Chapter 7 Flashcards
What is budgeting?
Expressing business plans in financial terms
How does a company’s master budget come?
Results from combining numerous specific plans prepared by different departments
What are the 3 levels of planning?
- Strategic planning
- Capital budgeting
- Operations budgeting
What is strategic planning?
Involves making long-term decisions such as defining the scope of the business, determining which products to develop or discontinue, identifying the most profitable markets
What is capital budgeting?
Focuses on intermediate-range planning and involves decisions such as whether to buy/lease equipment, whether to stimulate sales, or whether to increase company assets
What is operating budgeting?
Describes short-term objectives in specific amounts of sales targets, production goals and financing plans
What is perpetual budget?
Covers a 12-month reporting period
Advantage of keeping management constantly focused
What are advantages of budgeting?
Promotes planning
Enhances performance measurement
Enhances corrective actions
Promotes coordination
What is a limit of budgeting?
They limit individual freedom in favor of an established plan
Many people find evaluation based on budget expectations stressful
What is participative budgeting?
Invites participation in the budget process; fosters more cooperation and motivation
What is master budget?
Group of detailed budgets and schedules representing the company’s operating and financial plans
Includes:
Operating budget
Capital budget
Pro-forma financial statements
What is a sales budget?
Detailed schedule prepared by the marketing department showing:
Expected sales for the coming periods and expected collections on those sales
How do you calculate the total inventory?
Amount of the cost of budgeted sales + desired ending inventory
How do you calculate the required purchases?
Total inventory - beginning inventory
What is the structure of the inventory purchases budget?
Cost of budgeted sales
+ Desired ending inventory
Total inventory needed
- Beginning inventory
Required purchases
What does preparing a cash budget do?
Alerts management to anticipated cash shortages/excess cash balances
Divided into:
1. Cash receipts
2. Cash payments
3. Financing section
What does the pro forma income statement do?
Gives management an estimate of the expected profitability
What comes in the operating budget?
Sales budget - cash receipts
Inventory purchase budget - cash payment for inventory
SG&A budget - cash payment for SG&A expense
Cash budget
How do you prepare a sales budget?
Projected sales:
Cash sales
Sales on account (A/R) (a)
Total budgeted sales (b)
Schedule of cash receipts:
Current cash sales
+ Collection of A/R
Total budgeted collections
a - last number A/R b.s.
b - Total = sales revenue on i.s.
How do you prepare an inventory budget?
Projected purchases:
Cost of budgeted sales (a)
+ Desired ending inventory (b)
Total inventory
- Beginning inventory (c)
Required purchases
Schedule of cash payments for inventory purchases:
Current month’s A/P
Prior month’s A/P
Total budgeted disbursements for inventory
a - Total = COGS in i.s.
b - last number ending inventory b.s.
c - last number A/P b.s.
How do you prepare an SG&A budget?
Projected SG&A Expenses:
Salary
Sales commissions (a)
Supplies expense
Rent
Miscellaneous
Utilities (b)
Depreciation (c)
Total SG&A expense before interest (d)
Schedule of cash payment for SG&A expense:
Salary expense
Sales commissions
Rent
Miscellaneous
Utilities
Total payments for SG&A expense
a - last number s.c/P b.s.
b - last number u/P b.s.
c - Total A/D b.s.
d - Total SG&A expense i.s.
How do you calculate the cash receipts in the cash budget?
Beginning cash balance (prior month’s ending balance)
+ Cash receipts (schedule of cash receipts from sales budget)
Total cash available
How do you calculate the cash payments in the cash budget?
For inventory purchases (schedule of cash payments for inventory purchases)
For SG&A expenses (schedule of cash payments for SG&A expense)
For interest expenses
To purchase equipment (a)
Total budgeted disbursements
a - investing activity in c.f.
How do you calculate the financing activities in the cash budget?
Surplus (shortage) - calculate by doing total cash available - total budgeted disbursements
Borrowing (repayment) (a) - calculate whole number by keeping a minimum of ending cash balance
Ending cash balance (b)
a - total in financing activities in c.f.
b - last number in b.s. and c.f.
