1. Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 20 Master Budgets and Performance Planning

3. Conceptual Learning Objectives C1: Describe the importance and benefits of budgeting and the process of budget administration. C2: Describe a master budget and the process of preparing it. 20-3

4. A1: Analyze expense planning using activity-based budgeting. Analytical Learning Objectives 20-4

5. P1: Prepare each component of a master budget and link each to the budgeting process. P2: Link both operating and capital expenditures budgets to budgeted financial statements. P3: Appendix 20A: Prepare production and manufacturing budgets. Procedural Learning Objectives 20-5

6. Advantages Communicates plans and instructions Promotes analysis and a focus on the future Motivates employees Provides a basis for evaluating performance against past or expected results Coordinates business activities Defines goals and objectives Budget Process C 1 20-6

7. Continuous or Rolling Budget The budget may be a monthly or quarterly budget that rolls forward one month or quarter at a time. As the current month or quarter is completed a new quarter is added. Qtr 2 2013 Qtr 3 2013 Qtr 4 2013 Qtr 1 2014 Budget Timing C1 20-7

8. Master Budget Components Sales budget Merchandise purchases Prepare financial budgets: l Cash l Income l Balance sheet Prepare capital expenditure budget Prepare selling and general administrative budgets C 2 20-8

9. Sales Budget (Exhibit 20.6) P1 20-9

10. Hockey Den buys hockey sticks for $60.00 each and maintains an ending inventory equal to 90 percent of the next month’s budgeted sales. 900 hockey sticks are on hand on September 30. 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 (Exhibit 20.7) P1 20-10

11. Merchandise Purchases Budget (Exhibit 20.8) P1 20-11

12. From Hockey Den’s sales budget Selling Expense Budget (Exhibit 20.9) P1 20-12

13. General and Administrative Expense Budget (Exhibit 20.10) P1 20-13

14. Cash budget (Expected Receipts & disbursements) Budgeted income statement Budgeted balance sheet Financial Budgets P2 20-14

15. 40% of Hockey Den’s sales are for cash. 60% are credit sales (collected in full in the month following sale). Let’s prepare the cash receipts budget for Hockey Den. Budgeted Cash Receipts P2 20-15

16. 40% are October cash sales Budgeted Cash Receipts P2 From Hockey Den’s sales budget 60 percent of September sales are collected in October 20-16

17. Budgeted Cash Receipts (Exhibit 20.12) P2 20-17

18. Hockey Den’s purchases of merchandise are entirely on account. Full payment is made in the month following purchase. The September 30 balance of Accounts Payable is $58,200. Let’s look at cash disbursements for purchases for Hockey Den. Cash Disbursements for Purchases P2 20-18

19. From merchandise purchases budget Cash Disbursements for Purchases P2 20-19

20. Hockey Den: Will pay a cash dividend of $3,000 in November. Will purchase $25,000 of equipment in December. Has an income tax liability of $20,000 from the previous quarter that will be paid in October. Has a September 30 cash balance of $20,000. Has an agreement with its bank for loans at the end of each month to enable a minimum cash balance of $20,000. Continue Cash Budget P2 20-20

21. Hockey Den: Pays interest equal to 1% 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% income tax rate. Will pay taxes for current quarter next year. Let’s prepare the cash budget for Hockey Den. Cash Budget P2 20-21

22. From Cash Disbursements for Purchases P2 From Cash Receipts Budget 20-22

23. P2 From Selling Expense Budget (Exhibit 20.14) 20-23

24. .01 × $10,000 Because Hockey Den maintains a minimum cash balance of $20,000, the company must borrow $12,800. P2 (Exhibit 20.14) 20-24

25. Ending cash balance for October is the beginning November balance. Cash Budget Continued P2 20-25

26. .01 × $22,800 Cash balance is sufficient to repay the $22,800 loan. P2 (Exhibit 20.14) 20-26

27. P2 Exhibit 20.14 20-27

28. Cash Budget Continued P2 Exhibit 20.14 20-28

29. From the Sales Budget P2 From the Merchandise Purchases Budget Exhibit 20.15 20-29

30. From the Selling Expense Budget P2 Exhibit 20.15 20-30

31. From the General and Administrative Expense Budget Depreciation is a non-cash expense. P2 Exhibit 20.15 20-31

32. From the Cash Budget P2 Exhibit 20.15 20-32

33. $71,672 ×.40 P2 Exhibit 20.15 20-33

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 P2 20-34

35. From the Cash Budget P2 Exhibit 20.16 20-35

36. From the Merchandise Purchases Budget P2 Exhibit 20.16 20-36

37. From the Budgeted Income Statement P2 Exhibit 20.16 20-37

38. From the Cash Budget P2 Exhibit 20.16 20-38

39. P2 Exhibit 20.16 20-39

40. Activity-Based Budgeting Activity-based budgeting is based on activities rather than traditional items such as salaries, supplies, depreciation, and utilities. A1 Exhibit 20.17 20-40

41. End of Chapter 20 20-41