rate for the additional loan amounts to 5 % annually.

The interest expense of 7,500 results from multiplying the credit amount of 150,000 by the interest rate of 5 %.

This additional interest expense of 7,500 has a negative effect on the profit in the profit plan of the enterprise. Due to this additional interest expense of 7,500, the fixed costs rise in the profit plan. (2)

As the profit plan in the example given was based on the assumption of a profit or loss of 0 the increased fixed costs lead to a loss amounting to 7,500. Simultaneously, this loss which was compiled in the profit plan is the new basis for the finance plan. (3)

By the new loss of 7,500 which forms the basis for the finance plan (3), by the depreciation of 90,000 which was transferred from the basic data and by the increase of the loan of 150,000 which has already been presented in step 1, a new surplus of cash of 232,500 arises as result of the finance plan. (4)

All new changing values are incorporated from the finance plan into the budgeted balance sheet:

The loss of 7,500 which was transferred from the profit plan as the basis for the finance plan reduces the equity in the budgeted balance sheet. (3)

The new surplus of cash which was compiled amounting to 232,500 as the result of the finance plan increases the bank account in the budgeted balance sheet. (4)

Complete Answer Key Step 1-4/4

Figure 31: Financing | Complete Answer Key Step 1-4/4

The increase of the loan by 150,000 improves the liquidity in the finance plan of the enterprise. (1)

The interest rate for the additional credit amounts to 5 % annually. 5 % multiplied by the additional credit balance of 150,000 results in an additional interest expense of 7,500.

Due to the additional interest amount of 7,500 the fixed costs rise by 7,500 in the profit plan. (2)

As the profit plan in the example given is based on the assumption of a profit or loss of 0 the increased fixed costs result in a loss amounting to 7,500. This loss of 7,500 which was compiled in the profit plan forms also the new basis for the finance plan. (3)

By the loss of 7,500 which forms the basis for the finance plan ((3), by the existing depreciation of 90,000 (see basic data) and the increase of the loan by 150,000 ((1)) a surplus of cash of 232,500 arises as the result of the finance plan. (4)

All changing values of the finance plan are incorporated into the budgeted balance sheet:

The raising of the loan of 150,000 increases the existing bank loan in the budgeted balance sheet. (1)

The existing depreciation of 90,000 (see basic data) reduces the fixed assets in the budgeted balance sheet.

The loss of 7,500 which was transfered from the profit plan to the finance plan reduces the equity in the budgeted balance sheet. (3)

The surplus of cash of 232,500 as the result of the finance plan increases the bank account in the budgeted balance sheet. (4)