Budgeting LO 5 – Preparing Balance Sheet Budgets for a Manufacturing Business

LO 5 Cash Budget The cash budget estimates the expected receipts (inflows) and payments (outflows) of cash for a period of time. The cash budget is one of the most important elements on the budgeted balance sheet. It presents the expected receipts and payments of cash for a period of time.

LO 5 Cash Budget To demonstrate how cash receipts are estimated, assume the following information for Elite Associates Inc.: Accounts receivable, January 1, 2008 $370,000 January February March Budgeted sales $1,080,000 $1,240,000 $970,000 Elite Accessories Inc. expects to sell 10% of its merchandise for cash. Of the remaining 90% of the sales on account, 60% are expected to be collected in the month of the sale and the remainder in the next month. Cash receipts are estimated based upon expected cash flows from sales and collections of accounts receivable. Elite Accessories Inc. expects to sell 10% of its merchandise for cash. Of the remaining 90% of the sales on account, 60% is expected to be collected in the month of the sale and the remainder in the next month.

Estimated Cash Receipts LO 5 Estimated Cash Receipts January February March Receipts from cash sales: Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000 Part of Exhibit 16 The receipts from cash sales of $108,000 for January are estimated by multiplying January’s expected sales of $1,080,000 by 10%. Receipts from cash sales for February of $124,000 are estimated by multiplying February’s expected sales of $1,240,000 by 10%. Receipts from cash sales for March of $97,000 are estimated by multiplying March’s expected sales of $970,000 by 10%. Note A: $108,000 = $1,080,000 x 10% $124,000 = $1,240,000 x 10% $ 97,000 = $ 970,000 x 10%

Estimated Cash Receipts LO 5 Estimated Cash Receipts January February March Receipts from cash sales: Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000 Receipts from sales on account: Collections from prior month’s sales (40% of previous month’s credit sales—Note B)……….. $370,000 $388,800 $446,400 Collections on account from the prior month’s sales for January are $370,000, the accounts receivable balance as shown on Slide 4. Collections on account from the prior month’s sales for February of $388,800 are estimated by multiplying the January expected sales of $1,080,000 × 90% × 40%. Collections on account from the prior month’s sales for March of $446,400 are estimated by multiplying the February expected sales of $1,240,000 × 90% × 40%. Note B: $370,000, given as Jan. 1, 2012, Accts. Rec. balance $388,800 = $1,080,000 x 90% x 40% $446,400 = $1,240,000 x 90% x 40%

Estimated Cash Receipts LO 5 Estimated Cash Receipts January February March Receipts from cash sales: Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000 Receipts from sales on account: Collections from prior month’s sales (40% of previous month’s credit sales—Note B)……….. $370,000 $388,800 $446,400 Collections from current month’s sales (60% of current month’s credit sales—Note C)………… 583,200 669,600 523,800 Receipts from sales on account for January of $583,200, are estimated by multiplying the January expected sales of $1,080,000 × 90% × 60%. Receipts from sales on account for February of $669,600 are estimated by multiplying the February expected sales of $1,240,000 × 90% × 60%. Receipts from sales on account for March of $523,800 are estimated by multiplying the March expected sales of $970,000 × 90% × 60%. Note C: $583,200 = $1,080,000 x 90% x 60% $669,600 = $1,240,000 x 90% x 60% $523,800 = $ 970,000 x 90% x 60%

Estimated Cash Receipts LO 5 Estimated Cash Receipts The schedule of collections from sales for the 1st quarter of 2010, shown on this slide, summarizes the information from the prior three slides.

Estimated Cash Payments LO 5 Estimated Cash Payments The information in the following slides and summarized by Exhibit 17 is based on the following information for Elite Associates: Accounts payable, January 1, 2008 $190,000 January February March Manufacturing costs $840,000 $780,000 $812,000 Elite estimates its cash outflows for the first quarter based upon projected manufacturing costs. Elite expects to pay 75% of costs in the month they are incurred and the balance in the next month. The accounts payable balance on January 1, 2008 is $190,000. Depreciation expense on machines is estimated to be $24,000 per month and is included in the manufacturing costs. Elite Accessories expects to pay 75% of their manufacturing costs in the month in which they are incurred and the balance the next month.

Estimated Cash Payments LO 5 Estimated Cash Payments January February March Payments of prior month’s manu- facturing costs {[25% x previous month’s manufacturing costs (less depreciation)]—Note A}….. $190,000 $204,000 $189,000 From Exhibit 17 Note A: $190,000, given as January 1, 2012, Accounts Payable balance $204,000 = ($840,000 – $24,000) x 25% $189,000 = ($780,000 – $24,000) x 25% In January, Elite will pay the outstanding account’s payable balance of $190,000. In February, Elite will pay $204,000, comprised of 25% of January’s manufacturing cost of $840,000, less depreciation of $24,000. In March, Elite will pay $189,000, comprised of 25% of February’s manufacturing cost of $780,000, less depreciation of $24,000.

Estimated Cash Payments LO 5 Estimated Cash Payments January February March Payments of prior month’s manu- facturing costs {[25% x previous month’s manufacturing costs (less depreciation)]—Note A}….. $190,000 $204,000 $189,000 Payments of current month’s manufacturing costs {[75% x current month’s manufacturing costs (less depreciation)]— Note B}…………….…………… $612,000 $567,000 $591,000 In January, Elite will pay $612,000, which is 75% of the current month’s manufacturing cost of $840,000, less depreciation of $24,000. In February, Elite will pay $567,000, which is 75% of the current month’s manufacturing cost of $780,000, less depreciation of $24,000. In March, Elite will pay $591,000, which is 75% of the current month’s manufacturing cost of $812,000, less depreciation of $24,000. Note B: $612,000 = ($840,000 – $24,000) x 75% $567,000 = ($780,000 – $24,000) x 75% $591,000 = ($812,000 – $24,000) x 75%

Estimated Cash Payments LO 5 Estimated Cash Payments The schedule of payments for manufacturing costs for the 1st quarter of 2012, shown on this slide, summarizes the information from the previous two slides.

LO 5 Cash Budget Elite’s cash balance on January 1 is $280,000. The collections from sales and the schedule of cash payment amounts are also included. Additional cash from interest revenue is also presented as a part of total cash receipts.

LO 5 Cash Budget Additional cash outflows for Elite are quarterly taxes of $150,000; interest of $22,500; and equipment purchases of $274,000. Elite’s cash budget provides estimated cash receipts and estimated cash payments for the first three months of 2012. The bottom line of the cash budget projects whether Elite will have an excess or deficiency of cash for each month. Elite can use this information to determine its financing needs for each month.

Capital Expenditures Budget LO 5 Capital Expenditures Budget The capital expenditures budget summarizes plans for acquiring fixed assets. Such expenditures are necessary as machinery and other fixed assets wear out or become obsolete. In addition, purchasing additional fixed assets may be necessary to meet increasing demand for the company’s product. Fixed asset acquisitions are necessary when existing assets wear out or become obsolete. Capital expenditures can also be made to support expansion.

Capital Expenditures Budget LO 5 Capital Expenditures Budget The capital expenditures budget summarizes Elite’s plans for acquiring fixed assets. As this schedule shows, capital budgets are often prepared much further into the future than operating budgets. This is necessary since fixed assets may require a significant expenditure. Likewise, it could take years to construct new buildings or other production facilities.

Budgeted Balance Sheet LO 5 Budgeted Balance Sheet The budgeted balance sheet is prepared based on the operating, financing, and investing budgets of the master budget. It is similar to a normal balance sheet except that estimated amounts are used. The budgeted balance sheet estimates the financial condition at the end of a budget period.