1. Chapter Nine Profit Planning COPYRIGHT © 2012 Nelson Education Ltd.

2. Learning Objectives 1.Define budgeting and discuss its role in planning, control, and decision making 2.Define and prepare the operating budget, identify its major components, and explain the interrelationships of its various components 3.Define and prepare the financial budget, identify its major components, and explain the interrelationship of its various components 4.Describe the behavioural dimension of budgeting 9-2

3. OBJECTIVE  1 1 Define budgeting and discuss its role in planning, control, and decision making

4. COPYRIGHT © 2012 Nelson Education Ltd. Budgeting and Planning and Control Planning and Control are tied together Looking ahead to see what actions should be taken to realize particular goals Planning — Looking backward determining what actually happened and comparing it with the previously planned outcomes Control — 9-4

5. COPYRIGHT © 2012 Nelson Education Ltd. Budgets Key component of planning Financial plans for the future Identify objectives and actions needed to achieve them Before a budget is prepared, a strategic plan should be developed 9-5

6. COPYRIGHT © 2012 Nelson Education Ltd. Strategic Plan Identifies strategies for future activities and operations Long- and short-term objectives Objectives form the basis of the budget 9-6

7. COPYRIGHT © 2012 Nelson Education Ltd. Advantages of Budgeting 1.Forces managers to plan 2.Provides information that can be used to improve decision making 3.Provides a standard for performance evaluation 4.Improves communication and coordination 9-7

8. COPYRIGHT © 2012 Nelson Education Ltd. Master Budget Comprehensive financial plan for the organization as a whole Can be broken down into quarterly and monthly budgets 9-8

9. COPYRIGHT © 2012 Nelson Education Ltd. Continuous Budget A moving 12-month budget January 2011 February 2011 December 2011 January 2012 ……………. 9-9

10. COPYRIGHT © 2012 Nelson Education Ltd. Budget Committee & Director Roles Budget Committee: Reviews the budget Provides policy guidelines and budgetary goals Resolves differences that arise as the budget is prepared Approves the final budget Monitors actual performance as the year unfolds Budget Director: Responsible for directing and coordinating overall budgeting process Usually the controller 9-10

11. COPYRIGHT © 2012 Nelson Education Ltd. Major Components of the Master Budget Operational budgets –Describe the income-generating activities of a firm Financial budgets –Detain the inflows and outflows of cash and the overall financial position Master budget can be divided into… 9-11

12. OBJECTIVE  2 2 Define and prepare the operating budget, identify its major components, and explain the interrelationships of its various components

13. COPYRIGHT © 2012 Nelson Education Ltd. Example: Cornerstone 9-1 Information: Budgeted units to be sold for each quarter: 1,0001,2001,500and 2,000 Selling price is $10 per t-shirt Required: Prepare a sales budget for each quarter and for the year How to Prepare a Sales Budget 9-13

14. COPYRIGHT © 2012 Nelson Education Ltd. Sales Budget Projection approved by budget committee –describes expected sales in units and dollars Basis for all other operating and most of the financial budgets 9-14

15. COPYRIGHT © 2012 Nelson Education Ltd. Sales Budget Preparation Steps 1.Develop a sales forecast -responsibility of marketing department -bottom-up approach Salespeople submit sales projections 2.Forecast is reviewed by budget committee 3.Budget committee recommends changes prior to approval 9-15

16. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Sales Budget For the Year Ending December 31, 2011 Unit selling price 1,000 Quarter Units 1Year 5,700 × $10 Budgeted sales 234 1,2001,5002,000 × $10 $10,000 $12,000$15,000$20,000 $57,000 Most sales happen in summer and fall 9-16

17. COPYRIGHT © 2012 Nelson Education Ltd. Production Budget Describes how many units must be produced in order to meet sales needs and satisfy ending inventory requirements Formula: Units to be produced = Expected unit sales Units in ending inventory + - Units in beginning inventory 9-17

18. COPYRIGHT © 2012 Nelson Education Ltd. Example: Cornerstone 9-2 Sales budget: –1 st quarter = 1,000 units –2 nd quarter = 1,200 units –3 rd quarter = 1,500 units –4 th quarter = 2,000 units Beginning inventory is 180 t-shirts Ending inventory: –Desired quantity = 20% of the following quarter’s sales –Sales for the first quarter of 2008 = 1,000 units Information: How to Prepare the Production Budget Required: Prepare a production budget for each quarter and for the year 9-18

19. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Production Budget For the Year Ending December 31, 2011 1,000 Quarter Sales 1Year 5,700 234 1,2001,5002,000 20% of second quarter’s sales 20% × 1,200 units Desired ending inv. 240 300 400200 20% of third quarter’s sales 20% × 1,500 units 20% of the next year’s first quarter sales 20% × 1,000 units From the sales budget 9-19

20. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Production Budget For the Year Ending December 31, 2011 1,000 Quarter Sales 1Year 5,700 234 1,2001,5002,000 Beginning inventory as of January, 1, 2011 Desired ending inv. 240 300 400200 Total needs 1,2401,500 1,900 2,200 5,900 (240) (300) Less: Beg. inventory (180) (400)(180) 1 st quarter’s ending inventory is 2 nd quarter’s beginning inventory 9-20

21. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Production Budget For the Year Ending December 31, 2011 1,000 Quarter Sales 1Year 5,700 234 1,2001,5002,000 All four quarter’s production added together Desired ending inv. 240 300 400200 Total needs 1,240 1,500 1,900 2,200 5,900 (240) (300) Less: Beg. inventory (180) (400)(180) Units to be produced 1,060 1,2601,6001,8005,720 1,240 needed, we already have 180, so we need to produce 1,060 units 9-21

22. COPYRIGHT © 2012 Nelson Education Ltd. Direct Materials Purchases Budget Tells the amount and cost of raw materials to be purchased in each time period Formula: Direct materials needed for production + Desired direct materials in ending inventory - Direct materials in beginning inventory Direct materials to be purchased 9-22

23. COPYRIGHT © 2012 Nelson Education Ltd. How to Prepare a Direct Materials Purchases Budget Example: Cornerstone 9-3 Production budget –Units to be produced: 1 st quarter = 1,060 units 2 nd quarter = 1,260 units 3 rd quarter = 1,600 units 4 th quarter = 1,800 units Total for the year = 5,720 units Per-unit basis –One plain t-shirt, $3 each –5 grams of ink, $0.20 per gram Information: 9-23

24. COPYRIGHT © 2012 Nelson Education Ltd. Example Beginning inventory –58 plain t-shirts and 390 grams of ink Ending inventory –10% of the following quarter’s production –Desired ending inventory is 106 t-shirts and 530 grams of ink Information continued: Required: Prepare a direct materials purchases budget for: plain t-shirts and ink 9-24

25. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 10% of next quarter’s production needs Direct materials per unit ×1 Production needs 1,0601,260 1,600 1,800 5,720 Desired ending inv. 126 Plain T-Shirts 9-25 From production budget Each unit required 1 plain t-shirt

26. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 10% of the next year’s 1 st quarter production needs Direct materials per unit × 1 Production needs 1,060 1,260 1,600 1,800 5,720 160 180 Desired ending inv. 126 106 Plain T-Shirts 9-26

27. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 1 st quarter’s ending inventory is the 2 nd quarter’s beginning inventory Direct materials per unit × 1 Production needs 1,060 1,260 1,600 1,800 5,720 160 180 Desired ending inv. 126 106 Total needs1,1861,4201,780 1,906 5,826 Plain T-Shirts Less: Beg. inventory(58)(126) 9-27

28. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 Beginning of the year inventory Direct materials per unit × 1 Production needs 1,060 1,260 1,600 1,800 5,720 160 180 Desired ending inv. 126 106 Total needs 1,186 1,4201,780 1,906 5,826 Plain T-Shirts Less: Beg. inventory(58)(126) (160) (180)(58) 9-28

29. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 Turning # of t-shirts into $ amount Direct materials per unit × 1 Production needs 1,060 1,260 1,600 1,800 5,720 160 180 Desired ending inv. 126 106 Total needs 1,186 1,4201,780 1,906 5,826 Plain T-Shirts Less: Beg. inventory(58)(126)(160)(180)(58) Qty to be purchased Cost per t-shirt 1,1281,294 1,620 1,7265,768 × $3 9-29

30. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 Direct materials per unit × 1 Production needs 1,060 1,260 1,600 1,800 5,720 160 180 Desired ending inv. 126 106 Total needs 1,186 1,4201,780 1,906 5,826 Plain T-Shirts Less: Beg. inventory(58)(126)(160)(180)(58) Qty to be purchased Cost per t-shirt 1,1281,294 1,620 1,7265,768 × $3 Total cost $3,384 $3,882$4,860 $5,178$17,304 9-30

31. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 Direct materials per unit × 5 Ink It takes 5 grams of ink for each t-shirt We can do the same thing for ink 9-31

32. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 Direct materials per unit × 5 Production needs5,3006,300 8,000 9,000 28,600 800900 Desired ending inv. 630 530 Total needs 5,930 7,1008,9009,53029,130 Ink Less: Beg. inventory(390)(630)(800)(900)(390) Qty to be purchased Cost per t-shirt 5,5406,470 8,100 8,63028,740 × $0.20 Total cost $1,108$1,294$1,620$1,726$5,748 9-32

33. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2011 $3,384 Quarter Total purchase cost of t-shirts 1Year $17,304 234 $3,882$4,860$5,178 Total purchase cost of ink 1,108 1,294 1,620 1,726 5,748 Total direct materials purchase cost $4,492$5,176$6,480$6,904$23,052 9-33

34. COPYRIGHT © 2012 Nelson Education Ltd. Direct Labour Budget Shows the total direct labour hours needed and the associated cost for the number of units in the production budget 9-34

35. COPYRIGHT © 2012 Nelson Education Ltd. How to Prepare a Direct Labour Budget Example: Cornerstone 9-4 Production budget –Units to be produced: 1 st quarter = 1,060 units 2 nd quarter = 1,260 units 3 rd quarter = 1,600 units 4 th quarter = 1,800 units Total for the year – 5,720 units It takes 0.12 hour to produce one t-shirt Average wage cost per hour is $10 Information: Required: Prepare a direct labour budget 9-35

36. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Direct Labour Budget For the Year Ending December 31, 2011 1,060 Quarter Units to be produced 1Year 5,720 234 1,2601,6001,800 Direct labour per unit × 0.12 Total hours needed127.2151.2 192 216 686.4 × $10 Avg. wage per hour × $10 Total direct labour cost $1,272 $1,512$1,920 $2,160 $6,864 9-36

37. COPYRIGHT © 2012 Nelson Education Ltd. Overhead Budget Shows the expected cost of all production costs other than direct materials and direct labour Overhead costs are separated into fixed and variable costs and a variable rate is calculated 9-37

38. COPYRIGHT © 2012 Nelson Education Ltd. Example: Cornerstone 9-5 Direct labour budget –Budgeted direct labour hours: 1 st quarter = 127.2 hours 2 nd quarter = 151.2 hours 3 rd quarter = 192 hours 4 th quarter = 216 hours Total for the year = 686.4 hours Variable overhead rate is $5 per direct labour hour Fixed overhead is budgeted at $1,645 per quarter Information: How to Prepare an Overhead Budget Required: Prepare an overhead budget 9-38

39. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Overhead Budget For the Year Ending December 31, 2011 127.2 Quarter Budgeted direct labour hours 1Year 686.4 234 151.2192216 Variable overhead rate x $5 Variable overhead$ 636$ 756 $ 960 $1,080 $3,432 Budgeted fixed overhead Add in the fixed overhead of $1,645 per quarter Moose Patties bases its variable overhead on direct labour hours 9-39

40. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Overhead Budget For the Year Ending December 31, 2011 127.2 Quarter Budgeted direct labour hours 1Year 686.4 234 151.2192216 Variable overhead rate x $5 Variable overhead $ 636 $ 756 $ 960 $1,080 $3,432 1,645 Budgeted fixed overhead 1,645 6,580 Total overhead $2,281 $2,401$2,605 $2,725 $10,012 9-40

41. COPYRIGHT © 2012 Nelson Education Ltd. Ending Finished Goods Inventory Budget Supplies information needed for the balance sheet Important input for the preparation of the cost of goods sold budget 9-41

42. COPYRIGHT © 2012 Nelson Education Ltd. How to Prepare an Ending Finished Goods Inventory Budget Example: Cornerstone 9-6 Each shirt requires one plain t-shirt and 5 grams of ink Each t-shirt costs $3.00 and ink costs $0.20 per gram Takes 0.12 hours to produce one t-shirt Employees are paid an average of $10 per hour Variable overhead rate is $5 per direct labour hour Fixed overhead is budgeted at $1,645 per quarter Information: Required: Prepare an ending finished goods inventory budget 9-42

43. COPYRIGHT © 2012 Nelson Education Ltd. Direct labour Direct materials$4.00 1.20 Unit cost computation: 0.12 hours of direct labour × $10 per hour Moose Patties Inc. Ending Finished Goods Inventory Budget For the Year Ending December 31, 2011 T-shirt + Ink = $3.00 + (5 grams @ $0.20) = $4.00 9-43

44. COPYRIGHT © 2012 Nelson Education Ltd. Direct labour Direct materials$4.00 0.60 Overhead: Variable 1.20 1.15 Unit cost computation: Fixed Budgeted fixed overhead of $6,580 / 686.4 budgeted direct labour hours = $9.59 per hour $9.59 × 0.12 hours Moose Patties Inc. Ending Finished Goods Inventory Budget For the Year Ending December 31, 2011 $5 per direct labour hour × 0.12 hours

45. COPYRIGHT © 2012 Nelson Education Ltd. Direct labour Direct materials$4.00 0.60 Overhead: Variable Total unit cost$6.95 1.20 1.15 Unit cost computation: Fixed 200 shirts × $6.95 = $1,390 Moose Patties Inc. Ending Finished Goods Inventory Budget For the Year Ending December 31, 2011 9-45

46. COPYRIGHT © 2012 Nelson Education Ltd. Example: Cornerstone 9-7 Direct materials: –T-shirts = $3 each × 5,720 shirts produced –Ink = $0.20 per gram × 5 grams per shirt × 5,720 shirts produced Direct labour = $10 per hour x 0.12 hours per shirt × 5,720 shirts produced Variable overhead = $5 per direct labour hour × 0.12 hours per shirt x 5,720 shirts Fixed overhead = $1,645 per quarter × 4 quarters Information: HOW TO Prepare a Cost of Goods Sold Budget 9-46

47. COPYRIGHT © 2012 Nelson Education Ltd. Direct labour used $22,880 6,864 Direct materials used Moose Patties Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2011 5720 shirts × 0.12 hours per shirt × $10 per hour (5720 × $3 per t-shirt) + (5 grams ink × $0.20 per gram × 5720) 9-47

48. COPYRIGHT © 2012 Nelson Education Ltd. Overhead Direct labour used $22,880 10,012 Budgeted manufacturing costs Beginning finished goods 6,864 1,251 Direct materials used Moose Patties Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2011 $39,756 180 units @ $6.95 per unit cost Variable + Fixed 9-48

49. COPYRIGHT © 2012 Nelson Education Ltd. Overhead Direct labour used $22,880 10,012 Budgeted manufacturing costs Beginning finished goods Less: Ending finished goods(1,390) 6,864 1,251 Direct materials used Goods available for sale Moose Patties Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2011 $39,756 $41,007 Budgeted cost of goods sold $39,617 9-49

50. COPYRIGHT © 2012 Nelson Education Ltd. Selling and Administrative Expenses Budget Outlines planned expenditures for nonmanufacturing activities Selling and administrative expenses can be broken down into fixed and variable components 9-50

51. COPYRIGHT © 2012 Nelson Education Ltd. How to Prepare a Selling and Administrative Expenses Budget Example: Cornerstone 9-8 Sales budget 1,000; 1,200; 1,500; and 2,000 units sold in quarters 1 through 4, respectively Variable expenses = 0.10 per unit sold Fixed expenses: –Salaries average $1,420 per quarter –Utilities = $50 per quarter –Depreciation = $150 per quarter –Advertising = $100; $200; $300 and $500 for quarters 1 through 4 –Insurance is $500 and is paid in the third quarter Information: 9-51

52. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Selling and Administrative Expense Budget For the Year Ending December 31, 2011 1,000 Quarter Planned sales in units 1Year 5,700 234 1,2001,5002,000 Variable expenses* × $0.10 Total Variable exp. $ 100 $ 120 $ 150 $ 200 $ 570 Fixed expenses: Salaries $1,420 $5,680 Utilities50 200 Advertising Depreciation 100200 300 5001,100 150 600 Total Selling & Admin $1,820 $1,940 $2,570 $2,320$8,650 × $0.10 $1,420 Insurance ----- 500 ----- 500 Total fixed exp.$1,720 $1,820$2,420$2,120$8,080 9-52

53. COPYRIGHT © 2012 Nelson Education Ltd. Example: Cornerstone 9-9 Sales budget, $57,000 Cost of goods sold, $39,617 Selling and administrative expenses, $8,650 (600 is depreciation) Income tax rate, 40% Interest expense, $60 Information: How to Prepare a Budgeted Income Statement Required: Prepare a budgeted income statement 9-53

54. COPYRIGHT © 2012 Nelson Education Ltd. Less: Cost of goods sold Sales$57,000 (60) Gross margin Less: Selling and admin. exp. Net income (3,469) (39,617) $8,673 Operating income $17,383 (8,650) Income before taxes Less: Income taxes $5,204 $8,733 Less: Interest expense Moose Patties Inc. Budgeted Income Statement For the Year Ending December 31, 2011 Income before taxes of $8,673 × 40% tax rate 9-54

55. OBJECTIVE  3 3 Define and prepare the financial budget, identify its major components, and explain the interrelationships of its various components

56. COPYRIGHT © 2012 Nelson Education Ltd. Preparing the Financial Budget Cash budget Budgeted balance sheet Budget for capital expenditures The usual financial budgets prepared are: 9-56

57. COPYRIGHT © 2012 Nelson Education Ltd. Example: Cornerstone 9-10 25% of total sales are cash 75% of total are on credit –90% paid during the quarter of sale, 10% paid the following quarter 2011 Sales: (Q1 $10,000; Q2 $12,000; Q3 $15,000; Q4 $20,000) Balance in Accounts Receivable at end of 2010: $1,350 –Collected in cash during first quarter of 2011 Information: How to Prepare an Accounts Receivable Aging Schedule Required: Calculate cash sales expected in each quarter of 2011 Prepare a schedule showing cash receipts from sales expected in each quarter of 2011 9-57

58. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Cash Receipts from Credit Sales For the Year Ending December 31, 2011 $2,500 Quarter Cash sales 1234 Received on account from: Quarter 4, 2010 1,350 10% of 4 th quarter 2010’s credit sales will be collected in the 1st quarter of 2011 1 st quarter sales × 25% $10,000 × 25% 9-58

59. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Cash Receipts from Credit Sales For the Year Ending December 31, 2011 $2,500 Quarter Cash sales 1234 Received on account from: Quarter 4, 2010 1,350 Quarter 1, 2011 6,750 90% of this quarter’s credit sales 9-59

60. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Cash Receipts from Credit Sales For the Year Ending December 31, 2011 $2,500 Quarter Cash sales 1234 $3,000 Received on account from: Quarter 4, 2010 1,350 750 8,100 Quarter 1, 2011 6,750 Total cash receipts $10,600 Quarter 2, 2011 Quarter 3, 2011 Quarter 4, 2011 Remainder of 1 st quarter’s credit sales are collected along with 90% of 2 nd quarter’s sales 25% of 2 nd quarter’s sales

61. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Cash Receipts from Credit Sales For the Year Ending December 31, 2011 $2,500 Quarter Cash sales 1234 $3,000$3,750$5,000 Received on account from: Quarter 4, 2010 1,350 750 900 1,125 8,100 10,125 Quarter 1, 2011 6,750 13,500 Total cash receipts $10,600 $11,850$14,775 $19,625 Quarter 2, 2011 Quarter 3, 2011 Quarter 4, 2011 9-61

62. COPYRIGHT © 2012 Nelson Education Ltd. How to Determine Cash Payments on Accounts Payable Example: Cornerstone 9-11 All raw materials purchases on account –80% paid for in quarter of purchase –20% paid for in the quarter of purchase 4 th quarter 2010 purchases; $5,000 Expected purchases for 2011: –Quarter 1; $4,492 –Quarter 2; $5,176 –Quarter 3; $6,480 –Quarter 4; $6,904 Information: Required: Prepare a schedule showing anticipated payments for accounts payable for materials 9-62

63. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Cash Payments on Accounts Payable For the Year Ending December 31, 2011 Quarter Source 1234 Quarter 4, 2010 1,000 Quarter 1, 2011 3,594 80% × $4,492 20% × $5,000 9-63

64. COPYRIGHT © 2012 Nelson Education Ltd. Moose Patties Inc. Cash Payments on Accounts Payable For the Year Ending December 31, 2011 Quarter Source 1234 Quarter 4, 2010 1,000 898 1,035 1,296 4,141 5,184 Quarter 1, 2011 3,594 5,523 Total cash payments $4,594 $5,039$6,219 $6,819 Quarter 2, 2011 Quarter 3, 2011 Quarter 4, 2011 9-64

65. COPYRIGHT © 2012 Nelson Education Ltd. Example: Cornerstone 9-12 Information: All previous budgets and the following specific details: 1.$1,000 minimum cash balance is required for end of each quarter. Money can be borrowed and repaid in multiples of $1,000. Interest is 12% per year. Interest payments are made only for amount of principal being repaid. All borrowing takes place at beginning of a quarter, and repayment takes place at quarter end 2.Budgeted per quarter depreciation is $540 for overhead and $150 for selling and administrative expenses (Cornerstones 9-5 and 9-8) How to Prepare a Cash Budget 9-65

66. COPYRIGHT © 2012 Nelson Education Ltd. Example Information continued: 3. Capital budget for 2011 revealed plans to purchase additional screen printing equipment. Cash outlay for equipment, $6,500, will take place in Q1. Acquisition of equipment is to be financed with operating cash, supplementing it with short-term loans as necessary 4. Corporate income taxes are $3,469 and will be paid at end of fourth quarter (Cornerstone 9-9) 5. Beginning cash balance equals $5,200 6. All amounts in budget are rounded to the nearest dollar Required: Prepare a cash budget for Moose Patties 9-66

67. COPYRIGHT © 2012 Nelson Education Ltd. Cash sales and collections on account: $ 5,200 Quarter Beginning cash bal. 123 10,600 4 Year $15,800 Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011 Total cash available Less disbursements: Payments for: Raw materials $ (4,594) Calculated in Cornerstone 9-11 Calculated in Cornerstone 9-10 Calculated in Cornerstone 9-4 Direct labour (1,272) 9-67

68. COPYRIGHT © 2012 Nelson Education Ltd. Cash sales and collections on account: $ 5,200 Quarter Beginning cash bal. 123 10,600 4 Year $15,800 Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011 Total cash available Less disbursements: Payments for: Raw materials $ (4,594) Direct labour (1,272) Overhead (1,741) Budgeted selling and administrative expenses (Cornerstone 9-8) minus $150 depreciation per quarter Selling and administrative (1,670) Budgeted overhead (Cornerstone 9-5) minus $540 depreciation per quarter Depreciation is removed because it does not involve a cash disbursement

69. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget continued ---- Quarter Selling and administrative 123 4 Year Income taxes (1,670) Equipment (6,500) Total disbursements $(15,777) Excess of cash available over needs $ 23 Cash available – Cash needs Income taxes will be paid only in the 4 th quarter. Equipment will be purchased only in the 1 st quarter 9-69

70. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget continued ---- Quarter Selling and administrative 123 4 Year Income taxes (1,670) Equipment (6,500) Total disbursements $(15,777) Excess of cash available over needs $ 23 Financing: Borrowings 1,000 Repayments ---- Moose Patties Inc. must borrow $1,000 to meet their minimum ending cash balance 9-70

71. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget concluded 71 Quarter 123 Borrowings 1,000 4 Year Repayments Interest ---- Total financing $1,000 Ending cash balance $1,023 Financing: ---- 9-71

72. COPYRIGHT © 2012 Nelson Education Ltd. Cash sales and collections on account: $ 5,200 Quarter Beginning cash bal. 123 10,600 4 Year $15,800 Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011 Total cash available Less disbursements: Payments for: Raw materials $ (4,594) Direct labour (1,272) Overhead (1,741) Selling and administrative (1,670) $ 1,023 1 st quarter’s ending cash balance is the 2 nd quarter’s beginning balance 9-72

73. COPYRIGHT © 2012 Nelson Education Ltd. Cash sales and collections on account: $ 5,200 Quarter Beginning cash bal. 123 10,600 4 Year $15,800 Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011 Total cash available Less disbursements: Payments for: Raw materials $ (4,594) Direct labour (1,272) Overhead (1,741) Selling and administrative (1,670) $ 1,023 11,850 $12,873 $ (5,039) (1,512) (1,861) (1,790) 9-73

74. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget continued ---- Quarter Selling and administrative 123 4 Year Income taxes (1,670) Equipment (6,500) Total disbursements $(15,777) Excess of cash available over needs $ 23 Financing: Borrowings 1,000 Repayments ---- (1,790) ---- $(10,202) $ 2,671 ---- (1,000) Excess cash is used to repay $1,000 borrowed at end of Q1 9-74

75. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget concluded 75 Quarter 123 Borrowings 1,000 4 Year Repayments Interest ---- Total financing $1,000 Ending cash balance $1,023 Financing: ---- (1,000) (60) (1,060) $1,611 9-75

76. COPYRIGHT © 2012 Nelson Education Ltd. Cash sales and collections on account: $ 5,200 Quarter Beginning cash bal. 123 10,600 4 Year $15,800 Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011 Total cash available Less disbursements: Payments for: Raw materials $ (4,594) Direct labour (1,272) Overhead (1,741) Selling and administrative (1,670) $ 1,023 11,850 $12,873 $ (5,039) (1,512) (1,861) (1,790) $ 1,611 14,775 $16,386 $(6,219) (1,920) (2,065) (2,420) 9-76

77. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget continued ---- Quarter Selling and administrative 123 4 Year Income taxes (1,670) Equipment (6,500) Total disbursements $(15,777) Excess of cash available over needs $ 23 Financing: Borrowings 1,000 Repayments ---- (1,790) ---- $(10,202) $ 2,671 ---- (1,000) (2,420) ---- $(12,624) $ 3,762 ---- There is enough cash, so none is borrowed 9-77

78. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget concluded 78 Quarter 123 Borrowings 1,000 4 Year Repayments Interest ---- Total financing $1,000 Ending cash balance $1,023 Financing: ---- (1,000) (60) (1,060) $1,611 ---- $3,762 9-78

79. COPYRIGHT © 2012 Nelson Education Ltd. Cash sales and collections on account: $ 5,200 Quarter Beginning cash bal. 123 10,600 4 Year $15,800 Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011 Total cash available Less disbursements: Payments for: Raw materials $ (4,594) Direct labour (1,272) Overhead (1,741) Selling and administrative (1,670) $ 1,023 11,850 $12,873 $ (5,039) (1,512) (1,861) (1,790) $ 1,611 14,775 $16,386 $(6,219) (1,920) (2,065) (2,420) $ 3,762 19,625 $23,387 $(6,819) (2,160) (2,185) (2,170) 9-79

80. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget continued ---- Quarter Selling and administrative 123 4 Year Income taxes (1,670) Equipment (6,500) Total disbursements $(15,777) Excess of cash available over needs $ 23 Financing: Borrowings 1,000 Repayments ---- (1,790) ---- $(10,202) $ 2,671 ---- (1,000) (2,420) ---- $(12,624) $ 3,762 ---- (2,170) (3,469) ---- $(16,803) $ 6,584 ---- 9-80

81. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget concluded 81 Quarter 123 Borrowings 1,000 4 Year Repayments Interest ---- Total financing $1,000 Ending cash balance $1,023 Financing: ---- (1,000) (60) (1,060) $1,611 ---- $3,762 ---- $6,584 9-81

82. COPYRIGHT © 2012 Nelson Education Ltd. Cash sales and collections on account: $ 5,200 Quarter Beginning cash bal. 123 10,600 4 Year $15,800 Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011 Total cash available Less disbursements: Payments for: Raw materials $ (4,594) Direct labour (1,272) Overhead (1,741) Selling and administrative (1,670) $ 1,023 11,850 $12,873 $ (5,039) (1,512) (1,861) (1,790) $ 1,611 14,775 $16,386 $(6,219) (1,920) (2,065) (2,420) $ 3,762 19,625 $23,387 $(6,819) (2,160) (2,185) (2,170) $ 5,200 The year began with $5,200 in cash 9-82

83. COPYRIGHT © 2012 Nelson Education Ltd. Cash sales and collections on account: $ 5,200 Quarter Beginning cash bal. 123 10,600 4 Year $15,800 Moose Patties Inc. Cash Budget For the Year Ending December 31, 2011 Total cash available Less disbursements: Payments for: Raw materials $ (4,594) Direct labour (1,272) Overhead (1,741) Selling and administrative (1,670) $ 1,023 11,850 $12,873 $ (5,039) (1,512) (1,861) (1,790) $ 1,611 14,775 $16,386 $(6,219) (1,920) (2,065) (2,420) $ 3,762 19,625 $23,387 $(6,819) (2,160) (2,185) (2,170) $ 5,200 56,850 $62,050 $(22,671) (6,864) (7,852) (8,050) 9-83

84. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget continued ---- Quarter Selling and administrative 123 4 Year Income taxes (1,670) Equipment (6,500) Total disbursements (15,777) Excess of cash available over needs $ 23 Financing: Borrowings 1,000 Repayments ---- (1,790) ---- (10,202) $ 2,671 ---- (1,000) (2,420) ---- (12,624) $ 3,762 ---- (2,170) (3,469) ---- (16,803) $ 6,584 ---- (8,050) (3,469) (6,500) (55,406) $ 6,644 1,000 (1,000) During the year $1,000 is borrowed and repaid

85. COPYRIGHT © 2012 Nelson Education Ltd. Cash Budget concluded 85 Quarter 123 Borrowings 1,000 4 Year Repayments Interest ---- Total financing $1,000 Ending cash balance $1,023 Financing: ---- (1,000) (60) (1,060) $1,611 ---- $3,762 ---- $6,584 1,000 (1,000) (60) $6,584 9-85

86. COPYRIGHT © 2012 Nelson Education Ltd. Budgeted Balance Sheet Information: Last year’s balance sheet: Balance Sheet Moose Patties Inc. December 31, 2010 Assets Current assets: $ 5,200 Accounts receivable 1,350 Raw materials inventory252 Finished goods inventory 1,251 Total current assets$ 8,053 Cash 9-86

87. COPYRIGHT © 2012 Nelson Education Ltd. Example Property, plant and equipment (PP&E): Building and equipment Land$ 1,100 Total PP&E $1,000 Liabilities and Owner’s Equity: 33,153 Total owner’s equity 33,153 Total liabilities and owner’s equity $34,153 30,000 Accumulated depreciation(5,000) 26,100 Total assets $34,153 Current liabilities: Accounts payable Owner’s equity: Retained earnings Using this balance sheet and the budgets, we can prepare the December 31, 2011 balance sheet 9-87

88. COPYRIGHT © 2012 Nelson Education Ltd. Cash$ 6,584 Current assets: Moose Patties Inc. Balance Sheet December 31, 2011 Assets Accounts receivable1,500 Raw materials inventory 424 Finished goods inventory 1,390 Total current assets$ 9,898 Property, plant and equipment (PP&E): Land $ 1,100 Building and equipment 36,500 Accumulated depreciation (7,760) Total PP&E29,840 2010 balance $5,000 + $2,760 2011 depreciation Ending cash balance from cash budget 9-88

89. COPYRIGHT © 2012 Nelson Education Ltd. Balance Sheet continued Total PP&E Liabilities and Owner’s Equity: 29,840 Total assets$39,738 Current liabilities: Accounts payable$1,381 38,357 Owner’s equity: Retained earnings 2010 balance $33,153 + $5,204 2011’s projected net income 9-89

90. COPYRIGHT © 2012 Nelson Education Ltd. Balance Sheet continued Total PP&E Liabilities and Owner’s Equity: 29,840 Total assets$39,738 Current liabilities: Accounts payable$1,381 38,557 Owner’s equity: Retained earnings Total liabilities and owner’s equity $39,738 9-90