© The McGraw-Hill Companies, Inc., 2002 Slide 24-1 McGraw-Hill/Irwin 24 Master Budgets and Planning

© The McGraw-Hill Companies, Inc., 2002 Slide 24-2 McGraw-Hill/Irwin Advantages Communicates plans and instructions Promotes analysis and a focus on the future Motivates employees Provides a basis for evaluating performance Coordinates business activities Defines goals and objectives Importance of Budgeting

© The McGraw-Hill Companies, Inc., 2002 Slide 24-3 McGraw-Hill/Irwin Consists of managers from all departments of the organization. Provides central guidance to insure that individual budgets submitted from all departments are realistic and coordinated. Budget Committee

© The McGraw-Hill Companies, Inc., 2002 Slide 24-4 McGraw-Hill/Irwin Flow of Budget Data is a bottom-up process. Budget Committee

© The McGraw-Hill Companies, Inc., 2002 Slide 24-5 McGraw-Hill/Irwin Operating Budget The annual operating budget may be divided into quarterly or monthly budgets. Budget Timing

© The McGraw-Hill Companies, Inc., 2002 Slide 24-6 McGraw-Hill/Irwin Continuous or Rolling Budget The budget may be a twelve-month budget that rolls forward one month as the current month is completed Budget Timing

© The McGraw-Hill Companies, Inc., 2002 Slide 24-7 McGraw-Hill/Irwin Master Budget Components Sales budget Merchandise Purchases Prepare financial budgets: l cash l income l balance sheet Prepare capital expenditure budget Prepare selling and general administrative budgets Production and manufacturing budgets for manufacturers. (Appendix 24A)

© The McGraw-Hill Companies, Inc., 2002 Slide 24-8 McGraw-Hill/Irwin Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel Sales Budget

© The McGraw-Hill Companies, Inc., 2002 Slide 24-9 McGraw-Hill/Irwin In September 2001, Hockey Den sold 700 hockey sticks at $100 each. Hockey Den prepared the following sales budget for the next four months: Sales Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Sales Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin The quantity purchased is affected by: Just-in-time inventory systems that enable purchases of smaller, frequently delivered quantities. Safety stock inventory systems that provide protection against lost sales caused by delays in supplier shipments. Merchandise Purchases Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Hockey Den buys hockey sticks for $60.00 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. 900 hockey sticks are on hand on September 30. Inventory to be purchased = Budgeted ending inventory + Budgeted cost of sales for the period – Budgeted beginning inventory Exh Let’s prepare the purchases budget for Hockey Den. Merchandise Purchases Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Merchandise Purchases Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Merchandise Purchases Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Merchandise Purchases Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Merchandise Purchases Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Let’s prepare the sales budget for Hockey Den. Hockey Den pays sales commissions equal to 10 percent of total sales. Hockey Den pays a monthly salary of $2,000 to its sales manager. Selling Expense Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From Hockey Den’s sales budget Selling Expense Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Let’s prepare the general and administrative expense budget for Hockey Den. General and administrative salaries are $4,500 per month. Depreciation of equipment is $1,500 per month. General and Administrative Expense Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh General and Administrative Expense Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Cash Budget Expected Receipts and Disbursements Budgeted Income Statement Budgeted Balance Sheet Financial Budgets

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Forty percent of Hockey Den’s sales are for cash. The remaining sixty percent are credit sales that are collected in full in the month following sale. Let’s prepare the cash receipts budget for Hockey Den. Budgeted Cash Receipts

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh percent of September sales are collected in October Budgeted Cash Receipts From Hockey Den’s sales budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh % of sales Budgeted Cash Receipts 60% of sales

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Budgeted Cash Receipts

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Hockey Den’s purchases of merchandise are entirely on account. Full payment is made in the month following purchase. The September 30 balance of Accounts Payable is $58,200. Let’s look at cash disbursements for purchases for Hockey Den. Cash Disbursements for Purchases

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From merchandise purchases budget Cash Disbursements for Purchases

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Hockey Den: Will pay a cash dividend of $3,000 in November. Will purchase $25,000 of equipment in December. Has an income tax liability of $20,000 from the previous quarter that will be paid in October. Has a September 30 cash balance of $20,000. Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000. Continue Cash Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Hockey Den: Pays interest equal to one percent of the prior month’s ending loan balance. Repays loans when the ending cash balance exceeds $20,000. Owes $10,000 on this loan arrangement on September 30. Has 40 percent income tax rate. Will pay taxes for current quarter next year. Let’s prepare the cash budget for Hockey Den. Cash Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From Cash Receipts Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From Cash Disbursements for Purchases

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From Selling Expense Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From General and Administrative Expense Budget Depreciation is a non-cash expense.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh × $10,000 Because Hockey Den maintains a minimum cash balance of $20,000, the company must borrow $12,800.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Ending cash balance for October is the beginning November balance. Exh Cash Budget Continued

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh × $22,800 The cash balance is sufficient to repay the $22,800 loan.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Ending cash balance for November is the beginning December balance. Exh Cash Budget Continued

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh Cash Budget Continued

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Let’s prepare the budgeted income statement for Hockey Den. Cash Budget Budgeted Income Statement Completed Budgeted Income Statement

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Sales Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Merchandise Purchases Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Selling Expense Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the General and Administrative Expense Budget Depreciation is a non-cash expense.

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Cash Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh $71,672 ×.40

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Let’s prepare the budgeted balance sheet for Hockey Den. Budgeted Balance Sheet Completed Budgeted Income Statement Budgeted Balance Sheet

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Hockey Den reports the following account balances on September 30 prior to preparing its budgeted financial statements: Equipment $200,000 Accumulated depreciation $ 36,000 Common stock $150,000 Retained earnings $ 41,800 Let’s prepare the budgeted balance sheet for Hockey Den. Preparing a Budgeted Balance Sheet

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Cash Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Cash Receipts Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Merchandise Purchases Budget 8,100 $6

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh $200,000 September 30 balance plus the $25,000 December acquisition

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh $36,000 September 30 balance plus the $4,500 from the General and Administrative Expense Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Merchandise Purchases Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Budgeted Income Statement

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh From the Cash Budget

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Exh

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin Activity-Based Budgeting Activity-based budgeting is based on activities rather than traditional items such as salaries, supplies, depreciation, and utilities. Exh

© The McGraw-Hill Companies, Inc., 2002 Slide McGraw-Hill/Irwin I would be happy to assist you with your cash budget! End of Chapter 24