MGAB03H3 Lecture Notes - Lecture 10: Budget, Pro Forma, Financial Statement

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6 Sep 2015

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Direct materials budget, including a schedule of expected cash disbursements for purchases of materials. Slide 3: selling and administrative expense budget, cash budget, budgeted income statement, budgeted balance sheet. A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specified time period in the future: the use of budgets to control an organization"s activity is known as budgetary control. Planning involves developing objectives and preparing various budgets to achieve these objectives. Control involves the steps taken by management that attempt to ensure the objectives are attained. The budgeting models used the basic financial statements model. In contrast to the job order costing systems that have been studied in the past weeks, sales are the result rather than the beginning. The lecture provides an example of how to prepare an operating budget. This is followed by an illustration of a cash budget, which is a part of financial budgeting.

Related Questions

You are a Consultant for the professional service firm, BUSI2083 LLP. Your firm specializes in providing a wide variety ofinternal business solutions for different clients. One of thepartners in your practice is impressed with the work you havecompleted to date and would like to give you additionalresponsibility. She has asked you to take the lead on thisengagement with the hope that a successful outcome may lead to yourpromotion to Senior Consultant. You take the background files fromthe partner and get started.

Perfect Stitch Replicaâs Limited, a nationwide distributor oflow-cost imitation clothing, has an exclusive agreement for thedistribution of the clothing. Sales have grown so rapidly over thelast few years that it has become necessary to add new members tothe management team. To date, the company's budgeting practiceshave been minimal, and at times, the company has experienced a cashshortage. You have been given responsibility for all planning andbudgeting. Your first assignment is to prepare a master budget forthe next three months, starting April 1. You are anxious to make afavourable impression and have assembled the information below.

Additional Information

The clothing is sold to retailers for an average price of $10each. Recent and forecasted sales in units are as follows:

Recent and forecast sales:
January (actual)	20,000
February (actual)	26,000
March (actual)	40,000
April	65,000
May	100,000
June	50,000
July	30,000
August	28,000
September	25,000

Ending inventories should be equal to 40% of the next month'ssales in units.

The average cost of the clothing is $4 each. Purchases are paidfor as follows: 50% in the month of purchase and the remaining 50%in the following month. All sales are on credit, with no discount,and payable within 15 days. The company has found, however, thatonly 20% of a month's sales are collected by month-end. Anadditional 70% is collected in the following month, and theremaining 10% is collected in the second month following sale. Baddebts have been negligible.

The company's monthly operating expenses are given below:

Variable:
Sales commissions (percentage of sales)	4%
Fixed:
Advertising	$200,000
Rent	$18,000
Wages and salaries	$106,000
Utilities	$7,000
Insurance	$3,000
Depreciation	$14,000

All operating expenses are paid during the month, in cash, withthe exception of depreciation and insurance. Insurance is paid onan annual basis, in November of each year. The company plans topurchase $16,000 in new equipment during May and $40,000 in newequipment during June; both purchases will be paid in cash. Thecompany declares dividends of $15,000 each quarter, payable in thefirst month of the following quarter. The company's balance sheetat March 31 is given below:

Balance Sheet at March 31:
Assets
Cash	$ 74,000
Accounts receivable*	346,000
Inventory**	104,000
Prepaid insurance	21,000
Fixed assets, net of depreciation	950,000
Total assets	$1,495,000

Liabilities and Shareholders' Equity
Accounts payable	$ 100,000
Dividends payable	15,000
Common shares	800,000
Retained earnings	580,000
Total liabilities and shareholders' equity	$ 1,495,000

Notes to Balance Sheet:
*February sales	$ 26,000
March sales	320,000
	$ 346,000
**Number of units:
Dollar amount of inventory	104,000
Divide by cost per unit	$ 4
Number of units	26,000

The company wants a minimum ending cash balance each month of$50,000. All borrowing is done at the beginning of the month; anyrepayments are made at the end of the month. The company has anagreement with a bank that allows it to borrow in increments of$1,000 at the beginning of each month. The interest rate on theseloans is 1% per month, and for simplicity, assume that interest isnot compounded. At the end of the quarter, the company would paythe bank all of the accumulated interest on the loan and as much ofthe loan as possible (in increments of $1,000), while stillretaining at least $50,000 in cash.

Prepare the following budgets for the first three months of2016:

A sales budget by month and in total

A schedule of expected cash collections from sales, by month andin total.

A merchandise purchases budget in units and in dollars. Show thebudget by month and in total.

A schedule of expected cash disbursements for merchandisepurchases, by month and in total.

A cash budget. Show the budget by month and in total.

A budgeted Income Statement for the three-month period endingJune 30. Use the variable costing approach.

Provide a budgeted Balance Sheet as at June 30th.

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MGAB03H3 Lecture Notes - Lecture 10: Budget, Pro Forma, Financial Statement

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