Define sensitivity analysis. Why do managers conduct sensitivity analysis during the budget process?
What will be an ideal response
Sensitivity analysis is a what-if technique that asks what a result will be if a predicted amount is not achieved or if an underlying assumption changes. The master budget models the company's planned activities, and managers pay special attention to ensure that the results of the budgeted income statement, the budgeted balance sheet, and the budgeted statement of cash flows support key strategies. But actual results often differ from plans, so managers need to know how budgeted income and cash flows would change if key assumptions or predicted amounts in the master budget (a static budget) turn out to be incorrect. Because a flexible budget is prepared for various levels of sales volume, it is useful for sensitivity or what-if analysis and allows managers to plan for various sales levels. If managers have a better understanding of how changes in sales and costs are likely to affect net income and cash flows, they can react quickly if key assumptions or predicted amounts (such as sales price or sales volume) underlying the master budget prove to be wrong.
You might also like to view...
Victory Company purchases office equipment at the beginning of the year at a cost of $15,000. The machine is depreciated using the straight-line method. The machine's useful life is estimated to be 7 years with a $1,000 salvage value. The journal entry to record the first year's depreciation is:
A. Debit Office Equipment $2,000, credit Accumulated Depreciation $2,000. B. Debit Accumulated Depreciation $2,143; credit Office Equipment $2,143. C. Debit Depreciation Expense $2,000, credit Office Equipment $2,000. D. Debit Depreciation Expense $2,000, credit Accumulated Depreciation $2,000. E. Debit Depreciation Expense $2,143, credit Accumulated Depreciation $2,143.
Which one of the following is not one of the three business activities as shown in statement of cash flows?
A) Financing B) Operating C) Investing D) Measuring
The Taft-Hartley Act gives the president of the United States the right to seek an injunction against a strike that would create a national emergency
Indicate whether the statement is true or false
Which of the following is not descriptive of the law?
a. It is always prohibitory. b. It is pervasive. c. It may be permissive. d. Its function is to regulate human conduct and relations.