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Financial Budgeting

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 41

2 Financial Budgets

• ‘Pro-forma’ financial statements• Includes

– Budgeted income statement– Budgeted balance sheet– Budgeted statement of stockholders’ equity– Budgeted statement of cash flows

• Often replaced by the cash budget– Cash flows categorized by cash receipts and

cash disbursements

Budgeted Income Statement• Helps a company determine if its projections are feasible• Prepared after the operating budgets are complete

Sales revenue From the sales budget

Cost of goods sold based on unit costs from manufacturing budgets From materials purchases budget

Per unit cost of materials to be used in production Key point Materials purchased differ from materials to be used

From direct labor budget Per unit cost of labor to produce each product

From the manufacturing overhead budget Per unit cost of overhead to be applied

Selling and administrative costs From the selling and administrative costs budget

Income tax expense Based on the effective tax rate

Budgeted Income Statement

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Johnson, Inc.Budgeted Income Statement

For the Three Months Ended June 30Sales $600,000 Cost of goods sold 390,000 Gross margin 210,000 Selling and administrative expenses 160,000 Operating income 50,000 Income tax expense 15,000 Net income $ 35,000

Format parallels a GAAP multiple step income

statement

Budgeted Income Statement Example

  April May JuneProjected sales $160,000 $163,000 $175,000Projected merchandise purchases   $78,000   $88,000   $91,000

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Prepare Paradune’s budgeted income statement for May based on the following:

• Operating expenses are budgeted to be $29,200 in April, then increase by $1,000 per month. Of this amount is depreciation of $2,800. (Paid in the month incurred.)

• The company pays income taxes the month after accrual.  The tax rate is 30%.• The company plans to purchase a truck for $32,000 on May 1 by signing a 6% note.

Payments are due on the last day of each month at $1,200 each.• The budgeted gross profit rate is 35%.

Begin with budgeted sales revenue.

Budgeted sales revenue $163,000

Determine budgeted cost of goods sold. Cost of goods sold (65% x $163,000) 105,950

Gross profit 57,050Determine budgeted gross profit.

Continued

Budgeted Income Statement Example

  April May JuneProjected sales $160,000 $163,000 $175,000Projected merchandise purchases   $78,000   $88,000   $91,000

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Prepare Paradune’s budgeted income statement for May based on the following:

• Operating expenses are budgeted to be $29,200 in April, then increase by $1,000 per month. Of this amount is depreciation of $2,800. (Paid in the month incurred.)

• The company pays income taxes the month after accrual.  The tax rate is 30%.• The company plans to purchase a truck for $32,000 on May 1 by signing a 6% note.

Payments are due on the last day of each month at $1,200 each.• The budgeted gross profit rate is 35%.

List all operating expenses. Operating expenses ($29,200 + $1,000) 30,200

Calculate income from operations.

Income from operations 26,850

Other expenses: Interest expense ($32,000 x 6% x 1/12) 160

Calculate interest expense.

Gross profit $57,050From previous slide

Income before taxes 26,690Determine income

before taxes.Continued

Budgeted Income Statement Example

  April May JuneProjected sales $160,000 $163,000 $175,000Projected merchandise purchases   $78,000   $88,000   $91,000

7

Prepare Paradune’s budgeted income statement for May based on the following:

• Operating expenses are budgeted to be $32,000 in April, then increase by $1,000 per month. Of this amount is depreciation of $2,800. (Paid in the month incurred.)

• The company pays income taxes the month after accrual.  The tax rate is 30%.• The company plans to purchase a truck for $32,000 on May 1 by signing a 5% note.

Payments are due on the last day of each month at $1,200 each.• The budgeted gross profit rate is 35%.

Calculate income taxes. Income tax expense ($26,690 x 30%) 8,007

From previous slide Income before taxes $26,690

Determine budgeted net income. Budgeted net income $18,683

Key point: The income statement is accrual-based, while the cash flows appear on the cash budget.

Budgeted Balance Sheet

Last component of the master budget A function of all of the other budgets Also called a pro-forma balance sheet Presented in the same format as a historical

based balance sheet using a classified format Used to assess the effect of planned decisions

on future financial position

Only the preparation of the current asset and current liability sections of the budgeted

balance sheet will be covered. The complete coverage of a budgeted balance sheet is beyond

the scope of this course.

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Information SourcesCash budget

Sales budget

Materials purchases budget

Production budget & product cost analysis

Current Assets Cash

Accounts receivable

Inventories

Selling and administrative expense budget

Purchases budgetCurrent Liabilities Accounts payable

Salaries payable

Accrued expenses

Partial Budgeted Balance Sheet Example – Current Assets Section –

Ernest Inc. distributes a single product which sells for $5 each. Each unit costs $2. The budgeted cash balance at June 30 is $21,400. Additional information: End-of-month inventory equal to 20% of the next month's projected sales Sales--all on credit; 25% collected in the sale month, 75% in the month after sale Operating expenses total $12,000 per month; Paid in the month after incurred Purchases are paid 70% in the month purchased and 30% the month after Budgeted monthly unit sales are: May = 20,000; June = 24,000; July = 28,000

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Begin with the June 30 cash balance. Cash $21,400

Calculate inventory:20% x 28,000 x $2

Current assets

Calculate receivables:75% x 24,000 x $5 Accounts receivable 90,000

Prepare the current assets section of the balance sheet at June 30.

Inventory 11,200

Total current assets $122,600

Partial Budgeted Balance Sheet Example – Current Liabilities Section –

Ernest Inc. distributes a single product which sells for $5 each. Each unit costs $2. The budgeted cash balance at June 30 is $21,400. Additional information: Purchases are estimated at $25,700 for May, $22,000 for June, and $29,500 for

July. They are paid 70% in the month purchased and 30% the month after Operating expenses total $12,000 per month, which includes $2,100 of

depreciation; They are paid in the month after they are incurred. Income taxes are budgeted at $9,600 for May, $11,300 for June, $10,400 for July.

They are paid the month after accrual.

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Calculate accounts payable: 30% x $22,000 Accounts payable $6,600

List income taxes due

Current liabilities

Calculate accrued expenses: $12,000 - $2,100 Accrued operating expenses 9,900

Prepare the current liabilities section of the balance sheet at June 30.

Income taxes payable 11,300

Total current liabilities $29,600

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The End