1. Planning and Budgeting Chapter 13 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. Budgets A budget is a financial plan of the resources needed to carry out activities and meet financial goals. Budgets play an important role in managing cash flows. Critical success factors are the strengths of a company that enable it to outperform competitors. LO1 L.O. 1 Understand the role of budgets in overall organization plans. 13 - 2

3. Human Element in Budgeting L.O. 2 Understand the importance of people in the budgeting process. Organization goals Individual goals Goal congruence Participative budgeting: Use of input from lower- and middle-management employees; also called grass roots budgeting 13 - 3

4. Sales Forecasting L.O. 3 Estimate sales. Forecasting sales is the most difficult aspect of budgeting. Sales staff Market researchers Delphi technique Trend analysis Econometric models 13 - 4

5. Forecasting Production L.O. 4 Develop production and cost budgets. A production budget is a plan of resources needed to meet current sales demand and ensure that inventory levels are sufficient for future sales. Beginning balance BB Transfers in TI Transfers out TO +–=Ending balance Units in beginning inventory Required production Budgeted sales +–= Units in ending inventory 13 - 5

6. Cash Budget L.O. 5 Estimate cash flows. The cash budget is a statement of cash on hand at the start of the budget period, expected cash receipts, expected cash disbursements, and the resulting cash balance at the end of the budget period. Cash receipts: – Collection of accounts receivable – Cash sales – Sales of assets – Borrowing – Issuing stock – Other 13 - 6

7. Cash Budget LO5 Cash disbursements: – Materials purchases – Manufacturing costs – Operating activities – Debt repayment – Acquisition of new assets – Income taxes – Dividends – Other activities 13 - 7

8. Cash Collections Example LO5 Santiago Pants Monthly Collection Experience Sales on Credit Cash collected from current month's sales 20% Cash collected from last month's sales 75 Cash discounts taken (percentage of gross sales) 2 Written off as bad debt 3 Total disposition of credit sales in current month100% Expected Sales for Three Months January sales$500,000 February sales$450,000 March sales$600,000 13 - 8

9. Cash Collections Example LO5 Santiago Pants Multiperiod Schedule of Cash Collections For the Quarter Ended March 31 Beginning accounts receivable, January 1, $540,000 January sales, $500,000 a February sales, $450,000 b March sales, $600,000 c Total cash collections $540,000 100,000 $640,000 $375,000 90,000 $465,000 $337,500 120,000 $457,500 January $ 540,000 475,000 427,500 120,000 $1,562,500 Month FebruaryMarch Total for Quarter a 20% collected in January, 75% collected in February, and 5% not collected b 20% collected in February, 75% collected in March, and 5% not collected c 20% collected in March, 75% collected in April, and 5% not collected 13 - 9

10. Cash Disbursements Example LO5 Santiago Pants Monthly Disbursements for Purchases Experience Cash disbursement for current month's purchases 50% Cash disbursement for prior month's purchases 48 Cash discounts taken 2 Total cash disbursement for purchases100% Expected Purchases for Three Months January sales$120,000 February sales$200,000 March sales$250,000 13 - 10

11. Cash Disbursements Example LO5 Santiago Pants Multiperiod Schedule of Cash Disbursements For the Quarter Ended March 31 Beginning accounts payable, January 1, $256,000 January purchases, $120,000 a February purchases, $200,000 b March purchases, $250,000 c Additional cash payments Total cash disbursements $256,000 60,000 250,000 $566,000 $ 57,600 100,000 250,000 $407,600 $ 96,000 125,000 250,000 $471,000 January $ 256,000 117,600 196,000 125,000 750,000 $1,444,600 Month FebruaryMarch Total for Quarter a 50% paid in January, 48% paid in February, and 2% discounts taken b 50% paid in February, 48% paid in March, and 2% discounts taken c 50% paid in March, 48% paid in April, and 2% discounts taken 13 - 11

12. Budgeted Balance Sheet Example L.O. 6 Develop budgeted financial statements. Assets Current assets: Cash Accounts receivable Inventories Other current assets Total current assets Long-term assets: Property, plant, equipment Less: Accumulated depreciation Total assets Budget Year $ 830 540 155 161 $1,686 1,866 (1,246) $2,306 $ 6,940 7,200 4,265 -0- $18,405 1,470 (220) $19,651 $ 7,399 6,840 3,995 100 $18,334 -0- $18,334 $ 371 900 425 61 $1,757 3,336 (1,470) $3,623 Balance Jan 1AdditionsSubtractions Balance Dec 31 Santiago Pants Budget Balance Sheet For the Budget Year Ended December 31 ($000) 13 - 12

13. Budgeted Balance Sheet Example LO6 Liabilities and Shareholders Equity Current liabilities: Accounts payable Taxes payable Current portion of long-term debt Total current liabilities Long-term liabilities Total liabilities Shareholders' equity Common stock Retained earnings Total shareholders Total liabilities and shareholders equity Budget Year $ 256 187 23 $ 466 258 $ 724 $ 437 1,145 $1,582 $2,306 $1,715 550 23 $2,288 -0- $2,288 $ -0- 1,149 $1,149 $3,437 $1,694 350 23 $2,067 23 $2,090 $ -0- 30 $2,120 $ 277 387 23 $ 687 235 $ 922 $ 437 2,264 $2,701 $3,623 Balance Jan 1AdditionsSubtractions Balance Dec 31 Santiago Pants Budget Balance Sheet For the Budget Year Ended December 31 ($000) 13 - 13

14. Budgeting in Service Organizations Marketing and administrative cost budget Sales forecast Budgeted cost of services Budgeted income statement Cash budget Budgeted balance sheets L.O. 7 Explain budgeting in merchandising and service organizations. 13 - 14

15. Ethical Problems in Budgeting L.O. 8 Explain why ethical issues arise in budgeting. Budgets can create serious ethical issues for many people. The company must recognize the trade-off between encouraging unbiased reporting by managers and the use of budget information in performance evaluation and rewards. 13 - 15

16. Budgeting Under Uncertainty L.O. 9 Explain how to use sensitivity analysis to budget under uncertainty. Budgets allow management to explore many alternatives. Spreadsheets are helpful in preparing budgets and quantifying “what-if” conditions. 13 - 16

17. End of Chapter 13 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin