BUDGET AS PLANNING & CONTROLLING TOOL SALES BUDGET PREPARATION Sale forecast & Production budget OTHER ANCILLARY POLICY ISSUES DETERMINATION Finished goods level Materials ending inventory Production cost budget

FUNCTIONAL BUDGETS NEGOTIATION MASTER BUDGET OR CORPORATE BUDGET FINALIZATION OF BUDGET & IMPLEMENTATION CONTROLLING STAGE

VARIANCE ANALYSIS Difference between actual and budgeted numbers is known as variance. INVESTIGATION

PURPOSE & OBJECTIVES OF BUDGET Path to achieve the corporate objectives Compel Planning Increased Responsibility Accounting Ensures Control Increased Coordination Source of Motivation 11:25 to 16:00

A statement that incorporates both inflows and outflows. CASH BUDGETS A statement that incorporates both inflows and outflows. Based on the timings of each component. 16:10

COMPONENTS OF CASH BUDGET Non-cash items are not considered. Every item involving cash is included and considered. Example: Depreciation is a non-cash items. Accruals are not taken into cash budgets. Profits and losses are not related to cash budgets. Above all the essence of cash budget is the timing of occurrence of every line item. 22:15

EXAMPLE M/S Hi Land Ltd is in the process of preparing cash budget for the 1st quarter of 2007. The following information is available: Opening cash balance is Rs. 2,000/- Forecast sales are Rs 50,000/- each for Nov. 06 to Jan. 07 and Rs. 65,000 per month for Feb. & Mar. 07. 80% sales is on credit basis and 20% on cash.

Debtors pay after two months from the sale date. Materials cost will be Rs. 34,000/- for Nov. & Dec. 07 & Rs. 35,000/-, Rs. 36,000/- & Rs. 37,000/- for Jan to Mar. 07 respectively. Creditors are paid after one month. Electricity bill is paid in following month. Dec to Mar. expense is estimated at Rs. 6,000 per month. Recurring expense will be Rs. 4,000 per month for Nov. & Dec. 06 and Rs. 6,000, Rs 9000 & Rs. 12,000 for Jan. to Mar. 07 and are paid in the month of incurrence.

A new assets will be purchased in Jan 07 for Rs. 12,000/- A new assets will be purchased in Jan 07 for Rs. 12,000/-. payment will be made in Feb. 07. An old assets will be disposed off in January for Rs. 1,000/- and the receipt will hit the bank on first of February 07. Required: Prepare the cash budget for the first quarter of year 2007 and provide your feedback to the management.

SOLUTION CASH BUDGET Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 INFLOWS Rs.   Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 INFLOWS Rs. TOTAL SALES 50,000.00 65,000.00 SALES - CREDIT 80% 40,000.00 SALES - CASH 20% 10,000.00 13,000.00 SALES INFLOW 53,000.00 OTHER RECEIPTS SALE OF ASSET - 1,000.00 TOTAL INFLOWS 54,000.00 OUTFLOWS MATERIALS COST 34,000.00 35,000.00 36,000.00 CREDITORS PAYMENT ELECTRICITY 6,000.00 RECURRING EXP 9,000.00 12,000.00 CAPITAL PAYMENTS 46,000.00 62,000.00 NET CASH FLOW 4,000.00 (8,000.00) (1,000.00) OPENING CASH 2,000.00 (2,000.00) ENDING CASH (3,000.00)

CASH FLOW STATEMENT This statement is governed by International Accounting Standard 07. Purpose of Cash Flow Statement is to provide information about the inflows and outflows of cash and cash equivalents. Cash And Cash Equivalent has two characteristics: The inflows and outflows are grouped into three categories. both readily convertible into cash without loss of value

CASH FLOW STATEMENT IS DIVIDED INTO THREE CATEGORIES OPERATING ACTIVITIES INVESTING ACTIVITIES FINANCING ACTIVITIES

PURPOSE OF CASH FLOW STATEMENT To identify and assess the ability to generate future net cash flow from operations to pay debt, interest and dividends External financing requirements. To see the effects of cash & non cash investing and financing transactions. Assess the reasons for differences between income and associated cash receipts and payments.

METHODS OF PREPARING CASH FLOW STATEMENT COMPLIANCE OF IAS 07: DIRECT METHOD – BENCHMARK INDIRECT METHOD – ALLOWED ALTERNATIVE

EXAMPLE: INDIRECT METHOD   HI LAND LIMITED INCOME STATEMENT For the year Ended December 31, 2005  Rs. SALES 290,000.00 Less COST OF SALES 174,000.00 GROSS MARGIN 116,000.00 OPERATING EXP Administrative Exp 45,000.00 Selling & Marketing 20,900.00 Depreciation 13,000.00 Interest Exp 15,400.00 Gain on Sale of Land 2,500.00 Profit before taxes 24,200.00 Provision for taxes 9,700.00 Net Income 14,500.00

HI LAND LIMITED BALANCE SHEET AS ON DECEMBER 31, 2005   2005 2004 Fixed Assets Land 148,400.00 100,000.00 Buildings 465,000.00 415,000.00 Less: Accumulated Depreciation (217,000.00) (205,000.00) 396,400.00 310,000.00 Intangible Assets: Patents 5,000.00 6,000.00 CURRENT ASSETS Inventory 175,000.00 153,000.00 Accounts Receivable 109,000.00 90,000.00 Prepaid Expenses 15,500.00 17,000.00 Cash & Bank 50,000.00 55,000.00 349,500.00 315,000.00 Investment - Land - 27,500.00 TOTAL ASSETS 750,900.00 658,500.00 CURRENT LIABILITIES Accounts Payable 69,000.00 75,000.00 Accrued Liabilities 24,500.00 20,000.00 93,500.00 95,000.00 Long Term Liabilities: Bonds 200,000.00 Premium on Bonds 29,400.00 30,000.00 229,400.00 230,000.00 TOTAL LIBILITIES 322,900.00 325,000.00 SHAREHOLDERS' EQUITY Share Capital 335,500.00 255,500.00 Retained Earnings 92,500.00 78,000.00 Total Equity 428,000.00 333,500.00 TOTAL LAIBILITIES & EQUITY

For the Year Ended December 31, 2005 HI LAND LIMITED CASH FLOW STATEMENT For the Year Ended December 31, 2005 (INDIRECT METHOD) A CASH FLOW FROM OPERATING ACTIVITIES Rs.   Net Income 14,500.00 Adjustment for Non-Cash items: Add Depreciation and Amortization 13,000.00 Gain on Sale of Land (2,500.00) Operating profit before working capital changes 25,000.00 Change in working capital Increase in Inventory (22,000.00) Increase in Accounts Receivable (19,000.00) Decrease in Prepaid Expenses 1,500.00 Decrease in Accounts Payable (6,000.00) Increase in Accrued Liabilities 4,500.00 Decrease in Amortization of Bond Premium (600.00) Cash Generated from operations (16,600.00)