1. 22 - 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 22 Master Budgets and Planning

2. 22 - 2 Communicates management plans throughout the organization. Provides a benchmark for evaluating performance. Promotes analysis and a focus on the future. Converts long-term strategic plans into short-term financial plans. Motivates employees through participation in the budgeting process and the establishment of attainable goals. Enhances coordination so that activities of all units contribute to meeting the company’s overall goals. Budget Process C 1

3. 22 - 3 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 C 1 *Most of the 9% have eliminated annual budgeting in favor of rolling or continual budgeting.

4. 22 - 4 Flow of budget data is a bottom-up process. Budget Committee C 1

5. 22 - 5 2012201320142015 Operating Budget The annual operating budget may be divided into quarterly or monthly budgets. Budget Timing A continuous or rolling budget is a twelve-month budget that rolls forward one month as the current month is completed. C 1

6. 22 - 6 Master Budget Components C 2

7. 22 - 7 Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel Sales Budget P 1

8. 22 - 8 In September 2013, Hockey Den sold 700 hockey sticks at $100 each. Hockey Den prepared the following sales budget for the next four months: Sales Budget P 1

9. 22 - 9 Sales Budget P 1

10. 22 - 10 The quantity purchased will be 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 P 1

11. 22 - 11 Inventory to be purchased = Budgeted ending inventory + Budgeted cost of sales for the period – Budgeted beginning inventory Let’s prepare the purchases budget for Hockey Den. Merchandise Purchases Budget P 1 Hockey Den buys hockey sticks for $60 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. On September 30, 900 hockey sticks are on hand.

12. 22 - 12 Merchandise Purchases Budget P 1

13. 22 - 13 Let’s prepare the selling expense 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 P 1

14. 22 - 14 From Hockey Den’s sales budget P 1 Selling Expense Budget

15. 22 - 15 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 P 1

16. 22 - 16 P 1 General and Administrative Expense Budget

17. 22 - 17 Capital Expenditures Budget  Hockey Den does not anticipate disposal of any plant assets through December 2013, but management is planning to acquire additional equipment for $25,000 cash in December 2013.  Since this is the only budgeted capital expenditure for the quarter, no separate budget is shown. P 1

18. 22 - 18 Cash Budget Expected Receipts and Disbursements Budgeted Income Statement Budgeted Balance Sheet Financial Budgets P 2

19. 22 - 19  Forty percent of Hockey Den’s sales are for cash.  The remaining 60 percent are credit sales that are collected in full in the month following the sale. Let’s prepare the cash receipts budget for Hockey Den. Budgeted Cash Receipts P 2

20. 22 - 20 From Hockey Den’s sales budget 60 percent of September sales are collected in October 40% of sales 60% of sales P 2 Budgeted Cash Receipts

21. 22 - 21  Hockey Den’s purchases of merchandise are entirely on account.  Full payment is made in the month following the purchase.  The September 30 balance of Accounts Payable is $58,200. Let’s look at cash disbursements for purchases for Hockey Den. P 2 Cash Disbursements for Purchases

22. 22 - 22 From merchandise purchases budget Cash Disbursements for Purchases P 2

23. 22 - 23 Hockey Den: –Has a September 30 cash balance of $20,000. –Will pay a cash dividend of $3,000 in November. Continue Cash Budget P 2 Beginning Cash Balance Budgeted Cash Receipts Budgeted Cash Disbursements Preliminary Cash Balance +=–  If adequate, repay loans or buy securities.  If inadequate, increase short-term loans.

24. 22 - 24 Hockey Den: –Has an income tax liability of $20,000 from the previous quarter that will be paid in October. –Will purchase $25,000 of equipment in December. –Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000. –Pays interest each month 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. Cash Budget P 2

25. 22 - 25 From Cash Receipts Budget From Cash Disbursements for Purchases From Selling Expense Budget From General and Administrative Expense Budget Depreciation is a non-cash expense..01 × $10,000 Because Hockey Den maintains a minimum cash balance of $20,000, the company must borrow $12,800. P 2

26. 22 - 26 Ending cash balance for October is the beginning November balance. Cash Budget Continued P 2

27. 22 - 27.01 × $22,800 Cash balance is sufficient to repay the $22,800 loan. P 2

28. 22 - 28 Ending cash balance for November is the beginning December balance. Cash Budget Continued P 2

29. 22 - 29 P 2

30. 22 - 30 Cash Budget Continued P 2

31. 22 - 31 Let’s prepare the budgeted income statement for Hockey Den. Cash Budget Budgeted Income Statement Completed Budgeted Income Statement P 2

32. 22 - 32 From the Sales Budget P 2 From the Merchandise Purchases Budget From the Selling Expense Budget From the General and Administrative Expense Budget Depreciation is a non-cash expense. $71,672 ×.40

33. 22 - 33 Let’s prepare the budgeted balance sheet for Hockey Den. Budgeted Balance Sheet Completed Budgeted Income Statement Budgeted Balance Sheet P 2

34. 22 - 34 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 P 2

35. 22 - 35 From the Cash Budget P 2 From the Cash Receipts Budget $36,000 September 30 balance plus the $4,500 from the General and Administrative Expense Budget $200,000 September 30 balance plus the $25,000 December acquisition From the Merchandise Purchases Budget (810 units @ $60)

36. 22 - 36 P 2 From the Merchandise Purchases Budget From the Budgeted Income Statement From the Cash Budget

37. 22 - 37 Global View Royal Phillips Electronics of the Netherlands is a diversified company. Preparing budgets and evaluating progress helps the company achieve its goals. In a recent annual report, the company reports that it budgets sales to grow at a faster pace than overall economic growth. Based on this sales target, company managers prepare detailed operating, capital expenditures, and financial budgets. Budgeted and actual results of companies that do business globally are impacted by changes in foreign currency exchange rates as well as global and political uncertainties. Forecasting in that environment is difficult.

38. 22 - 38 Activity-Based Budgeting Activity-based budgeting is based on activities rather than traditional items such as salaries, supplies, depreciation, and utilities. A 1

39. 22 - 39 P 3 Appendix 22A: Production and Manufacturing Budgets

40. 22 - 40 Appendix 22A: Production and Manufacturing Budgets P 3

41. 22 - 41 Appendix 22A: Production and Manufacturing Budgets P 3

42. 22 - 42 Appendix 22A: Production and Manufacturing Budgets P 3

43. 22 - 43 End of Chapter 22