CHAPTER 7 PowerPoint Author: LuAnn Bean, Ph.D., CPA, CIA, CFE Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

7-2 Three Levels of Planning 1.Strategic planning 1.Strategic planning involves making long-term decisions such as defining the scope of the business, determining which products to develop or discontinue and identifying the most profitable markets. 2.Capital budgeting 2.Capital budgeting focuses on intermediate-range planning and involves decisions such as whether to buy or lease equipment, whether to stimulate sales, or whether to increase company assets. 3.The Operations budget 3.The Operations budget describes short-term objectives in specific amounts of sales targets, production goals, and financing plans. 1.Strategic planning 1.Strategic planning involves making long-term decisions such as defining the scope of the business, determining which products to develop or discontinue and identifying the most profitable markets. 2.Capital budgeting 2.Capital budgeting focuses on intermediate-range planning and involves decisions such as whether to buy or lease equipment, whether to stimulate sales, or whether to increase company assets. 3.The Operations budget 3.The Operations budget describes short-term objectives in specific amounts of sales targets, production goals, and financing plans.

7-3 Advantages of Budgeting BudgetingBudgeting Promotes Planning Promotes Coordination Enhances Performance Measurement Enhances Corrective Actions

7-4 Budgeting and Human Behavior Upper management must be sensitive to the impact of the budgeting process on employees. Budgets are constraining. They limit individual freedom in favor of an established plan. Many people find evaluation based on budget expectations stressful. Think of students and exams. Upper management must demonstrate that budgets are sincere efforts to express realistic goals employees are expected to meet.

7-5 Cash payments for S & A Cash payments for inventory Inventory purchases budget Income statement S & A expense budget Balance sheet Cash receipts Sales budget Cash budget Statement of cash flows Cash Receipts and Payments Schedules Operating Budgets Pro forma Financial Statements Start

7-6 Sales Budget: Projected Sales Section $40,000 × 120% = $48,000 $120,000 × 120% = $144,000 Accounts receivable at December 31 st are $172,800, the uncollected sales on account.

7-7 Sales revenue on the income statement will be the sum of the monthly sales ($582,400). Exhibit 7.2 Sales Budget Sales Budget: Schedule of Cash Receipts

7-8 Pro Forma Data $160,000

7-9 Inventory Purchases Budget $134,400 × 25% = $33,600 $155,960 × 40% = $62,384 Accounts Payable

7-10 $145,600 × 60% = $87,360 $145,600 × 40% = $58,240

7-11 Selling and Administrative Expense Budget

7-12 Cash Budget

7-13 Cash Budget

7-14 (g) $212,028 - $188,368 - $13,000

7-15 Pro Forma Income Statement The pro forma income statement gives management an estimate of the expected profitability of HH. If the project appears to be unprofitable, management can make the decision to abandon it. Although managers remain responsible for data analysis and decision making, computer technology offers powerful tools to assist in those tasks.

7-16 Pro Forma Income Statement

7-17 End of Chapter 7