Meaning and Components of a Financial Reporting System - Essay Example

Liabilities should also be clearly recorded and equity as well included in the financial statements. Equity is the residual interest in assets after all liabilities have been taken care of and is also called owner’s equity.

Operating budget versus activity-based budget
An operating budget refers to a yearly budget presented in terms of cost accounts, functional categories, and budget classification code among others. It consists of estimates of the total value of resources needed in operation. It is used to track operations in maintenance, wages as well as dividend payments among others. An activity-based budget is one in which activities happening in a specific organization are recorded and costs associated with them are recorded as well. (Cokins, 2006) This is followed by an act of associating these costs with a company’s goals and hence from this, an activity-based budget is developed.

This withstanding, it is of essence to understand that not both of these budgets can be used in operation. Both of the aforementioned budgets act to guide management on how to utilize resources for a given fiscal year. Both activity-based budget and operating budget pay attention to the previous year’s performance and hence develop a way in which to approach the coming year. Management has a say on the way to plot both but may not have much say on influencing how costs will be spread through a certain fiscal year. Though goals are set, both budgets have little or no control at all on whether or not the goals will be achieved. Both activity-based budget and operating budget engage all stakeholders hence success or failure is attributed to all.

Activity-based budgeting and operating budget display some differences. Activity-based budget is majorly based on operating activities and costs as opposed to operating budget which is based on budget classification codes and cost accounts. The operating budget keeps track of maintenance operations, salaries and wages, and interest payments. The activity-based budget on the contrary mainly focuses on a company’s goals and how much has been achieved. (Proctor, 2009)

Management of ICBI should adopt the activity-based budget. It is not hard to come up with and it is rather cheap since it avoids a bloated budget by making sure that relevant activities are recorded and costs associated with them. ICBI management should be sure of the goals of the company, activities, and resources required to run these activities. These activities should be recorded and tied with codes. Having recorded all activities required for performance, every cost code should then be associated with costs relevant to them and with special attention to the goals of ICBI.

Budget guidelines for ICBI
There has to be a plan before any budget is made and this plan has some guidelines to help develop it. A budget cannot be made by one mind but requires to have a group of individuals that will work together to help develop a comprehensive budget. It should be prepared within the generally accepted principles and procedures of accounting.
A budget should incorporate all costs of operations. No cost should be left unbudgeted so as to cushion a company against extra costs that may come up during a certain period of implementation. Such costs include training costs, salaries, wages, and depreciation costs among others. Another guideline that the management of ICBI could use is the period of implementation of the budget. This period should be so clear so as to avoid other diversions along a certain fiscal year. It is at management's discretion to alter such a period though altering should not be a popular decision. It is always advisable to be having a clear laid-down period that will take care of other upcoming costs in the coming fiscal year. (Plumlee, 2009)

Management of ICBI should also consider the taxation bracket within which the company falls in. This will help avoid the government intruding during a certain fiscal year asking for payment of taxes. The goals of the company should be taken into consideration when preparing the budget. This will help ensure that the budget made reflects these goals and costs are associated with such targets are taken care of. (Hall, 2010)