Chapter 08 – Lecture Notes
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a. The ending inventory in units (5,000)
is derived from the production
budget.
Learning Objective 7: Prepare a selling and
administrative expense budget.
G. The selling and administrative expense budget
i. Assume the information as shown to enable the
preparation of Royal’s selling and administrative
expense budget. This budget lists the budgeted
expenses for areas other than manufacturing and it
is typically a compilation of many smaller,
individual budgets.
1. The first step in preparing this budget is to
multiply the variable S, G & A rate by the
number of units sold.
2. The second step is to add in the fixed S, G
& A expenses to arrive at total S, G & A
expenses.
3. The third step is to deduct noncash S, G &
A expenses to arrive at cash disbursements
for S, G & A expenses.
Quick Check – S, G & A expense calculations
4. The same steps are followed for the months
of May and June to arrive at total cash
disbursements for S, G & A expenses for the
quarter of $230,000.
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Chapter 08 – Lecture Notes
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Learning Objective 8: Prepare a cash budget.
H. The cash budget
i. The format of the cash budget
1. This budget should be broken down into
time periods that are as short as feasible. It
consists of four major sections:
a. The receipts section lists all cash
inflows excluding cash received from
financing.
b. The disbursements section consists
of all cash payments excluding
repayments of principal and interest.
c. The cash excess or deficiency
section determines if the company
will need to borrow money or if it
will be able to repay funds previously
borrowed.
d. The financing section details the
borrowings and repayments projected
to take place during the budget
period.
Helpful Hint: The idea that the cash budget should
cover time periods as a short as possible should be
understood by students with checking accounts.
Fluctuations in cash flows can lead to a negative
balance during the month even though the balance is
positive at both the beginning and end of the month.
ii. Assume the information as shown to enable the
preparation of Royal’s cash budget.
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1. The first step in preparing this budget is to
calculate the total cash available ($210,000).
Notice:
a. The cash collections for April
($170,000) come from the schedule
of expected cash collections.
2. The second step is to calculate the total cash
disbursements ($230,000). Notice:
a. Each cash disbursement, except
dividends, comes from a schedule or
budget that had already been
prepared.
3. The third step is to calculate the excess
(deficiency) of cash available over
disbursements ($20,000).
4. The fourth step is to determine the
financing requirements and the ending cash
balance. Notice:
a. Because Royal maintains a $30,000
cash balance, it must borrow
$50,000 on its line-of-credit.
b. The ending cash balance ($30,000)
coincides with Royal’s minimum
requirement.
c. The ending cash balance for April
will carry forward to become the
beginning balance for May.
5. These four steps are repeated for the month
of May. The result is a $30,000 excess of
cash available over disbursements for May.
a. Since Royal must maintain a
minimum cash balance of $30,000, it
will not repay any of its loan in May.
Quick Check – cash budgeting calculations
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6. The same four steps are repeated for June.
The result is an excess of cash available of
$95,000.
a. This excess enables Royal to repay
the $50,000 in principal that was
borrowed plus interest on the loan of
$2,000 ($50,000 × 16% × 3/12).
b. The ending cash balance for the
quarter is $43,000.
7. Once the cash budget has been completed,
the budgeted income statement can be
prepared. The cash budget must be prepared
first so that the interest expense can be
determined for the budgeted income
statement.
Learning Objective 9: Prepare a budgeted income
statement.
I. The budgeted income statement
i. The numbers for the budgeted income statement
come from other budgets that have already been
prepared. More specifically:
1. The sale revenue comes from the sales
budget.
2. The cost of goods sold, on a per unit basis,
comes from the ending finished goods
inventory budget.
3. The selling and administrative expenses
come from the selling and administrative
expenses budget.
4. The interest expense comes from the cash
budget.
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Helpful Hint: Indicate that, for simplicity, income taxes
were not included in these budgets, but taxes must be
considered in a company’s budgeting process.
Learning Objective 10: Prepare a budgeted balance
sheet.
J. The budgeted balance sheet
i. Assume the information as shown to enable the
preparation of the budgeted balance sheet.
1. The budgeted balance sheet is prepared as
follows:
a. Cash ($43,000) is taken from the
ending cash balance of the cash
budget.
b. Accounts Receivable ($75,000) is
25% of June’s sales ($300,000).
c. Raw materials inventory ($4,600) is
calculated by multiplying the ending
inventory of raw material in pounds
(11,500) by the cost per pound
($0.40).
d. The finished goods inventory
($24,950) is taken from the ending
finished goods inventory budget.
e. Land, equipment, and common stock
are all given.
f. Accounts payable ($28,400) is 50%
of June’s purchases ($56,800).
g. The ending retained earnings
($336,150) is calculated by adding
net income ($239,000) to the
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beginning retained earnings
($146,150), and then subtracting
dividends ($49,000).