1. Financial Budgeting Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 41

2. 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

3. 3 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

4. Budgeted Income Statement 4 Johnson, Inc. Budgeted Income Statement For the Three Months Ended June 30 Sales $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

5. Budgeted Income Statement Example AprilMayJune Projected sales$160,000$163,000$175,000 Projected merchandise purchases $78,000 $88,000 $91,000 5 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 57,050 Determine budgeted gross profit. Continued

6. Budgeted Income Statement Example AprilMayJune Projected sales$160,000$163,000$175,000 Projected merchandise purchases $78,000 $88,000 $91,000 6 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 $57,050 From previous slide Income before taxes 26,690 Determine income before taxes. Continued

7. Budgeted Income Statement Example AprilMayJune Projected sales$160,000$163,000$175,000 Projected 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.

8. 8 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.

9. 9 Information Sources Cash budget Sales budget Materials purchases budget Production budget & product cost analysis Selling and administrative expense budget Purchases budget

10. 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 10 Begin with the June 30 cash balance. Cash $ 21,400 Calculate inventory: 20% x 28,000 x $2 Calculate inventory: 20% x 28,000 x $2 Current assets Calculate receivables: 75% x 24,000 x $5 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

11. 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. 11 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

12. 12 The End