This technique invites participation in the budget process by personnel at all levels of the organization, not just top-level managers. The accuracy of the sales forecast is critical because all other budgets are derived from the sales budget. The Pro Forma Data column in the sales budget shows two figures that HH will report on the budgeted financial statements at the end of the quarter (December 31).
It is HH's policy to maintain an ending inventory equal to 25 percent of the next month's projected cost of goods sold. Purchases are expected to increase by 2 percent per month in each of the next three months. The cost of the investment in store fixtures is in the cash budget, not in the cash outflow for S&A expenses.
The Pro Forma Data column of the S&A expense budget displays four figures that HH will report on the quarter-end budgeted financial statements.
Cash Budget
The cash payments for stock purchases come from the form for cash payments for stock purchases (appendix 7.3, section 2, row 15). The cash payments for S&A expenses come from the schedule of cash payments for S&A expenses (Appendix 7.4, section 2, row 21). Finally, the cash payment for the shop equipment comes from the construction budget (not shown in this chapter).
The figures in the Pro Forma Data column of the cash budget (Exhibit 7.5) are referenced alphabetically. Cash receipts from customers, item (a) and cash payment items (b), (c) and (d) are reported in the operating activities section of the pro forma statement of cash flows (Exhibit 7.8).
REALITY BYTES
HH borrows or repays principal and pays interest on the last day of each month. Determining the amount to borrow or repay at the end of each month is discussed in more detail in the rest of the text. The $130,000 purchase of store equipment, item (e), is reported in the investing activities section of the pro forma statement of cash flows.
If a manager in a commercial enterprise does not meet the budget targets set for his or her part of the business, the manager may receive a poor performance evaluation. The ending cash balance of $10,660, item (g), is reported as the ending balance on the pro forma statement of cash flows and as an asset on the pro forma balance sheet.
CHECK YOURSELF 7.2
Pro Forma Income Statement
HAMPTON HAMS
Pro Forma Balance Sheet
Pro Forma Statement of Cash Flows
A Look Back <<
CHECK YOURSELF 7.3
What is the normal starting point in devel- oping the master budget?
How does the level of inventory affect the production budget? Why is it important to
What are the components of the cash bud- get? Describe each
The primary reason for preparing a cash budget is to determine the amount of cash
What information does the pro forma in- come statement provide? How does its prep-
How does the pro forma statement of cash l ows differ from the cash budget?
Budget responsibility
Preparing a sales budget
Preparing a schedule of cash receipts
Preparing sales budgets with different assumptions
Determining cash receipts from accounts receivable
Using judgment in making a sales forecast
Preparing an inventory purchases budget
Determine the amount of accounts receivable that the company will report on the third quarter pro forma balance sheet. Determine the amount of cost of goods sold that the company will report on its first quarter pro forma income statement. Determine the amount of ending inventory the company will report on its pro forma balance sheet at the end of the first quarter.
Preparing a schedule of cash payments for inventory purchases Sciara Books buys books and magazines directly from publishers and distributes them to grocery
Determining the amount of expected inventory purchases and cash payments
Preparing a schedule of cash payments for selling and administrative expenses
Complete the cash payment schedule for S&A expenses by filling in the missing amounts. Determine the amount of wages payable that the company will report on its pro forma balance sheet at the end of the fourth quarter. Determine the amount of prepaid insurance that the company will report on its pro forma balance sheet at the end of the fourth quarter.
Preparing inventory purchases budgets with different assumptions Executive officers of Dominick Company are wrestling with their budget for the next year. The
Determining the amount of cash payments and pro forma statement data for selling and administrative expenses
Determine the amount of services payable that the store will report on the January 31 pro forma balance sheet. Determine the amount of depreciation expense that the store will report on the income statement for 2011, assuming that monthly depreciation remains the same for the entire year.
Preparing a cash budget
Preparing pro forma income statements with different assumptions Norman Jelen, the controller of Wing Corporation, is trying to prepare a sales budget for the
Preparing a sales budget and schedule of cash receipts
Preparing an inventory purchases budget and schedule of cash payments
The company pays 60 percent of the creditors in the month of purchase and the remaining 40 percent in the month after the purchase. Determine the amount of ending inventory that Spratt will report on the pro forma balance sheet at the end of the quarter. Determine the balance in accounts payable Spratt will report on the pro forma balance sheet at the end of the quarter.
Preparing pro forma income statements with different assumptions Top executive officers of Zottoli Company, a merchandising firm, are preparing the next year’s
Preparing a schedule of cash payments for selling and administrative expenses
Preparing a cash budget
Preparing budgets with multiple products
Preparing a master budget for retail company with no beginning account balances
October sales are estimated at $120,000, of which 40 percent will be cash and 60 percent credit. The company expects 100% recovery of receivables created through credit sales in the month following the sale. The company wants to maintain a minimum ending inventory of 10 percent of cost of goods sold for the next month.
The company pays 70 percent of bills payable in the month of purchase and the remaining 30 percent in the following month. Utility and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Patel borrows funds, in $1,000 increments, and pays them back on the last day of the month.
It pays interest at 1 percent per month in cash on the last day of the month.
Behavioral impact of budgeting
The president had consistently approved the division's budget proposal based on 5 percent growth in the past. I'll impose a 15 percent revenue increase to teach them a lesson!" says the president smugly. Assume that cost of goods sold and SG&A remain stable relative to sales.
If growth is indeed 10 percent as normal, how much bonus would Chaudhry Division directors receive if the president had approved the division's proposal. If the actual results turn out to be a 10 percent increase as usual, how much bonus would Chaudhry Division directors receive since the president imposed a 15 percent increase.
Budget responsibility
Preparing a sales budget
Preparing a schedule of cash receipts
Determine the amount of accounts receivable that the company will report on the quarterly pro forma balance sheet.
Preparing sales budgets with different assumptions
Determining cash receipts from accounts receivable
Using judgment in making a sales forecast Starr Greetings Corporation sells greeting cards for various occasions
Preparing an inventory purchases budget
Preparing a schedule of cash payments for inventory purchases Waldrop Grocery buys and sells groceries in a community far from any major city. Cedric Waldrop,
Determining the amount of inventory purchases and cash payments Bellaire Oil Corporation, which distributes gasoline products to independent gasoline
Preparing a schedule of cash payments for selling and administrative expenses
Preparing inventory purchases budgets with different assumptions Rachel Khan has been at odds with her brother and business partner, David, since childhood
The company tries to maintain 15 percent of the next quarter's expected cost of goods sold as the current quarter's ending inventory.
Determining the amount of cash payments for selling and administrative expenses
Preparing a cash budget
Determining amount to borrow and pro forma statement balances Kerry Norton, the president of Donnelly Corporation, has been working with his controller to
Preparing a sales budget and schedule of cash receipts
Preparing an inventory purchases budget and schedule of cash payments
Morris expects cost of goods sold and variable selling and administrative expenses to remain flat relative to sales next year. However, he has developed a good relationship with his supplier, who is willing to give him a volume discount that will reduce the cost of goods sold by 3 percent. If the company scales up its advertising campaign to increase consumer awareness, selling and administrative expenses will increase to $150,000.
Preparing a schedule of cash payments for selling and administrative expenses
Preparing a cash budget
Preparing budgets with multiple products
Preparing a master budget for a retail company with no beginning account balances
The company borrows funds, in increments of $1,000, and pays them back in whatever amount is available on the last day of the month. It pays interest of 1.5 percent per month in cash on the last day of the month.
Behavioral impact of budgeting
Business Applications Case Preparing and using pro forma statements Nancy Pinedo and Justin Johnson recently graduated from the same university. After graduation
Five thousand dollars came from personal savings they had amassed by working part-time while in college, and $15,000 was borrowed from Nancy's parents. They agreed to pay interest on the outstanding loan amount every month at an annual interest rate of 6 percent. They were able to rent space in a parking lot near the campus they attended, believing that students would accept their food as an alternative to the typical fast food currently available.
Justin thinks they should pay back some of the money they borrowed, but Nancy thinks they should prepare a set of forecasted financial statements for their first year in business before deciding whether or not to repay any principal on the loan. She remembers a bit about budgeting from a survey of accounting course she took and thinks the results of their first two months in business can be extended over the next 10 months to prepare the budget they need. They estimate the wagon will last at least five years, after which they expect to sell it for $5,000 and move on to something else in their lives.
Nancy agrees to prepare a forecast (pro forma) income statement, balance sheet and cash flow statement for the first year of operation, including the two months already passed. Prepare the annual pro forma financial statements you would expect from Nancy, based on her comments about her expectations for the company. Review the statements you prepared for the first requirement and prepare a list of reasons why actual results for Justin and Nancy's business are unlikely to match the budgeted statements.
Group Assignment Master budget and pro forma statements
Cash payments for sales commissions and utilities are made in the month following the month in which the costs were incurred. Supplies and other business expenses are paid in cash in the month in which they are incurred. Representatives should submit the missing information in the following pro forma income statement and balance sheet for the fourth quarter of 2011.
Research Assignment Analyzing budget data for the United States government
Use the data in the third column, “Dei cit Surplus,” to determine how many years since 1960 the budget has shown a surplus and how often a dei cit has occurred. Based on the data in Table 1.2, identify the three years with the highest deficits as a percentage of GDP. Based on your findings for Requirement b, regarding the year with the highest deficit as a percentage of GDP, go to Table 1.1 and calculate the deficit for that year as a percentage of revenue.
Identify the i ve departments that seem to have changed the most from the Clinton years to the Bush years. Undistributed offset receipts." Note, if you want to approach this task more precisely, you can calculate the average percentage for each department for the eight years each president served and compare the two averages. The Gpoaccess website includes a spreadsheet version of the historical data tables, which allows for a reasonably easy Excel analysis.
Writing Assignment Continuous budgeting
Ethical Dilemma Bad budget system or unethical behavior?
Simmons' task of deciding how the money should be spent; that is the task of the school board. Simmons that if the money is not spent by the fiscal close date, the school board will likely reduce next year's budget allocation. Cleaver's last words were, “Don't blame me if parents of West High students complain about East High having more equipment.
Explain how participatory budgeting could improve resource allocation for the Harris County School District.
Spreadsheet Assignment Using Excel
Spreadsheet Assignment Mastering Excel
