MANAGERIAL ACCOUNTING
MICROSOFT
CORPORATION
Microsoft Corporation is a worldwide provider of software, services,
and Internet technologies for personal
and business computing. Founded in
1975, the company operates subsidiary offices in more than 60 foreign
countries and employs nearly 44,000
people worldwide. Microsoft is well
known for its Windows and Microsoft
Office software, among other products.
Financial Analysts at Microsoft provide strategic and business development analysis, reporting, accounting
support, adherence to internal controls, and strategic counsel. They create and publish the budgets and
communicate the process and results.
Senior Financial Analysts need a
degree in accounting, finance, or a
closely related field, and a minimum of
3 years of experience. Ideal candidates should have excellent communication skills and the ability to work
independently. Microsoft is looking for
individuals with high-caliber analytical
skills and the ability to think strategically. Applicants should have a flexible,
can-do attitude and be able to work
well with other groups.
THINK CRITICALLY
1. Would you be interested in working
for Microsoft? Why or why not?
2. What do you think is meant by a
“flexible, can-do attitude”?
2.1 BUDGET PLANNING
2.2 BUDGETED INCOME
STATEMENT
2.3 CASH BUDGETS
The Chapter 2 video for
this module introduces the
concepts in this chapter.
Budgeting
PROJECT OBJECTIVES
■ Become aware of the budgeting process and the purposes of budgeting
■ Create and analyze a budgeted income statement
■ Create and analyze a cash budget and performance report
GETTING STARTED
Read through the Project Process below. Make a list of any materials you will
need. Decide how you will get the needed materials or information.
■ Add to your list of Personal Skills and Accounting-Related Skills created in the
Chapter 1 project any additional skills that the work of a budget analyst
requires.
■ Use the income statement showing results for two years created in the
Chapter 1 project or create a new company and income statement.
PROJECT PROCESS
Part 1 LESSON 2.1 Discuss in class the purposes of budgeting. Create a chart
that summarizes the purposes. Delete the component percentage
columns from the comparative income statement prepared in Chapter 1.
Add the Increase/(Decrease) columns shown in the comparative income
statement in Lesson 2.1. Create formulas to calculate the amounts and
percentages in these columns.
Part 2 LESSON 2.2 Write an operational plan for the business. Consider current economic conditions and the analysis of the comparative income
statement. Create budget schedules for sales, purchases, selling
expenses, administrative expenses, and other revenue and expenses.
Compile a budgeted income statement from these budget schedules.
Make a list of all assumptions you made.
Part 3 LESSON 2.3 Use the schedules and budgeted income statement to create cash payments and cash receipts budget schedules. Make a list of all
assumptions you made. Create a performance report and analyze the
result, recommending action where needed.
CHAPTER REVIEW
Project Wrap-up Hold a class debate on the following statement or a similar
one: “A company’s budget should be distributed to employees at all levels of the
company so that they can perform their jobs efficiently.”
31
CHAPTER 2 BUDGETING
LESSON 2.1
BUDGET PLANNING
DESCRIBE five
purposes of budgeting
LIST sources of budget
information
PREPARE AND
ANALYZE a
comparative
income statement
PURPOSE OF BUDGETING
managers in a business make decisions every day that affect the
profitability of the business. In order to make effective decisions and coorDdinateepartment
the decisions and actions of the various departments, a business needs
to have a plan for its operations. Planning the financial operations of a business is called budgeting.
A budget is a written financial plan of a business for a specific period of
time, expressed in dollars. Each area of a business’s operations typically has a
separate budget. For example, a business might have an advertising budget, a
purchasing budget, a sales budget, a manufacturing budget, a research and
development budget, and a cash budget. New and ongoing projects would
each have a detailed budget. Each budget would then be compiled into a
master budget for the operations of the entire company.
A
nthony Sanchez is the creative director in the advertising department of a
large merchandising business. His boss told him in a meeting that he
would have to estimate the costs of each advertising campaign that is
planned for next year. Anthony replied, “I’m not a numbers person. I’m the
creative guy! Why are you asking me?” Should Anthony participate in estimating the costs of advertising for his company? Why or why not?
32
2.1 BUDGET PLANNING
A business that does not have a budget or a plan will make decisions that
do not contribute to the profitability of the business because managers lack a
clear idea of goals of the business. A budget serves five main purposes—communication, coordination, planning, control, and evaluation.
◆
COMMUNICATION
In the budgeting process, managers in every department justify the resources
they need to achieve their goals. They explain to their superiors the scope and
volume of their activities as well as how their tasks will be performed. The
communication between superiors and subordinates helps affirm their
mutual commitment to company goals. In addition, different departments
and units must communicate with each other during the budget process to
coordinate their plans and efforts. For example, the MIS department and the
marketing department have to agree on how to coordinate their efforts about
the need for services and the resources required.
Budgets can be prepared by any financial
entity, from an individual, family, or business
to a governmental or
not-for-profit group.
◆
COORDINATION
Different units in the company must also coordinate the many different tasks
they perform. For example, the number and types of products to be marketed
must be coordinated with the purchasing and manufacturing departments to
ensure goods are available. Equipment may have to be purchased and
installed. Advertising promotions may need to be planned and implemented.
And all tasks have to be performed at the appropriate times.
◆
PLANNING
A budget is ultimately the plan for the operations of an organization for a
period of time. Many decisions are involved, and many questions must be
answered. Old plans and processes are questioned as well as new plans and
processes. Managers decide the most effective ways to perform each task.
They ask whether a particular activity should still be performed and, if so,
how. Managers ask what resources are available and what additional resources
will be needed.
◆
CONTROL
Once a budget is finalized, it is the plan for the operations of the organization. Managers have authority to spend within the budget and responsibility
to achieve revenues specified within the budget. Budgets and actual revenues
and expenditures are monitored constantly for variations and to determine
whether the organization is on target. If performance does not meet the budget, action can be taken immediately to adjust activities. Without constant
monitoring, a company does not realize it is not on target until it is too late
to make adjustments.
◆
EVALUATION
One way to evaluate a manager is to compare the budget with actual performance. Did the manager reach the target revenue within the constraints of
the targeted expenditures? Of course, other factors, such as market and general economic conditions, affect a manager’s performance. Whether a manager achieves targeted goals is an important part of managerial responsibility.
33
CHAPTER 2 BUDGETING
◆
BUDGET PERIOD
Budgets are usually prepared for a period of one year. An annual budget is
also usually broken down into smaller periods of time, such as quarterly and
monthly budgets, to provide frequent opportunities to compare actual performance with budgeted performance.
Weekly and daily budget reports may also be distributed to managers to
compare actual performance with the budget on a year-to-date basis.
Frequent updates remind managers of the goals set at the beginning of the
year and keep them up to date on the progress toward those goals.
Why are annual budgets usually broken down into smaller periods of
time, such as quarterly or monthly budgets?
SOURCES OF BUDGET INFORMATION
udget planners use many information sources, such as company records,
general economic information, and information from staff and managers,
Bto help
determine company goals and strategies and to prepare a final budget.
◆
As a class, discuss
ways that managers
can obtain general economic information as
well as information specific to the market of a
particular industry.
COMPANY RECORDS
The accounting and sales records of a business contain much of the information needed to prepare budgets. Accounting information about previous
years’ operations is used to determine trends in sales, purchases, and operating expenses. Expected price changes, sales promotion plans, and market
research studies are also important in projecting activity for a budget period.
◆
GENERAL ECONOMIC INFORMATION
A general slowdown or speedup in the national economy may affect budget
decisions. Unusually high inflation rates affect budgeted amounts. A labor
strike may affect some related industries and thus affect company operations.
Rising fuel prices may make it more expensive to ship and receive products.
Energy shortages and utility rate increases also make operations more expensive. New product development, changes in consumer buying habits, availability of merchandise, international trade, and general business conditions
all must be considered when preparing budgets.
◆
34
COMPANY STAFF AND MANAGERS
Sales personnel estimate the amount of projected sales. Project managers estimate costs of making new products. Considering projected sales for the new
budget period, other department managers project budget items for their
areas of responsibility within the business.
2.1 BUDGET PLANNING
◆
GOOD JUDGMENT
Good judgment by the individuals preparing the budgets is essential to realistic budgets. Even after evaluating all available information, answers to many
budget questions are seldom obvious. Some proposed projects may be more
worthy than others, and some worthy projects may not be possible to achieve
from projected revenues and profit. Some information will conflict with
other information. Ultimately, final budget decisions are based on good
judgment in selecting the best alternatives from the many possible options.
Why is good judgment important to making budget decisions?
COMPARATIVE INCOME STATEMENT
reparation for planning a budget involves analyzing existing financial
information. An analysis of previous years’ sales, cost, and expense
Pamounts
is an important part of budget
preparation. One
analytical tool is the
comparative income
statement, which is an
income statement
containing sales, cost,
and expense information for two or more
years.
Reflections, Inc., is a
corporation that sells
mirror glass. The comparative income statement |for Reflections,
shown on the next
page, provides two
years of information
about sales, costs,
and expenses. This
statement shows trends
that may be taking
place in these items. The statement also highlights items that may be increasing or decreasing at a higher rate than other items on the statement.
35
CHAPTER 2 BUDGETING
Reflections, Inc.
Comparative Income Statement
for Years Ended December 31, 20X1 and 20X2
Increase (Decrease)
Amount
Percentage
20X2
20X1
$1,880,000
1,231,720
$ 648,280
$1,700,000
1,105,000
$ 595,000
$180,000
126,720
$ 53,280
$ 45,120
150,410
7,200
10,800
11,490
75,200
34,160
11,280
$345,660
$ 37,800
140,640
7,000
10,800
11,960
68,000
28,320
10,850
$315,370
$ 7,320
9,770
200
0
(470)
7,200
5,840
430
$30,290
19.4
6.9
2.9
0.0
(3.9)
10.6
20.6
4.0
9.6
$ 14,400
19,200
4,800
38,770
22,540
30,000
77,830
13,620
11,280
10,080
$242,520
$588,180
$ 12,000
19,200
4,500
33,640
20,590
30,000
75,240
14,600
10,230
7,320
$227,320
$542,690
$ 2,400
0
300
5,130
1,950
0
2,590
(980)
1,050
2,760
$15,200
$45,490
20.0
0.0
6.7
15.2
9.5
0.0
3.4
(6.7)
10.3
37.7
6.7
8.4
$ 60,100
$ 52,310
$ 7,790
14.9
$ 3,000
$ 6,500
($ 3,500)
(53.8)
$ 57,100
$ 45,810
$11,290
24.6
9,280
6,870
2,410
35.1
Net Income after Federal Income Tax
$ 47,820
$ 38,940
$ 8,880
22.8
Units (sq. ft.) of Mirror Sold
376,000
340,000
36,000
10.6
Operating Revenue
Net Sales
Cost of Merchandise Sold
Gross Profit on Operations
Operating Expenses
Selling Expenses
Advertising Expense
Delivery Expense
Depr. Expense—Delivery Equipment
Depr. Expense—Warehouse Equipment
Miscellaneous Expense—Sales
Salary Expense—Commissions
Salary Expense—Regular
Supplies Expense—Sales
Total Selling Expenses
Administrative Expenses
Depr. Expense—Office Equipment
Depr. Expense—Computer System
Insurance Expense
Miscellaneous Expense—Administrative
Payroll Taxes Expense
Rent Expense
Salary Expense—Administrative
Supplies Expense—Administrative
Uncollectible Accounts Expense
Utilities Expense
Total Administrative Expenses
Total Operating Expenses
Income from Operations
Other Expenses
Interest Expense
Net Income before Federal Income Tax
Federal Income Tax Expense
◆
10.6
11.5
9.0
PREPARING A COMPARATIVE INCOME STATEMENT
The first column of Reflections’ comparative income statement shows actual
sales, costs, and expenses for the most current year, 20X2. The second column shows the actual amounts for the previous year, 20X1. The Increase/
(Decrease) columns show both the dollar amount and the percentage by
36
2.1 BUDGET PLANNING
which an item in 20X2 has increased or decreased over 20X1. The parentheses around the word Decrease in the column heading indicate that any
amounts or percentages that are decreases will be enclosed in parentheses.
Calculating Amounts Amounts are calculated by subtracting the previous year’s (20X1) amount from the current year’s (20X2) amount. For
example, the amount of increase for Net Sales is $1,880,000 minus
$1,700,000, or $180,000.
Current Year Previous Year Increase/(Decrease)
$1,880,000 $1,700,000 $180,000
Whenever the 20X1 amount is greater than the 20X2 amount, the item
has decreased, and the amount is placed in parentheses. For example, the
amount of decrease for Interest Expense is $3,000 minus $6,500, or $3,500,
which is shown on the comparative income statement as ($3,500).
Current Year Previous Year Increase/(Decrease)
$3,000 $6,500 ($3,500)
Calculating Percentages The percentage of increase or decrease is
calculated by dividing the amount of increase or decrease by the previous
year’s amount and then multiplying by 100. For example, the amount of
increase for Net Sales, $180,000 is divided by the 20X1 Net Sales amount,
$1,700,000 as shown below. Percentages are also rounded to the nearest tenth
of a percent, so 10.59% is shown as 10.6%.
Increase/(Decrease) Previous Year 100 Percent of Inc./(Dec.)
$180,000
$1,700,000 100 10.6%
Percentages for amounts that are decreases are also enclosed in parentheses.
Increase/(Decrease) Previous Year 100 Percent of Inc./(Dec.)
($3,500)
$6,500 100 (53.8%)
37
CHAPTER 2 BUDGETING
◆
ANALYZING A COMPARATIVE INCOME STATEMENT
Managers review each increase or decrease amount on the comparative
income statement. The percentage increase or decrease also indicates
whether a change is favorable, unfavorable, or normal compared with net
sales. If a cost or expense percentage increase is higher than the percentage
increase for net sales, net income is unfavorably affected. But if a cost or
expense percentage increase is lower than the percentage increase in sales,
net income is favorably affected. Decreases have the opposite effect. If a
cost or expense item decrease is a higher percentage than the net sales
decrease, net income is favorably affected. If the net sales decrease is a
higher percentage than cost and expense items, net income is unfavorably
affected. The effect of these changes in net sales, cost, and expense items is
shown in the following table.
Cost or Expense
Percentage
Less Than or
Greater Than
Net Sales
Percentage
Net
Income
Effect on
Net Income
Increase
Greater than
Increase
Decreases
Unfavorable
Increase
Less than
Increase
Increases
Favorable
Decrease
Greater than
Decrease
Increases
Favorable
Decrease
Less than
Decrease
Decreases
Unfavorable
Unfavorable results require further inquiry to determine the cause.
Reflections’ net sales for 20X2 increased 10.6% over net sales for 20X1.
The goal for 20X2 was to increase sales volume by 10.0%. The actual
10.6% increase resulted from an increase in units sold from 340,000 to
376,000 square feet of mirrors. The unit sales price remained at $5.00.
Management attributed the increase to two factors: (1) A more intensive
advertising campaign increased market share from 42.0% to 45.0%. (2)
Favorable economic conditions spurred new home building and created a
greater demand for mirrors.
Reflections, Inc., analyzes each cost and expense amount and percentage. For example, the cost of merchandise sold increased 11.5% from
20X1 to 20X2. Most of the increase resulted from the 10.6% increase in
the number of units sold. In addition, the purchase price per square foot
increased during 20X2 from $3.25 per square foot to $3.30. Advertising
expense increased 19.4% from 20X1 to 20X2. The increase is consistent
with the successful effort to expand market share. Management believes
that the more expensive television advertising resulted in a significant
increase in third and fourth quarter unit sales.
On a comparative income statement, if the percentage increase in net
sales is less than the percentage increase in Salary Expense, is this favorable or unfavorable? Why?
38
2.1 BUDGET PLANNING
THINK CRITICALLY
1. Dana Washington runs a small metal fabricating business. He employs
three workers in the metal shop, but performs all management,
accounting, and sales functions himself. He says that he never creates
a budget because he just doesn’t have the time. How would Mr.
Washington benefit from preparing a budget?
2. Sportif has two sales departments — clothing and accessories. The
manager of the clothing department distributes copies of the annual
budget to the employees and discusses it and the year’s plans with the
sales associates. The manager of the accessories department does not
communicate the budget to the sales associates. What effect do you
think this has on the associates in the two departments?
3. Elizabeth Tanaka is a retired widow who receives a monthly Social
Security check. Each month she cashes the check and puts the cash
into different envelopes for expenses such as food, rent, and transportation. One envelope is for savings for a trip to visit her family. Is
Mrs. Tanaka budgeting? How?
4. For each of the following increases and decreases on a comparative
income statement, indicate whether the effect on net income is favorable or unfavorable.
Net Sales
Effect on Net
Income
Cost of Merchandise Sold, increase 6%
increase 5%
Unfavorable
Advertising Expense, increase 3%
increase 6%
Favorable
Salary Expense, decrease 3%
decrease 2%
Favorable
MAKE CONNECTIONS
5. RESEARCH Use an Internet search engine to find an organization that
describes its budgeting process. Write a brief description of the process.
6. ANALYSIS Obtain the annual report of a company and review its comparative income statement. Using word-processing software, write a
brief analysis of the major increases and decreases on the statement.
39
CHAPTER 2 BUDGETING
LESSON 2.2
BUDGETED INCOME STATEMENT
DESCRIBE the purpose
of an operational plan
PREPARE sales and
purchases budget
schedules
PREPARE expenses
budget schedules
PREPARE a budgeted
income statement
OPERATIONAL PLANS AND GOALS
analyzing the previous years’ records, a business sets goals, develops
operational plans for meeting the goals, and prepares projections of sales,
Acosts,fter
and expenses for the coming year. Goals are broad statements of what
a business wishes to accomplish. An operational plan is a statement of how
a company will meet its goals. An annual operational plan establishes targets
that the company will work toward in the coming year. A planning group
consisting of the company’s executive officers and department managers
generally determines operational plans and goals.
P
atricia Parker is a very autocratic manager, always preferring to make decisions on her own without consulting anyone she supervises. She also carries this style through the budgeting process, making all decisions about net
sales, costs, and expenses without consulting sales representatives, advertising managers, marketers, and purchasers. She begrudgingly asks the
accounting department what depreciation figures she should use for equipment on the selling expenses budget. She frequently says, “I am the one who
is responsible for meeting the budget, so I will be the one who creates it.”
Does Patricia’s attitude take full advantage of the benefits of the budgeting
process?
40
2.2 BUDGETED INCOME STATEMENT
At Reflections, Inc., the planning group includes the president and all
department managers. The planning group reviews the analysis of the previous years’ comparative income statement and considers possible changes in
economic conditions that may affect the company. From these discussions,
the company’s operational plan and goals for the coming year are determined.
The planning committee developed the following planning guidelines.
Operational Plan for 20X3
■ The economy is projected to remain strong throughout 20X3. Therefore,
the sales goal is to increase unit sales to 400,000 units, about a 6.4%
increase. The unit sales price will be increased in the second quarter
from $5.00 to $5.25 per square foot to recover mechandise cost
increases in 20X2 and projected increases in the budget year.
■
Sales distribution by quarters is projected to be consistent with prior
quarters.
■
The unit cost of merchandise is projected to rise from $3.30 to $3.40 in
the first quarter, a 3.0% increase.
■
An automated cutting machine has been ordered. It will cost $20,000
and is projected to save about $10,000 per year in salary expense.
■
All employees on salary will receive a 5.0% salary increase.
Write an operational
plan for a service
business that you
could be operating,
such as a landscaping,
painting, or word
processing business.
Consider the
percentage increase in
sales, equipment
purchases, advertising
strategies, and so on
that would be needed
to achieve the plan.
Present your plan to
the class.
The operational plan is converted into a more precise plan, expressed in
dollars, by preparing a budgeted income statement. Reflections prepares separate budget schedules for the major parts of the budgeted income statement.
Budget schedules are detailed statements of the operations of a specific segment of a business for a period of time. Reflections prepares budget schedules
for sales, purchases, selling expenses, administrative expenses, and other revenue and expenses. To permit frequent comparisons of actual with budgeted
amounts, schedules are separated into quarterly projections.
At Reflections, the accounting department coordinates budget preparation.
The sales manager prepares the sales, purchases, and selling expenses budget
schedules. The administrative manager prepares the administrative expenses
budget schedule and the other revenue and expenses budget schedules. The
accounting department prepares the budgeted income statement from these
schedules. The completed budget, with attached schedules, is submitted to
the budget committee for approval. The budget committee consists of the
president and two members of Reflections’ board of directors.
What is the relationship between a company’s operational plan and a
budgeted income statement?
41
CHAPTER 2 BUDGETING
SALES AND PURCHASES BUDGET SCHEDULES
he sales manager prepares the sales and
purchases budget schedules. The sales
Tbudget
schedule is prepared first because
the other schedules are affected by the
projected net sales. For example, projected net sales is used to estimate the
amount of merchandise that must be
Purchased and the amount that may be
spent for sales, advertising, and other selling and administrative expenses.
◆
PREPARING THE SALES BUDGET SCHEDULE
Procedures for completing the sales budget schedule are shown below.
1. Actual Unit Sales, 20X2 Enter the actual annual and quarterly unit sales
for the current year. Because there will be a price increase, unit sales rather
than dollar sales are used. Changes in selling prices would make it difficult
to see actual increases in unit sales if the amounts were expressed only as
dollars.
The sales budget
schedule is prepared
first because many
other budget estimates
depend on the amount
of sales. As a class,
brainstorm to determine which other operating elements of a
business depend on
sales revenue. Then
discuss which elements do not depend
on sales revenue.
2. Sales Percentage by Quarter Divide each quarter’s actual unit sales for
20X2 by the annual sales for 20X2 and multiply by 100 to determine
what percentage of the year’s unit sales will be realized in each quarter.
Round percentages to the nearest tenth of a percent.
3. Projected Unit Sales, 20X3 Multiply each quarter’s sales percentage by
the projected unit sales for the year to calculate the quarterly unit sales.
Reflections, Inc., rounds all unit calculations to the nearest 100 units.
4. Unit Sales Price Enter the unit sales price for each quarter. The unit sales
price increases to $5.25 in the second quarter.
5. Net Sales Calculate the sales dollar amount for each quarter by multiplying projected unit sales times unit sales price. Reflections, Inc. rounds all
dollar calculations to the nearest $10. Calculate the Annual Budget
amount for net sales by adding the four quarterly amounts.
Reflections, Inc.
Sales Budget Schedule
For Year Ended December 31, 20X3
Actual Unit Sales, 20X2
Sales Percentage by Quarter
Projected Unit Sales, 20X3
Times Unit Sales Price
Net Sales
42
Annual
Budget
376,000
400,000
$2,075,600
Schedule 1
Quarter
1st
91,600
24.4%
97,600
$5.00
$488,000
2d
99,000
26.3%
105,200
$5.25
$552,300
3d
103,800
27.6%
110,400
$5.25
$579,600
4th
81,600
21.7%
86,800
$5.25
$455,700
2.2 BUDGETED INCOME STATEMENT
◆
PREPARING THE PURCHASES BUDGET SCHEDULE
Procedures for completing the purchases budget
schedule are shown below.
1. Unit Sales for Quarter (second line) Enter the
projected quarterly unit sales from the sales budget schedule. Because there will be a price
increase, unit sales rather than dollar sales are
used.
2. Ending Inventory (first line) Calculate the
ending inventory for each quarter. The sales
manager estimates that ending inventory for one
quarter should be about 40% of the units required for the next quarter’s sales. The calculation is shown for the first quarter, rounded to
the nearest hundred. Use 40,000 units for the
fourth quarter’s ending inventory.
Ending Inventory Next Quarter’s Ending Inventory
Percentage
Sales Units
40%
105,200
42,080 (rounded to 42,100)
3. Total Units Needed Add the ending inventory and the unit sales for
the quarter.
4. Less Beginning Inventory The beginning inventory for each quarter
is the ending inventory from the previous quarter. The beginning inventory for the first quarter, 39,200, is the ending inventory for December
31 of the previous year, taken from company records.
5. Purchases The purchases that need to be made in a quarter are the total
units needed less the beginning inventory.
6. Times Unit Cost: Enter the unit cost for each quarter. Unit cost is
expected to increase to $3.40 in the first quarter and remain the same for
the rest of the year.
7. Cost of Purchases Multiply the unit purchases for the quarter by the
unit cost.
Reflections, Inc.
Purchases Budget Schedule
For Year Ended December 31, 20X3
Schedule 2
Quarter
Ending Inventory
Unit Sales for Quarter
Total Units Needed
Less Beginning Inventory
Purchases
Times Unit Cost
Cost of Purchases
1st
42,100
97,600
139,700
39,200
100,500
$3.40
$341,700
2d
44,200
105,200
149,400
42,100
107,300
$3.40
$364,820
3d
34,700
110,400
145,100
44,200
100,900
$3.40
$343,060
4th
40,000
86,800
126,800
34,700
92,100
$3.40
$313,140
43
CHAPTER 2 BUDGETING
F
or budgets, accuracy is a relative term. All budget amounts are forecasts, estimates, or predictions. So a number rounded to the nearest 100 may be as
accurate as a prediction needs to be. Each business decides how far to round a
number or calculation based on the relative size of the business. The Cookie
Cutter, a small, family-owned bake shop specializing in gourmet cookies, rounds
all units to the nearest 100 and rounds all dollar calculations to the nearest $10.
The company’s projected unit sales for 20X3 are listed as 247,300 units. Of those
units, first quarter projections represent 24.3%. If each cookie (unit) retails for
$2.29, what are the projected net sales for the first quarter of 20X3?
SOLUTION
24.3% 247,300 60,093.9, rounded to 60,100
60,100 $2.29 $137,629, rounded to $137,630 in first quarter net sales
On a purchases budget schedule, what amount is used for the beginning
inventory for each quarter?
EXPENSES BUDGET SCHEDULES
sales manager prepares the selling expenses budget schedule while the
manager prepares the administrative expenses budget schedTule.headministrative
However, both managers depend on other company managers for input
into these budgets. For example, the sales personnel may provide information
about needed supplies, the advertising manager may supply much of the
advertising expense information, and the accounting department may provide information about depreciation.
◆
PREPARING THE SELLING EXPENSES BUDGET SCHEDULE
Some selling expenses are very stable and require little planning, such as
depreciation expense. Others are closely related to sales and fluctuate as sales
increase and decrease.
1. Advertising Expense Advertising expense in 20X2 was 2.4% of net sales
($45,120 $1,880,000). The same level of promotion will be maintained
for the new year. Therefore, Advertising Expense for each quarter will be
2.4% of each quarter’s dollar net sales as shown on the sales budget sched44
2.2 BUDGETED INCOME STATEMENT
ule. For the first quarter, the calculation is 2.4% $488,000 $11,712
($11,710 rounded to the nearest $10).
2. Delivery Expense Experience shows that delivery is about $0.40 per unit
sold. Therefore, quarterly forecasts for delivery expense are calculated by
multiplying $0.40 times the number of units expected to be sold in the
quarter. For the first quarter, $0.40 97,600 $39,040.
3. Depreciation Expense—Delivery Equipment No new delivery equipment will be added, so depreciation expense for the year remains the same
as it appears on the income statement for 20X2, $7,200. The amount is
divided equally among the four quarters.
4. Depreciation Expense—Warehouse Equipment A new automated
cutter will be acquired at the beginning of the second quarter, increasing
quarterly depreciation expense in the second, third, and fourth quarters
from $2,700 to $3,700 per quarter.
5. Miscellaneous Expense—Sales Miscellaneous expense was 0.6%
($11,490 $1,880,000) of net sales in 20X2. Management wants to
reduce miscellaneous expense to 0.5% of net sales. The first quarter’s miscellaneous expense is calculated as 0.5% $488,000 $2,440.
Budget analysts held
about 59,000 jobs in
private industry and
government in 1998.
Governments account
for one-third of all
budget analyst jobs.
The Department of
Defense employed
seven out of every ten
budget analysts in the
federal government.
6. Salary Expense—Commissions Salespersons will continue to earn a
4.0% commission on net sales. First quarter commissions are calculated as
4.0% $488,000 $19,520.
7. Salary Expense—Regular The new automated cutter will reduce salary
expense by $10,000, and a 5.0% increase will be added to the remaining
salaries. The annual regular salary expense is calculated below.
Salary Expense (from 20X2 income statement)
Less Reduction from automated cutter
Total
Plus 5.0% rate increase ($24,160 5.0%, rounded)
Projected Salary Expense—Regular
$34,160
10,000
$24,160
1,210
$25,370
The projected amount is then allocated among the four quarters based on
each quarter’s sales percentage from the sales budget schedule. First quarter
regular salaries are calculated as $25,370 24.4% $6,190.
Reflections, Inc.
Selling Expenses Budget Schedule
For Year Ended December 31, 20X3
Advertising Expense
Delivery Expense
Depr. Expense—Delivery
Equipment
Depr. Expense—Warehouse
Equipment
Miscellaneous Expense—Sales
Salary Expense—Commissions
Salary Expense—Regular
Supplies Expense—Sales
Total Selling Expenses
Schedule 3
Annual
Budget
$ 49,820
160,000
Quarter
1st
$11,710
39,040
2d
$13,260
42,080
3d
$ 13,910
44,160
4th
$10,940
34,720
7,200
1,800
1,800
1,800
1,800
13,800
10,380
83,020
25,370
12,450
$362,040
2,700
2,440
19,520
6,190
2,930
$86,330
3,700
2,760
22,090
6,670
3,310
$95,670
3,700
2,900
23,180
7,000
3,480
$100,130
3,700
2,280
18,230
5,510
2,730
$79,910
45
CHAPTER 2 BUDGETING
8. Supplies Expense—Sales In 20X2, supplies expense was 0.6% of net
sales ($11,280 $1,880,000). The same percentage is expected in 20X3.
First quarter supplies expense is 0.6% $488,000 $2,928 (rounded to
$2,930).
◆
PREPARING THE ADMINISTRATIVE EXPENSES BUDGET
SCHEDULE
Many of Reflections’ administrative expenses are known and remain about
the same each period. The annual budget amount for these items is shown
below. These expenses are divided equally among the four quarters.
■ Depreciation Expense—Office Equipment $14,400
■ Depreciation Expense—Computer System $19,200
■ Rent Expense $30,000
Reflections, Inc.
Selling Expenses Budget Schedule
For Year Ended December 31, 20X3
Depr. Expense—Office Equipment
Depr. Expense—Computer System
Insurance Expense
Miscellaneous Expense—
Administrative
Payroll Taxes Expense
Rent Expense
Salary Expense—Administrative
Supplies Expense—Administrative
Uncollectible Accounts Expense
Utilities Expense
Total Administrative Expenses
Schedule 4
Annual
Budget
$ 14,400
19,200
5,600
Quarter
1st
$ 3,600
4,800
1,400
2d
$ 3,600
4,800
1,400
3d
$ 3,600
4,800
1,400
4th
$ 3,600
4,800
1,400
36,760
22,810
30,000
81,720
14,540
12,450
10,980
$248,460
9,190
5,540
7,500
20,430
3,420
2,930
4,870
$63,680
9,190
5,900
7,500
20,430
3,870
3,310
1,470
$61,470
9,190
6,070
7,500
20,430
4,060
3,480
1,610
$62,140
9,190
5,300
7,500
20,430
3,190
2,730
3,030
$61,170
Many other administrative expenses are closely related to some other item
on the income statement. These expenses are calculated each quarter based
on a percentage of the budget estimate for the other item for each quarter.
These expenses are as follows.
■ Miscellaneous Expense 49.8% of administrative salaries for each quarter.
Management is committed to reducing this percentage to 45.0% in 20X3.
Note that quarterly administrative salary expense must be calculated
before this item can be calculated.
■ Payroll Taxes Expense 12.0% of total quarterly salaries, including Salary
Expense—Commissions, Salary Expense—Regular, and Salary Expense—
Administrative.
■ Supplies Expense—Administrative 0.7% of net sales for each quarter.
■ Uncollectible Accounts Expense 0.6% of net sales for each quarter.
46
2.2 BUDGETED INCOME STATEMENT
Other administrative expenses are estimated as shown below.
1. Insurance Expense Annual insurance premium
cost is projected to increase to $5,600, distributed equally among the quarters.
2. Salary Expense—Administrative No new
administrative personnel will be hired in 20X3.
The 20X2 amount, $77,830, is therefore
increased by 5.0% and distributed equally each
quarter.
3. Utilities Expense Utilities expense is based on
the amount of power, heat, telephone, and other
utilities used in 20X2. Costs are projected to
increase by 9.0%, consisting of a 5.0% increase
in activity and a 4.0% increase in rates.
Company records show the following utilities
costs for 20X2 for each quarter. Each is multiplied by 109% to calculate 20X3 projected quarterly expenses.
20X2 Actual
20X3 Projected
Utilities Expense 109% Utilities Expense
1st Quarter $ 4,470 109% $ 4,870
2d Quarter
1,350 109% 1,470
3d Quarter
1,480 109% 1,610
4th Quarter
2,780 109% 3,030
Total
$10,080 109% $10,980
FORMAT SPREADSHEETS TO COMMUNICATE Budget spreadsheets
are printed and used by managers at many levels of a company, and they
may also be available online for quick reference. Therefore, the formatting of
the spreadsheets must be clear so that readers of the spreadsheets can
easily understand them. Formats may consist of the size and style of type
used, the way borders and rules are applied, and the character formatting of
numbers. Currency may be expressed with or without decimals, with or without commas for separating thousands, and with or without dollar signs.
Percentages also have decimal options and options for using a percent sign.
Negative numbers may be indicated with minus signs or parentheses or
even with different colors. Managers should also consider whether budgets
will be printed or only displayed online. For example, the color red may be
used to indicate negative numbers, but the color may appear as black on a
printed copy. Thus, negative numbers may need to be formatted differently if
the budgets are to be printed.
THINK CRITICALLY Select one of the reports in this chapter. Describe
what kinds of formats have been used, and suggest any improvements that
might be needed.
47
CHAPTER 2 BUDGETING
◆
PREPARING THE OTHER REVENUE AND EXPENSES BUDGET
SCHEDULE
The other revenue and expenses budget schedule shows activities other than
normal operations. Typical items are interest income, interest expense, and
gains and losses on the sale of plant assets. Reflections has no other revenue
items and only one other expense item. This is the interest due on the
$20,000 loan used to acquire the automated cutter. Reflections plans to
repay the loan at the beginning of the fourth quarter, so the budget schedule
allocates the $2,250 interest equally over the first three quarters.
Reflections, Inc.
Other Revenue and Expenses Budget Schedule
For Year Ended December 31, 20X3
Other Expenses
Interest Expense
Schedule 5
Annual
Budget
Quarter
1st
2d
3d
$2,250
$750
$750
$750
4th
Why are some expenses distributed over quarters using each quarter’s
percentage of total net sales while other expenses are distributed equally?
PREPARING THE BUDGETED INCOME
STATEMENT
As a class, discuss
how different categories of expenses
may affect the sales
revenue and net income
of a company. Identify
which expenses might
lead to increased sales.
Determine whether a
certain increase in
a category automatically increases
(or decreases) sales by
the same percentage.
48
he budget schedules for revenue, cost, and expense items show the detailed
items. Therefore, the budgeted income statement is shortened, and the
Tbudget
schedules are then attached to it. Most of the information on the
income statement is copied directly from the budget schedules. However,
three items need to be calculated as shown below.
Beginning Inventory The beginning inventory for the first quarter is
shown in units on the purchases budget schedule, 39,200 units. These items
were on hand at the end of 20X2 and, therefore, are multiplied by the 20X2
inventory cost of $3.30 (39,200 $3.30 $129,360). The beginning
inventory for the first quarter is the same as the beginning inventory for the
year. The beginning inventory for each of the next three quarters is the same
number as the ending inventory for the preceding quarter. The beginning
inventory for the second, third, and fourth quarters are multiplied by the
20X3 unit cost of $3.40.
Ending Inventory The ending inventory amounts are calculated by
multiplying the ending inventory unit amounts from the purchases budget
schedule by the 20X3 unit cost of $3.40. The ending inventory for the
annual budget is the same as the ending inventory for the fourth quarter.
2.2 BUDGETED INCOME STATEMENT
Federal Income Tax Federal income tax is calculated on total net
income using tax rates from the Internal Revenue Service. The amount is distributed equally among the four quarters. Because of rounding, the sum of
the four quarters is less than the actual calculated amount by $10. Therefore,
it is desirable to increase the fourth quarter’s amount by $10 so that the
annual budget equals the sum of the quarterly amounts.
15% of net income before taxes, zero to $50,000
25% of net income before taxes less $5,000, $50,001 to $75,000
34% of net income before taxes less $11,750, $75,001 to $100,000
39% of net income before taxes less $16,750, $100,001 to $335,000
Net Income before Fed. Inc. Tax Tax Rate Amount Fed. Inc. Tax
$106,770
39% $16,750 24,890, rounded
Reflections, Inc.
Budgeted Income Statement
For Year Ended December 31, 20X3
Operating Revenue
Net Sales (Schedule 1)
Cost of Merchandise Sold
Beginning Inventory
Purchases (Schedule 2)
Total Merchandise Avail.
for Sale
Less Ending Inventory
Cost of Merchandise Sold
Gross Profit on Operations
Annual
Budget
1st
2d
Quarter
3d
4th
$2,075,600
$488,000
$552,300
$579,600
$455,700
$ 129,360
1,362,720
$129,360
341,700
$143,140
364,820
$150,280
343,060
$117,980
313,140
$1,492,080
136,000
$1,356,080
$ 719,520
$471,060
143,140
$327,920
$160,080
$507,960
150,280
$357,680
$194,620
$493,340
117,980
$375,360
$204,240
$431,120
136,000
$295,120
$160,580
Operating Expenses
Selling Expenses (Schedule 3)
Administrative Expenses
(Schedule 4)
Total Operating Expenses
$ 362,040
$ 86,330
$ 95,670
$100,130
$ 79,910
248,460
$ 610,500
63,680
$150,010
61,470
$157,140
62,140
$162,270
61,170
$141,080
Income from Operations
$ 109,020
$ 10,070
$ 37,480
$ 41,970
$ 19,500
Net Deduction (Schedule 5)
$ 2,250
$ 750
$ 750
$ 750
Net Income before Fed.
Income Tax
Federal Income Tax Expense
$ 106,770
24,890
$ 9,320
6,220
$ 36,730
6,220
$ 41,220
6,220
$ 19,500
6,230
$ 81,880
$ 3,100
$ 30,510
$ 35,000
$ 13,270
Net Income after Fed.
Income Tax
Most amounts on a budgeted income statement are copied from budget
schedules. Which amounts need to be calculated and why?
49
CHAPTER 2 BUDGETING
THINK CRITICALLY
1. Complete the sales, cost, and expenses budget schedules for Photex
Corporation on the next two pages. Round units to the nearest 100 and
dollars to the nearest $10. Some information has already been completed for you. Then use the budget schedules to prepare a budgeted
income statement.
a.
Sales Budget Schedule
b.
Purchases Budget Schedule: The sales manager requests that
40.0% of each quarter’s unit sales be available in the prior quarter’s
ending inventory.
c.
Expenses Budget Schedules: Payroll taxes expense is 12.0% of
total company salaries. Other expenses are based on a percentage
of net sales for each quarter.
Advertising Expense, 1.2%
Delivery Expense, 0.6%
Miscellaneous Expense — Sales, 0.4%
Salary Expense — Sales, 5.0%
Supplies Expense — Sales, 0.8%
Uncollectible Accounts Expense, 0.6%
Utilities Expense, 1.8%
d.
Other Revenue and Expenses Budget Schedule: This schedule is
already completed.
e.
Budgeted Income Statement: The units in beginning inventory for
the first quarter were on hand at the end of 20X2 when the unit cost
was $4.00. Use the tax rate table in this lesson to calculate Federal
Income Tax Expense and distribute it equally among the quarters.
2. When preparing an administrative expenses budget schedule, what are
some of the factors that should be considered?
MAKE CONNECTIONS
3. PERSONAL FINANCE Make a list of your personal income and expenditures for a week and then project them for a quarter. Be sure to consider
all sources of income, such as allowances, earnings from a job, and gifts.
Make a personal operational plan for the next year, being sure to include
any long-term goals such as purchasing a car or taking a trip. Then create
an annual budget, showing income and expenditures for each quarter.
4. GOVERNMENT Search the Internet to locate the most current budget of
the U.S. government. Review the budget and furnish the following information. Then write a brief report about parts of the budget that interest you.
Budget year
Total Revenues
Amount allocated to Defense
Amount allocated to Education
5. STATISTICS Use the graphics functions of spreadsheet software to prepare a bar graph of the selling expenses budget schedule in this lesson.
50
2.2 BUDGETED INCOME STATEMENT
Photex Corporation
Sales Budget Schedule
For Year Ended December 31, 20X3
Annual
Budget
120,000
Actual Unit Sales, 20X2
Sales Percentage by Quarter
Projected Unit Sales, 20X3
Times Unit Sales Price
Net Sales
130,000
$780,000
Schedule 1
Quarter
1st
22,000
18.3%
23,800
$6.00
$142,800
2d
34,400
28.7%
37,300
$6.00
$223,800
3d
34,800
29.0%
37,700
$6.00
$226,200
4th
28,800
24.0%
31,200
$6.00
$187,200
Photex Corporation
Purchases Budget Schedule
For Year Ended December 31, 20X3
Schedule 2
Quarter
1st
14,900
23,800
38,700
12,500
26,200
$4.25
$111,350
Ending Inventory
Unit Sales for Quarter
Total Units Needed
Less Beginning Inventory
Purchases
Times Unit Cost
Cost of Purchases
2d
15,100
37,300
52,400
14,900
37,500
$4.25
$159,380
3d
12,500
37,700
50,200
15,100
35,100
$4.25
$149,180
4th
9,600
31,200
40,800
12,500
28,300
$4.25
$120,280
Photex Corporation
Selling Expenses Budget Schedule
For Year Ended December 31, 20X3
Advertising Expense
Delivery Expense
Depr. Expense—Delivery
Equipment
Depr. Expense—Store
Equipment
Miscellaneous Expense—Sales
Salary Expense—Sales
Supplies Expense—Sales
Total Selling Expenses
Schedule 3
Annual
Budget
$ 9,360
4,680
Quarter
1st
$ 1,710
860
2d
$ 2,690
1,340
3d
$ 2,710
1,360
4th
$ 2,250
1,120
2,400
600
600
600
600
6,680
3,120
39,000
6,240
$71,480
1,670
570
7,140
1,140
$13,690
1,670
900
11,190
1,790
$20,180
1,670
900
11,310
1,810
$20,360
1,670
750
9,360
1,500
$17,250
Photex Corporation
Other Revenue and Expenses Budget Schedule
For Year Ended December 31, 20X3
Other Expenses
Interest Expense
Schedule 5
Annual
Budget
Quarter
1st
2d
3d
4th
$5,000
$1,250
$1,250
$1,250
$1,250
51
CHAPTER 2 BUDGETING
Photex Corporation
Administrative Expenses Budget Schedule
For Year Ended December 31, 20X3
Depr. Expense—Office
Equipment
Insurance Expense
Miscellaneous Expense—
Administrative
Payroll Taxes Expense
Rent Expense
Salary Expense—
Administrative
Supplies Expense—
Administrative
Uncollectible Accounts Expense
Utilities Expense
Total Administrative Expenses
Schedule 4
Annual
Budget
Quarter
1st
2d
3d
4th
$ 3,600
4,200
$ 900
1,050
$ 900
1,050
$ 900
1,050
$ 900
1,050
3,000
7,700
9,600
750
1,610
2,400
750
2,100
2,400
750
2,110
2,400
750
1,880
2,400
25,200
6,300
6,300
6,300
6,300
2,800
4,680
14,040
$74,820
700
860
2,570
$17,140
700
1,340
4,030
$19,570
700
1,360
4,070
$19,640
700
1,120
3,370
$18,470
Photex Corporation
Budgeted Income Statement
For Year Ended December 31, 20X3
Operating Revenue
Net Sales (Schedule 1)
Cost of Merchandise Sold
Beginning Inventory
Purchases (Schedule 2)
Total Merchandise Avail.
for Sale
Less Ending Inventory
Cost of Merchandise Sold
Gross Profit on Operations
Annual
Budget
1st
2d
3d
4th
$780,000
$142,800
$223,800
$226,200
$187,200
$ 50,000
540,190
$ 50,000
111,350
$ 63,330
159,380
$ 64,180
149,180
$ 53,130
120,280
$590,190
40,800
$549,390
$230,610
$161,350
63,330
$ 98,020
$ 44,780
$222,710
64,180
$158,530
$ 65,270
$213,360
53,130
$160,230
$ 65,970
$173,410
40,800
$132,610
$ 54,590
$ 13,690
$ 20,180
$ 20,360
$ 17,250
17,140
$ 30,830
19,570
$ 39,750
19,640
$ 40,000
18,470
$ 35,720
$ 84,310
$ 13,950
$ 25,520
$ 25,970
$ 18,870
$ 5,000
$ 1,250
$ 1,250
$ 1,250
$ 1,250
$ 79,310
$ 12,700
$ 24,270
$ 24,720
$ 17,620
15,220
3,810
3,810
3,810
3,790
$ 64,090
$ 8,890
$ 20,460
$ 20,910
$ 13,830
Operating Expenses
Selling Expenses (Schedule 3) $ 71,480
Administrative Expenses
(Schedule 4)
74,820
Total Operating Expenses
$146,300
Income from Operations
Net Deduction (Schedule 5)
Net Income before Fed.
Income Tax
Federal Income Tax Expense
Net Income after Fed.
Income Tax
52
Quarter
2.3 CASH BUDGETS
LESSON 2.3
CASH BUDGETS
PREPARE a cash budget
PREPARE AND
ANALYZE a
performance report
PLANNING THE CASH BUDGET
ood cash management requires planning and controlling cash so that it
will be available to meet obligations when they come due. Therefore,
GReflections,
Inc., prepares a cash budget to help analyze cash inflows and cash
outflows. A cash budget is a budget that details the cash receipts and cash
payments a business expects in a specific period of time.
The treasurer prepares the cash budget in consultation with the budget
committee. A corporation treasurer is an officer of the corporation who is
usually responsible for planning the corporation’s requirement for and use of
cash.
L
ily Wu manages the cash functions of a small business. She does not
believe in preparing annual cash budgets because she says that keeping
good records of cash receipts, cash payments, and the current checking
account balance is an accurate method of ensuring there is always enough
cash to make the required payments. When receipts are slow, she postpones
paying suppliers and occasionally delays paying the other three employees for
a few days. Discuss the advantages and disadvantages of Mrs. Wu’s practices.
53
CHAPTER 2 BUDGETING
The treasurer must
analyze the following cash
items.
1. Projected receipts
from cash sales, customers on account,
and other sources.
2. Projected cash payments for ordinary
expenses such as rent,
payroll, and payments
to vendors on account.
3. Other cash payments
such as buying plant
assets or supplies.
A cash receipts budget schedule and a cash payments budget schedule are
prepared in order to compile the cash budget.
◆
CASH RECEIPTS BUDGET SCHEDULE
A cash receipts budget schedule shows all projected cash receipts for a budget
period. Projections on a cash receipts budget schedule are composed of the
following items.
1. Quarterly cash sales
2. Quarterly collections on account from customers The amounts received
from customers will not be the same as the amount of sales on account.
Normally, cash is received for sales on account made during the previous
one or two months. In addition, some sales returns and allowances and
uncollectible accounts are likely.
3. Cash received from other sources Such as from bank loans.
Reflections, Inc.
Cash Receipts Budget Schedule
For Year Ended December 31, 20X3
Schedule A
Quarter
1st
54
2d
3d
4th
From Sales
Prior Year’s 4th Quarter ($408,000)
1st Quarter Sales ($488,000)
2d Quarter Sales ($552,300)
3d Quarter Sales ($579,600)
4th Quarter Sales ($455,700)
Total Receipts from Sales
$469,550
$536,510
$570,830
$112,440
364,560
$477,000
From Other Sources
Note Payable to Bank
Total Cash Receipts
20,000
$489,550
$536,510
$570,830
$477,000
$79,150
390,400
$94,670
441,840
$107,150
463,680
2.3 CASH BUDGETS
Analysis of Cash Receipts from Sales An analysis of Reflections’
sales for previous years shows the following pattern of cash receipts for net
sales per quarter.
1. About 60.0% of all net sales are cash sales.
2. About 20.0% of all net sales are sales on account collected in the same
quarter as the sale. Therefore, 80.0% = 60.0% + 20.0% of a quarter’s net
sales are collected during the same quarter as the sale.
3. About 19.4% of sales on account are collected in the following quarter.
4. About 0.6% of net sales prove to be uncollectible.
Calculating Cash Receipts from Sales A quarter’s cash receipts
from sales, as shown in the cash receipts budget schedule, are calculated in
two steps.
1. Cash receipts for 19.4% of the previous quarter’s net sales are collected in
the following quarter. For the first quarter in 20X3, 19.4% of the fourth
quarter of 20X2 is calculated as 19.4% $408,000 $79,152, rounded
to $79,150.
A 1995 Price Waterhouse study found
that budgeting costs
large multinational
enterprises a median
of $63,000 for every
$100 million of base
revenue within finance
departments alone and
that budget preparation
took an average of 110
days from start to finish.
2. Cash receipts for 80.0% of the current quarter’s net sales are received in
the current quarter. For the first quarter in 20X3, this is calculated as
80.0% $488,000 $390,400.
Cash Receipts from
Other Sources Cash
sales and collections on
account provide most of
the cash receipts. When
additional cash is needed,
other sources of cash
should be planned. Reflections’ treasurer made a
preliminary plan of projected cash receipts and
cash payments. The treasurer then determined that
cash on hand could be
unusually low at the end
of the first quarter as peak
sales begin in the second
quarter. The treasurer,
therefore, plans to borrow
$20,000 during the first
quarter. This is recorded
as a note payable on the
cash receipts budget
schedule.
55
CHAPTER 2 BUDGETING
◆
CASH PAYMENTS BUDGET SCHEDULE
A cash payments budget schedule shows all projected cash payments for a
budget period. Projections on a cash payments budget schedule are composed
of the following items.
1. Quarterly cash payments for accounts payable or notes payable to
vendors
2. Quarterly cash payments for each expense item This projection requires
an analysis of the selling expenses, administrative expenses, and other revenue and expenses budget schedules.
3. Quarterly cash payments for buying equipment and other assets.
4. Quarterly cash payments for dividends
5. Quarterly cash payments for investments
Quarterly Cash Payments for Merchandise An analysis of past
records for payments to vendors shows the following cash payment pattern.
1. About 10.0% of all purchases are cash purchases.
2. About 60.0% of all purchases are purchases on account paid for in the
current quarter. Therefore, 70.0% (10.0% 60.0%) of a quarter’s purchases are paid for during the same quarter.
3. The remaining 30.0% of purchases on account in one quarter are paid for
in the following quarter.
Reflections, Inc.
Cash Payments Budget Schedule
For Year Ended December 31, 20X3
Schedule B
Quarter
1st
For Merchandise
Prior Year’s 4th Quarter Purchases
($212,600)
1st Quarter Purchases ($341,700)
2d Quarter Purchases ($364,820)
3d Quarter Purchases ($343,060)
4th Quarter Purchases ($313,140)
Total Cash Payments for Purchases
For Operating Expenses
Cash Selling Expenses
Cash Administrative Expenses
Total Cash Operating Expenses
For Other Cash Payments
Federal Income Tax Expense
Automated Cutting Machine
Cash Dividend
Investment
Note Payable and Interest
Total Other Cash Payments
Total Cash Payments for Purchases
56
$ 63,780
239,190
2d
$102,510
255,370
3d
$109,450
240,140
4th
$102,920
219,200
$302,970
$357,880
$349,590
$322,120
$ 81,830
52,350
$134,180
$ 90,170
49,760
$139,930
$ 94,630
50,260
$144,890
$ 74,410
50,040
$124,450
$ 6,220
20,000
$ 6,220
$ 6,220
$ 6,230
$ 6,220
$500,700
50,000
25,000
22,250
$103,480
$550,050
50,000
$ 26,220
$463,370
$ 56,220
$554,030
2.3 CASH BUDGETS
Cash payments for purchases are calculated using the same procedure used
for cash receipts. Purchase amounts are from the purchases budget schedule.
Cash Payments for Operating Expenses Cash payments for most
operating expenses are made in the quarter in which the expense is incurred.
However, both the selling and administrative expenses budget schedules
include items for which cash will not be paid, such as depreciation and
uncollectible accounts expenses. Therefore, these amounts are not included in
the cash payments budget schedule. The first quarter’s cash payments for selling and administrative expenses are calculated as shown below.
Selling Expenses
Less: Depr. Exp.—Delivery Equipment
Depr. Exp.—Warehouse Equipment
Cash Payment for Selling Expenses
Administrative Expenses
Less: Depr. Exp.—Office Equipment
Depr. Exp.—Computer System
Uncollectible Accounts Expense
Cash Payment for Admin. Expenses
$86,330
$1,800
$2,700
$3,600
4,800
2,930
$4,500
$81,830
$63,680
11,330
$52,350
Other Cash Payments Other cash payments are made for federal
income tax, plant assets, dividends, investments, and repayments of loans.
Reflections, Inc., has the following additional cash payments.
1. Federal Income Tax Expense: Payments for federal
income tax are on the budgeted income statement.
2. The new automated cutting machine will be
bought for $20,000 at the
end of the first quarter.
3. The company will pay a
$50,000 dividend to stockholders in both the second
and fourth quarters.
4. Projections indicate that
there will be a large cash
balance in the third quarter. Therefore, a $25,000
interest-earning investment will be made in the fourth quarter.
5. The promissory note and interest, $22,250, will be repaid at the beginning of the fourth quarter.
The last line of the cash payments budget schedule shows the total cash
payments projected each quarter. This total indicates the minimum amount
of cash that must be available each quarter.
57
CHAPTER 2 BUDGETING
BUDGETING WITH FOREIGN
CURRENCY
ompanies with significant operations in other countries face a unique budgeting problem. They have to merge budgets expressed in different currencies
into one master budget. A U.S.-based company would prefer to express the
master budget in U.S. dollars. Budget schedules for operations in other countries could be converted to U.S. dollars before being merged with the other
budget schedules. However, currency exchange rates fluctuate from day to day
depending on economic conditions and the political situation in other countries.
Most experts recommend that the foreign operations prepare their budgets in
the local currency. Then at the end of a budget period, managers are evaluated
on the basis of their actual performance in the local currency. For the master
budget, however, conversion to the dominant currency is necessary. Companies
might use the current exchange rate or an average predicted exchange rate for
a year. At the end of a reporting period, the amounts could be adjusted to reflect
the current exchange rate. As an alternative, some companies keep the original
converted amount on the budget and add a column for tracking differences due
to changing exchange rates.
C
THINK CRITICALLY Would a U.S. company that buys goods from another
country to sell in the United States have the same problem budgeting for foreign
currency as a U.S. company that operates a factory in another country?
58
2.3 CASH BUDGETS
◆
CASH BUDGET
A cash budget shows for each budget period a projection of a company’s
beginning cash balance, cash receipts, cash payments, and ending cash balance. A cash budget is prepared from the information in the cash receipts and
cash payments budget schedules. The first quarter beginning cash balance is
taken from the balance sheet for the last day of the previous period.
At the end of each quarter, the actual cash balance is compared with the
projected cash balance on the cash budget. If the actual balance is less than
the projected balance, the reasons must be determined so that action can be
taken to correct the problem. Some customers may not be paying on time, or
expenses may be exceeding budget projections. Frequent comparisons alert
managers to the need to either take corrective action or borrow additional
cash until receipts and payments are brought into balance.
Reflections, Inc.
Cash Budget
For Year Ended December 31, 20X3
Cash Balance—Beginning
Cash Receipts (Schedule A)
Cash Available
Less Cash Payments (Schedule B)
Cash Balance—Ending
1st
$ 21,780
489,550
$511,330
463,370
$ 47,960
Quarter
2d
3d
$ 47,960
$ 30,440
536,510
570,830
$584,470
$601,270
554,030
500,700
$ 30,440
$100,570
As a class, discuss
reasons why a
company’s cash
balance might fall
below the projected
balance. Then discuss the consequences of a cash
shortfall.
4th
$100,570
477,000
$577,570
550,050
$ 27,520
Why is the quarterly ending cash balance on a cash budget compared
with the actual ending cash balance?
\
59
CHAPTER 2 BUDGETING
PERFORMANCE REPORT
report that compares budgeted and actual amounts for a specific period of
time is a performance report. It can be prepared anytime, but usually is
prepared quarterly or monthly. The purpose is to determine whether actual
performance matches the budget so that corrective action can be taken if it
does not. When large variations are identified early, managers may make
changes to correct negative effects on net income for the year. If conditions
change significantly, the budget for the remainder of the year can be revised.
A
Reflections, Inc.
Performance Report
For Quarter Ended March 31, 20X3
Unit Sales (sq. ft.)
Operating Revenue
Net Sales
Cost of Merchandise Sold
Gross Profit on Operations
Actual
98,500
$488,000
327,920
$160,080
$492,500
330,680
$161,820
$4,500
2,760
$1,740
0.9
0.8
1.1
Operating Expenses
Selling Expenses
Advertising Expense
Delivery Expense
Depr. Expense—Delivery Equipment
Depr. Expense—Warehouse Equipment
Miscellaneous Expense—Sales
Salary Expense—Commissions
Salary Expense—Regular
Supplies Expense—Sales
Total Selling Expenses
Administrative Expenses
Depr. Expense—Office Equipment
Depr. Expense—Computer System
Insurance Expense
Miscellaneous Expense—Administrative
Payroll Taxes Expense
Rent Expense
Salary Expense—Administrative
Supplies Expense—Administrative
Uncollectible Accounts Expense
Utilities Expense
Total Administrative Expenses
Total Operating Expenses
$ 11,710
39,040
1,800
2,700
2,440
19,520
6,190
2,930
$ 86,330
$ 12,050
38,730
1,800
2,700
2,530
19,620
6,190
2,900
$ 86,520
$ 340
(310)
0
0
90
100
0
(30)
$ 190
2.9
(0.8)
0.0
0.0
3.7
0.5
0.0
(1.0)
0.2
$ 3,600
4,800
1,400
9,190
5,540
7,500
20,430
3,420
2,930
4,870
$ 63,680
$150,010
$ 3,600
4,800
1,400
9,350
5,550
7,500
20,430
3,490
2,800
5,180
$ 64,100
$150,620
$0
0
0
160
10
0
0
70
(130)
310
$ 420
$ 610
0.0
0.0
0.0
1.7
0.2
0.0
0.0
2.0
(4.4)
6.4
0.7
0.4
Income from Operations
$ 10,070
$ 11,200
$1,130
11.2
$ 750
$ 750
$0
0.0
$ 9,320
6,220
$ 3,100
$ 10,450
6,220
$ 4,230
$1,130
0
$1,130
12.1
0.0
36.5
Net Deduction
Net Income before Federal Income Tax
Federal Income Tax Expense
Net Income after Federal Income Tax
60
Increase (Decrease)
Amount
Percentage
900
0.9
Budget
97,600
2.3 CASH BUDGETS
A performance report is similar to a comparative income statement.
However, a performance report compares actual amounts with projected
amounts for the same period. A comparative income statement, on the other
hand, compares actual performance in one period with actual performance in
another period.
The first amount column of the performance report shows amounts projected for the first quarter. The second amount column shows the actual sales,
costs, and expenses for the quarter. The third amount column shows how
much the actual amount varies from the projected amount. For example,
actual net sales, $492,500, less projected net sales, $488,000, equals the
increase, $4,500. The fourth column shows the percentage the actual amount
increased or decreased from the projected amount. For example, the net sales
increase, $4,500, divided by projected net sales, $488,000, equals the percentage of increase, 0.9%. Percentages are rounded to the nearest tenth of a
percent. Decreases are indicated by parentheses.
It is important to understand that the meaning of increases and decreases
differs depending on the item being considered. For example, an increase in
net sales is a favorable result while an increase in cost of merchandise sold or
an expense is unfavorable.
◆
ANALYZING THE PERFORMANCE REPORT
All significant differences should be analyzed to determine why the differences occurred. Normally, Reflections only considers changes of 5.0% or
more to be significant. However, items that influence gross profit are large
dollar amounts, and small percentage changes affect net income significantly.
Therefore, Reflections’ sales manager reviews changes in net sales and cost of
merchandise sold regardless of the amount of change.
Reflections’ performance report indicates that three items should be
reviewed.
1. Net sales
2. Cost of merchandise sold
3. Utilities expense
Managers should determine what actions can correct unfavorable results
such as the 6.4% increase in utilities expense. If the utility service cost has
increased, the manager cannot change that. However, if power is being
wasted, procedures may need to be changed to avoid the waste.
Managers should also determine what actions caused favorable results,
such as the 0.9% increase in net sales, and encourage a continuation of those
favorable actions.
Why is a performance report prepared?
61
CHAPTER 2 BUDGETING
THINK CRITICALLY
1. Complete the cash receipts and cash payments budget schedules on
the next page. Round dollars to the nearest $10. Some information has
already been completed for you. Then use the completed cash budget
schedules to prepare a cash budget.
a.
Cash Receipts Budget Schedule: In each quarter, cash sales are
10.0% and collections of accounts receivable are 40.0% of the projected net sales for the current quarter. Collections from the preceding quarter’s net sales are 49.4% of that quarter. Uncollectible
accounts expense is 0.6% of net sales.
b.
Cash Payments Budget Schedule: In each quarter, cash payments
for cash purchases are 10.0%, and cash payments for accounts
payable are 55.0% of the purchases for the current quarter. Cash
payments for purchases of the preceding quarter are 35.0% of that
quarter.
In the first quarter, $40,000 will be borrowed on a promissory note,
and equipment costing $30,000 will be purchased for cash. In each
quarter, dividends of $10,000 will be paid in cash. In the fourth
quarter, the promissory note and $5,000 interest will be paid.
c.
Cash Budget
2. It is often said that the primary cause of business failure is lack of cash
flow. Others say that poor planning is the primary cause. Explain your
opinion about these statements?
3. Orpheon Corporation’s first quarter performance report shows a net
sales increase of 4.5%, a cost of merchandise sold decrease of 0.7%,
and an advertising expense increase of 12.4%. Net income before federal income tax exceeds the budgeted amount by 8.7%. All other
increases and decreases are less than 2.0%. What action would you
suggest?
MAKE CONNECTIONS
4. CONSUMER ECONOMICS Find textbooks or magazine articles that
explain why individuals and families should protect their credit rating.
Then write a brief comparison about how this information relates to
cash flow for a business.
5. COMMUNICATION Use presentation software to explain how a cash
receipts budget schedule is prepared.
6. BUSINESS Search the Internet to find information about how small
businesses use credit cards to help their cash flow. Write a brief report
on your findings.
62
2.3 CASH BUDGETS
Photex Corporation
Cash Receipts Budget Schedule
For Year Ended December 31, 20X3
Schedule A
Quarter
1st
2d
3d
4th
From Sales
Prior Year’s 4th Quarter ($161,280)
1st Quarter Sales ($142,800)
2d Quarter Sales ($223,800)
3d Quarter Sales ($226,200)
4th Quarter Sales ($187,200)
Total Receipts from Sales
$151,070
$182,440
$223,660
$111,740
93,600
$205,340
From Other Sources
Note Payable to Bank
Total Cash Receipts
40,000
$191,070
$182,440
$223,660
$205,340
$ 79,670
71,400
$ 70,540
111,900
$110,560
113,100
Photex Corporation
Cash Payments Budget Schedule
For Year Ended December 31, 20X3
Schedule B
Quarter
1st
2d
3d
4th
For Merchandise
Prior Year’s 4th Quarter Purchases
($105,600)
1st Quarter Purchases ($111,350)
2d Quarter Purchases ($159,380)
3d Quarter Purchases ($149,180)
4th Quarter Purchases ($120,280)
Total Cash Payments for Purchases
$109,340
$142,570
$152,750
$ 52,210
78,180
$130,390
For Operating Expenses
Cash Selling Expenses
Cash Administrative Expenses
Total Cash Operating Expenses
$ 11,420
15,380
$ 26,800
$ 17,910
17,330
$ 35,240
$ 18,090
17,380
$ 35,470
$ 14,980
16,450
$ 31,430
$ 3,810
30,000
10,000
$ 3,810
$ 3,810
$ 3,790
10,000
10,000
$ 43,810
$179,950
$ 13,810
$191,620
$ 13,810
$202,030
10,000
45,000
$ 58,790
$220,610
Quarter
2d
3d
$ 52,720
$ 43,540
182,440
223,660
$235,160
$267,200
191,620
202,030
$ 43,540
$ 65,170
4th
$ 65,170
205,340
$270,510
220,610
$ 49,900
For Other Cash Payments
Federal Income Tax Expense
Equipment Purchases
Cash Dividend
Note Payable and Interest
Total Other Cash Payments
Total Cash Payments for Purchases
$ 36,960
72,380
$ 38,970
103,600
$ 55,780
96,970
Photex Corporation
Cash Budget
For Year Ended December 31, 20X3
Cash Balance—Beginning
Cash Receipts (Schedule A)
Cash Available
Less Cash Payments (Schedule B)
Cash Balance—Ending
1st
$ 41,600
191,070
$232,670
179,950
$ 52,720
63
CHAPTER SUMMARY
LESSON 2.1 Budget Planning
A. A budget is a written financial plan of a business that provides communication between levels of a business, coordination between departments,
planning of operations, control of operations, and evaluation of performance. Budgets are usually prepared for a period of one year but may
also be broken down into smaller periods, such as months or quarters.
B. Sources of budget information include company records, general economic information, company staff and managers, and good judgment.
C. A comparative income statement compares two years of sales, cost, and
expense amounts and provides information for planning operations.
LESSON 2.2 Budgeted Income Statement
A. Businesses set goals and formulate an operational plan as a foundation
for budgeting.
B. A sales budget schedule provides information needed for other budget
schedules. A purchases budget schedule forecasts cost of merchandise.
C. Selling expenses, administrative expenses, and other revenue and
expenses budget schedules show the planned expenses of a business.
D. A budgeted income statement shows the forecasted operations of a
business and is compiled from the other budget schedules.
LESSON 2.3 Cash Budgets
A. Cash receipts and cash payments budget schedules show forecasted
cash inflows and outflows for each quarter. They are used to prepare
the cash budget to manage the flow of cash.
B. A performance report compares actual performance with budgeted performance for a specific period of time. It is analyzed carefully in order to
take corrective action where needed.
VOCABULARY BUILDER
64
Choose the term that best fits the definition. Write the letter of the answer
in the space provided. Some terms may not be used.
a
1. Written financial plan of a busia. budget
ness for a specific period of time,
expressed in dollars
b. budget schedules
a
2. Statement of how a company will
c. budgeting
meet its goals
d. cash budget
a
3. Report that compares budgeted
e. comparative income
and actual amounts for a specific
statement
period of time
f. goals
a
4. Detailed statements of the operg. operational plan
ations of a specific segment of a
h. performance report
business for a period of time
a
5. Budget that details the cash
receipts and cash payments a business expects in a specific
period of time
a
6. Planning the financial operations of a business
a
7. Broad statements of what a business wishes to accomplish
a
8. Income statement containing sales, cost, and expense information for two or more years
REVIEW CONCEPTS
9. How does a budget serve the purpose of control?
10. Give three examples of general economic trends that can affect a
company’s performance.
11. What information about sales, costs, and expenses can a comparative
income statement provide?
12. How are amounts and percentages in the Increase/(Decrease)
columns of a comparative income statement calculated?
13. In the sales budget schedule, how are the sales percentages by quarter
calculated?
14. Why would a sales budget schedule state sales amounts in both units
and dollars?
15. Why is the sales budget schedule prepared before other budget
schedules?
16. When an item on an expenses budget schedule is expressed as a percentage of net sales, how is each quarter’s amount calculated?
17. What are the usual sources of cash on a cash receipts budget schedule?
65
18. When preparing a cash payments budget schedule, why aren’t the totals
from the selling and administrative expenses budget schedules used?
19. When a performance report is analyzed, why do managers examine
the variations in net sales and cost of merchandise sold even if the
percentage of change is relatively low?
APPLY WHAT YOU LEARNED
20. Within a company, a budget serves five main purposes: communication, coordination, planning, control, and evaluation. Do these same
elements apply to families when budgeting? Why or why not?
21. In the last month of a fiscal year, Ellen Shaw, sales manager, saw that
unless extraordinary measures were taken, the store would not meet
budgeted net sales for the year. Therefore, she cut selling prices to
produce more sales. Is this an appropriate way to meet a budget?
22. Budget World is a small discount store in a mall. In October, a fire
caused so much damage that the store was closed for one month. In
December, the owner gave the sales manager a bad review because
sales did not reach the budgeted amount for the year. What is your
opinion of this scenario?
23. Toward the end of a fiscal year, it is apparent that the company will not
reach its budgeted net income. The sales manager, therefore, requires
that sales representatives cut all long-distance travel for the last two
months to keep expenses lower. Is this a good idea?
66
MAKE CONNECTIONS
24. TECHNOLOGY People in high-tech industries often criticize the budget
process because they say that the average life of a new technology
product is six months. Is this criticism justified? What process could be
used instead?
25. ETHICS Thomas Gradison is the sales manager and is responsible for
both sales and cost of merchandise on the annual budget. In the last
three months of the fiscal year, he delays purchasing any new merchandise so that cost of merchandise will be under budget and will
result in a good performance review for him. Is this ethical?
26. SCIENCE Conduct a library or Internet search to determine the U.S.
budget for the human genome research project. Describe your findings.
27. HISTORY The Falkland Islands war between Great Britain and
Argentina in 1982 cost Great Britain more than 1.6 billion pounds and
the loss of 255 lives, 6 ships, and 9 aircraft. Create a slide show presentation of this information and include your ideas on the difficulties
of budgeting for a war.
28. TECHNOLOGY Create a spreadsheet for the cash budget and budget
schedules in this chapter, or create one using your own information.
Design the spreadsheet in such a way that formulas and cell references create all the amounts in the cash budget, with the exception of
the beginning cash balance for the first quarter.
29. CAREERS Conduct research at the library to learn about a career as
a budget analyst. Write a brief report summarizing the educational
requirements, employment outlook, and salary ranges from entry-level
employees to experienced budget analysts.
67