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Financial Manamegent Prelim Module
Financial Manamegent Prelim Module
Financial Manamegent Prelim Module
Marylin L. Asumbra
Aldon M. Francia
Table of Contents
Course Description: This course provides the students an understanding of the financial
management methods used for analyzing the benefits of various sources of finance. It includes
the following topics, overview of financial management; financial statement analysis, financial
forecasting, planning and budgeting; the mathematics of time value of money; management of
cash and marketable securities; receivables management; inventory management, working capital
policy and sources of short-term and medium-term financing;
capitalexpendituresandinvestments,long-termfinancialplanningandtreasury management
Course Requirements:
Assessment Tasks -60%
MajorExams -40%
PeriodicGrade 100%
Introduction
The business is created for the purpose of maximizing the shareholder’s wealth. The
management must be able to track the overall performance of the business. This could be
done by preparing the different Financial Statements (FS). The said FS aid the decision
makers and the management in making decision for the business. Needless to say, these
financial statements speak for the business.
There are different ways in analyzing the financial statement of a business. The
introductionofthedifferentfinancialstatements,theuseandcomputationofthecommon-size
financialstatementsaswellasthe inherentlimitationsarethetopicsincludedinthismodule.
Learning Outcomes
6. calculate the major indicator differences (increase or decrease) in peso form that
1
Lesson 1. Financial Statements (Cabrera & Cabrera, 2017)
The financial statement preparation is vital for decision making process. These
statements will give the decision makers an overall insight on the financial condition of the
business.
c. Statement of CashFlow
This statement shows the inflows and outflows of cash for a specific
period. In this statement, transactions that involve cash are being exposed. It is
important to know whether the business has sufficient cash to support its
operation thus, the statement of cash flow is created for this purpose.
2
Lesson 2. General Approach to FS analysis (Cabrera et. al., 2017)
What is FS analysis?
The FS analysis is the method of examining the FS of a business for the
purpose of making decision. Outside parties use this to understand the overall
health of an organization, as well as to assess its business worth and financial
performance.Internalmanagementuseitasafinancialmanagementreportingtool.
b. Short-term solvencyanalysis
Solvencyratioscalculatetheabilityofanenterprisetopayitslongterm debt,
as well as the interest added to it. Solvency ratios, as part of the financial ratio
study, help the company owner assess the long-term survival chances for
theorganization.Solvencyratiosareconfusedwithliquidityratios,attimes.Both
evaluate the financial health of acompany.
3
e. OtherConsiderations
1. Quality ofearnings
Thequalityofearningsofanorganizationisexposedbydiscardingany
irregularities, accounting tricks or one-time incidents that could distort the
actual results bottom-line figures. Once these are removed, the proceeds
derived from higher sales or lower costs can be clearlyseen.
3. Transparent financialreporting
In order for the analysis to be useful, a transparent financial reporting
is needed. It means that the financial statements being presented must be
concise, clear and free from bias.
a. Informationderivedareonly―indicators‖ofprofitabilityandfinancialstrengthbut not
absolutemeasures
b. Limitation inherent in accounting data due to some factors, like, failure to reflect
changes in purchasing power,etc.
c. Limitation of performance measuresused
d. Management may influence the outcome of financialstatements.
4
c. Gross profit variation analysis – involves analysis the adequacy or inadequacy
of gross profit which determine the final results ofoperations
d. Cash flow analysis- involves the analysis of the company’s cash disbursements
and receipts in terms of investing, operating, and financingactivities.
e. Financial ratios- implies the existence of mathematical relationships between
accounts listed in the financialstatements
Assessment Task 1
I. QUESTIONS
1. What is the objective of financial statementanalysis?
2. What are some of the indications of satisfactory short-term solvency or workingcapital
position of a businessfirm?
3. What are some of the tests of a sound or healthy long-term financialposition?
4. Give some indications of managerial efficiency in the use of companyresources.
5. What are the most commonly used techniques in the analysis and interpretationof
financialstatements?
6. What are the steps involved in using trend percentages in financialanalysis?
7. Distinguish between horizontal and vertical analysis of financial statementdata
8. What is the basic objective in looking at trends in financial ratios and otherdata?
9. Define trendpercentages
10. Discuss the steps in analyzing financial statements using trendpercentages.
11. In financial statement analysis, what is the basic objective of observing trends indata
and ratios? Suggest some other standards ofcomparison.
12. Distinguish between trend percentages and component percentages. Which
would be better suited for analyzing the change in sales over a term ofseveral
years?
13. NetssalesofthePremiereGeneralStorehavebeenincreasingatareasonable
rate,butnetincomehasbeendecliningsteadilyasapercentageofthesesales. What
appears to be theproblem?
5
14. UnderwhatcircumstanceswouldyouconsideracorporatenetincomeofP1millionfor
theyearasbeingunreasonablylow?Underwhatcircumstanceswouldyou considera
corporate profit of P1 million as being unreasonablyhigh?
III. PROBLEMS
6
d. Notes receivable..................................... 120,000 -0-
e. Notes payables........................................ 860,000 800,000
f. Cash......................................................... 82,400 80,000
g. Sales.................................................. 990,000 900,000
Selected information from the financial statements of Yellow Harvest includes the following:
2020 2019
Netsales…………………………………… P2,200,000 P2,000,000
Totalexpenses…………………………….. 1,998,000 1,800,000
Required:
a. Compute the percentage change in 2020 for the amounts of (1) net sales and (2) total
expenses
b. Usingtheinformationdevelopedinaparta,expressyouropinionastowhetherthe
company’s net income for2020:
1. Increased at a greater or lower percentage rate than did netsales.
2. Represented a larger or smaller percentage of net sales revenue than in 2019. For
eachanswer,explainyourreasoningwithoutmakinganycomputationsorreferences to
pesoamounts.
7
XYZ Corporation
Statement of Financial Position
As of December 31
Change
XYZ Corporation
Income Statement
Years ended December 31
8
(P thousands)
Change
Required
1. Compute the missing changes in peso amounts and percentages in theabove
statements
2. Evaluate the company’s short-term financial position, leverages, managerial efficiency
and Profitability using the increase-decrease method ofanalysis.
IV. MULTIPLECHOICE
9
c. verticalanalysis
d. common-sizestatements
10
c. Interim financialstatements
d. Analysis of the past year'soperations
11.In each of the past five years, the net sales of Beta Co. have increased at abouthalf
the rate of inflation, but net income has increased at approximately twice the rate of
inflation. During this period, the company's total assets, liabilities and equityhave
11
remained almost unchanged; dividends are approximately equal to net
income.These relationships suggest (indicate all correct answers):
a. Management is successfully controlling costs andexpenses
b. The company is selling more merchandise everyyear
c. The annual return on assets has beenincreasing
d. Financing activities are likely to result in a net use ofcash
12. Holly Corporation's net income was P400.000 in 2018 and P160,000 in 2019.What
percentage increase in net income must Holly achieve in 2020 to offset the decline
in profits in2019?
a.60% c. 600%
b.150% d.67%
13. Infinancialstatementanalysis,themostdifficultofthefollowingitemstopredictis
whether:
a. The company's market share is increasing ordeclining
b. The company will be solvent in sixmonths
c. Profits will increase in the comingyear
d. The market price of share capital will rise or fall over the nextmonths
Summary
Review of the financial statements gives an insight as to what is going to occur in the
future.Basefromthecurrentfinancialinformation,financialStatementsusersdetermineifthe
situation is improving, deteriorating or staying constant. They gain insight into the direction in
which future results are likely to shift by comparing existing data which are similar from
previousperiod.
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to assess how the business's position in question is comparable with certain performance
expectations.
Financial ratios highlights movements, relationships, and patterns that are very hard
todiscern,giventhattheunprocessedunderlyingdatastandonitsown. Financialdataratios are
also easier to comprehend through organizing the data into your point ofview.
Reference
Cabrera, E.B., & Cabrera, G.A., (2017). Management Accounting: Concepts and
Applications. Manila, Philippines: Conanan Enterprises
13
MODULE 2
FINANCIAL STATEMENT ANALYSIS – PART 2
Introduction
Thefirstmodulefocusesonthepart1ofthefinancialstatementanalysis.Thismodule
willfocusonthecomputationofthefinancialratios,itspurposeandlimitations,aswellasthe
illustration of the various types of ratios namely: activity ratios, profitability ratios, leverage
ratios, and liquidityratios.
Thefinancialratiosareimportantbecauseithelpstrackthecompany’soverallliquidity,
profitability,efficiencyandstability.Withtheavailabledatafromtheseratios,themanagement may
be able to take advantage of the opportunities and overcome the possiblethreats.
Learning Outcomes
1
4
Lesson 1. Definition of Financial ratios (Cabrera et. al., 2017)
Financial ratios are created by using numerical values taken from the financial
financial statement – income statement, financial position statement, and cash flow
statement – are used to perform quantitative analysis and to assess a liquidity position,
value, growth, margins, profitability, debt, yield rate, etc.
Purpose of FinancialRatios
By means of a ratio analysis, the user of the FS comes into control of measures that
provide overview into the profitability of the operational activities, the soundness of the
long-term and short-term financial condition of the company and the effectiveness with
The most significant limitations on the use of the ratio analysis are the following:
1. Ratiosmustbeusedonlyasfinancialinstruments,asweaknessorpowerindicators and
theFSofthebusiness.ThereareavarietyofshortcomingsintraditionalFSpreparation in
compliance with the PFRS that administrators have to rely on if the figures are
relevant.
3. Ratios are a combination of several different estimates — some are for a span of
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a. Own experience in the business (prioryear)
c. Management framework(Budget)
d. Rule ofthumb
a. The numerator and denominator must be based on quantities as of the same date ofthe
balance sheet when determining a ratio Thesame applies to percentages that use only
the income statement amounts. Exception: growth ratioarithmetic.
b. Ifthesumofanincomestatementandabalancesheetsumareusedtogethertomeasure a ratio,
the balance sheet amount will be calculated as an average of the value of the income
statement over the time periodspecified.
c. Iftheinitialbalanceofabalancesheetaccountisnotavailableandcannotbecalculated from the
data given, the ending balance is used as the averagebalance.
d. If transactions and/or purchases are made without making any distinction of whether
they'remadeoncreditorincash,assumptionsshallbemadeaccordingtotheratiobeing
calculated:
Turnover ratios: They make purchases and sales onaccount.
Cash flow ratios: purchases and sales are made incash.
e. As a rule it is assumed that an operating year has 360 days, except as otherwise
stipulated.
A year of 360 days is usually preferred, since this is compatible with a year of12
months and a month of 30 days;
Instead, a year can contain 365 calendar days, 300 working days or any number of
appropriatedays.
16
Lesson 4. Most Commonly Used Ratios (Cabrera et. al., 2017)
FINANCIAL RATIOS
Current Ratio Current Assets It is measure of adequacy of
(Banker’s Ratio) Current Liabilities working capital. It is the primary
(Working Capital Ratio) test of liquidity to meetcurrent
obligations from current assets.
Quick Ratio It measures the number of times
(Acid Test Ratio) Quick Assets that the current liabilities could be
Current Liabilities paid with the available cash and
near-cash assets (i.e.,cash, current
receivables and marketable
securities).
Working Capital Activity Ratios (Efficiency Ratios)
17
Average Age of Receivables 360 days It indicates the length of
(Average Collection Period) Payables Turnover time during which
(Days’ Sales in Receivable) payables remain unpaid.
Current Assets Turnover Cost of Sales + Itmeasuresthemovement
OperatingExpense and utilization of current
s** assets to meetoperating
Average Current Assets requirements.
* TEST OFSOLVENCY
Time Interest Earned EBIT It determines the extent to which
Interest Expense operations cover interest expense.
Debt-Equity Ratio Total Liabilities Proportion of assets provided by
Total Equity creditors compared to that
provided byowners
Debt Ratio Total Liabilities Proportion of total assets provided
Total Assets by creditors
Equity Ratio TotalEquity Proportion of total assets provided
TotalAssets by owners.
TEST OFPROFITABILITY
Return on Sales Income Determines the proportion ofsales
Net Sales that went into company’searnings
Return on Assets Income Efficiency with which assets are
Average Assets used to operate the business.
MARKET TEST
Price-Earnings (PE) ratio Price Per Share It indicates the number of pesos
Earnings Per Share required to buy P 1 of earnings
Dividend Per Share Measures the rate of return in the
Dividend Yield Price Per Share investor’s common stock
investments.
Dividend Pay-out Dividend PerShare It indicates the proportion of
Earnings PerShare earnings distributed as dividends
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investment by owners and
weakness in trading on the
equity*
Fixed Assets to Total Fixed Assets (Net) Indicates possible over-expansion
Assets Total Assets of plant and equipment
Sales to Fixed Assets Net Sales Test roughly the efficiency of
(Plant Turnover) Fixed Assets (Net) management in keeping plant
properties employed.
Book Value Per Share- Common Shareholders’ Equity Measures recoverable amount by
Common Stock Common Shares Outstanding common stockholders in the event
of liquidation if assets are realized
at their book values
Times Preferred Dividend Net Income After Taxes It indicates ability to provide
Earned Preferred Dividends dividends to preferred
stockholders.
Capital Intensity Ratio Total Assets Measures efficiency of the firm to
Net Sales generate sales through
employment of its resources
Times Fixed Charges Net Income before taxes & Measure ability to meet fixed
Earned fixedcharges charges.
(fixed charges + sinking fund
payment)
19
Assessment Task 2
Prepare common size income statements for Wise Company, a sole proprietorship, for the
two years shown below by converting the peso amounts into percentages. For each year,
sales will appear as 100% and other items will be expressed as a percentage of sales.
(Incometaxesarenotinvolvedasthebusinessisnotincorporated.)Commentonwhetherthe
changes from 2018 to 2019 are favorable orunfavorable.
2019 2018
Sales ₱ 500,000.00 ₱ 400,000.00
Cost of Goods Sold 330,000.00 268,000.00
Gross Profit ₱ 170,000.00 ₱ 132,000.00
Operating Expenses 140,000.00 116,000.00
NetIncome ₱ 30,000.00 ₱ 16,000.00
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Problem 2 (Common-Size Income Statement)
Rainbow Company
Comparative IncomeStatement
For the Years Ended June 30, 2019, and 2018
2019 2018
Sales ₱ 5,000,000.00 ₱ 4,000,000.00
Less: Cost of Goods Sold 3,160,000.00 2,400,000.00
Gross Margin ₱ 1,840,000.00 ₱ 1,600,000.00
Selling Expenses 900,000.00 700,000.00
Administrative Expenses 680,000.00 584,000.00
Total Expenses 1,580,000.00 1,284,000.00
Net Operating Income ₱ 260,000.00 ₱ 316,000.00
Interest Expense 70,000.00 40,000.00
Net Income Before Taxes ₱ 190,000.00 ₱ 276,000.00
Thepresidentisconcernedthatnetincomeisdownin2019eventhoughsaleshaveincreased
duringtheyear.Thepresidentisalsoconcernedthatadministrativeexpenseshaveincreased,
since the company made a concerted effort during 2019 to pare "fat" out of theorganization.
Required:
1. Express each year's income statement in common-size percentages. Carry
computations to one decimalplace.
2. Comment briefly on the changes between the twoyears.
21
Problem 3 (Financial Ratios)
Marina Company
Statement of Financial Position
June 30, 2020
Assets
Current Assets
Cash P 21,000.00
Accounts Receivables 160,000.00
Merchandise Inventory 300,000.00
Prepaid Expenses 9,000.00
Total Current Assets P 490,000.00
Property, Plant and Equipment 810,000.00
Total Assets P 1,300,000.00
22
Marina Company
Income Statement
For the month ended June 30, 2020
Sales P 2,100,000.00
Less: Cost of Goods Sold 1,260,000.00
Gross Margin P 840,000.00
Less: Operating Expenses 660,000.00
Net Operating Income P 180,000.00
Less: Interest Expenses 30,000.00
Net Income before Taxes P 150,000.00
Less: Income Taxes 45,000.00
Net Income P 105,000.00
Account balances at the beginning of the company’s fiscal year were: accounts receivable,
P140,000; and inventory, P260,000. All sales were on account.
Required:
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Problem 4 (Financial Ratio)
Refer to the financial statements for Marina Company in the previous problem. Assess at the
beginning of the year totaled P1,100,000, and the equity totaled P725,000.
Required:
Summary
Module 2 discusses the significance of the different ratios that measure liquidity,
profitabilityandstabilityofacompany.Italsoexplainsthelimitationsofusingratiostoanalyze a
company’s performance during the year as qualitative factors are not considered in the
computations. This module specifically shows the formulas used in computing for the
profitability, liquidity as well as the stability of the company under study. The interpretation of
theratioswillbeveryhelpfulintheanalysisofperformanceofacompanyforagivendateand period
for decision makingpurposes.
References
Cabrera, E.B., & Cabrera, G.A., (2017). Management Accounting: Concepts and
Applications. Manila, Philippines: Conanan Enterprises.
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MODULE 3
FINANCIAL FORECASTING
Introduction
It is a need for a business to do forecasting. This forecast will help the management
to do their work effectively and efficiently towards the achievement of the business’ overall
goals. It is evident that a business must be able to foresee the events and things that might
happen in order to counter the bad ones.
Theanalysisoftheavailabledatacanhelpthemanagementtomakestrategicdecision and
goals for the long-run. The management uses the historical data, especially the financial
data, to make this financialforecast.
Learning Outcomes
2
5
Lesson 1. Nature of Financial Forecasting (Cabrera, 2015)
Nature of FinancialForecasting
The need for raising funds externally is one of the concerns for the firm in anticipating
events even before they occur. Therefore it is being done in the planning stage where the
management may be able to base their operating plans from the set of projected financial
statements.
Projected financial statement preparation begins with a revenue forecast for the next
five years or more. Then, the assets needed to achieve the revenue target are determined,
and a decision is taken about how to fund the assets required.
Steps in financialforecasting
a. Determination of the amount of funds needed for a givenperiod
b. Determine the amount of money the firm will generate internally on through
operations
c. Calculate the additional funds in extend financing required three the useof:
1. Projected on Pro-forms Financial Statement method
2. Formulamethod
26
Project liability and shareholders' equity accounts, which will not rise instantaneously
withsales
Determine additional fundsneeded.
Formula Method
The AFN may be calculated as follows:
27
Assessment Task 3
I. QUESTIONS
28
3. When using the percent-of-sales method in forecasting funds needed, which ofthe
following is nottrue?
a. As the dividends payout ratio decreases, the required new funds alsodecrease
b. Required new funds decrease as profits marginsincrease
c. Required new funds increase as accumulated depreciationincreases
d. As the tax rate increases, the required new fundsincrease
4. BH Inc. determines that sales will rise from P300,000 to P500,000 next year.
Spontaneous assets are 70% of sales and spontaneous liabilities are 30% ofsales.
BH has 10% profit margin anda
40% dividend payout ratio. What is the level of required newfunds?
a. P50,000
b. P20,000
c. P 100,000
d. BH is in balance and no new funds are needed
5. A firm has targeted a 40% growth in sales this year. Last year’s cash as a percent of
sales was 15%, accounts receivable 30%, and inventory 35%. What percentage
growth in current assets is required to support the growth in sales under the percent-
of-sales forecastingmethod?
a. 32%
b. 26%
c. 18%
d. Not enough information to tell
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7. Firms that successfully increase their rates of inventory will, among otherthings,
a. be able to reduce their borrowingneeds
b. be able to reduce their dividend paymentsstockholders
c. find it more difficult to be given credit by their resourcesuppliers
d. have a greater need for high balances in their cashaccounts
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11. Which of the following statements isincorrect?
a. A lower dividend payout ratio will decrease the firm’s need forborrowing
b. A higher growth rate in sales will require more externalfunds
c. sales projections and the ability to accurately predict the future havea large
impact on cash flowtargets
d. The generations of sales and profits ensures that there will be adequatecash
on hand to meet financial obligations as they comedue
12. A firm forecasted sales of P3, 000 in April, P4,500 in May and P6,500 in June. All
sales are on credit. 30% is collected the month of sales and the remainder the
following month. What will be the balance in accounts receivable at the end of
June?
a.P1,950
b.P6,500
c.P4,550
d.P5,100
13. In general, the larger the portion of a firm’s sales that are on credit,the
a. lower will be the firm’s need toborrow
b. higher will be the firm’s need toborrow
c. more rapidly credit sales will be paidoff
d. more the firm can buy raw oncredit
14. The need for an increase or decrease in short term borrowing can be predictedby
a. ratioanalysis
b. trendanalysis
c. a cashbudget
d. an incomestatement.
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15. The following is the statement of financial position for 2014 for marvellousInc.
Marvelous Inc
Statement of Financial Position
2014
Assets Liabilities &Equity
Cash P150,000 Accounts Payable P 900, 000
Accounts receivable 900,000 Notes payable 300, 000
Inventory 600, 000 Accrued expenses 75,000
Current assets 1,650,000 Current liabilities 1,275,000
Fixed assets 600,000 Ordinary shares 750,000
Retained earnings 225,000
Total assets P2,250, 000 Total liabilities & equity P2,250,000
Salesfor2014wereP3,000,000.Salesfor2015havebeenprojectedto increaseby20%.
Marvelous Inc. is operating below capacity. The company has an 8% return on sales70%
is paid out asdividends.
16. A company had sales last year of P10 million, with net income equal to 6% of sales.
This year the sales are expected to be P11.2million. The accounts receivable balance
was P1.5 million at the end of last year. Using the percentage-of-sales method, the
accounts receivable balance at the end of this year is forecasted tobe
a. P1.572million.
b. P1.68million
c. P2.172million
d. P2.7million
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17. A company had P500,000 of sales for the year just ended and is projecting sales of
P600,000 for the coming year. For every P1 increase in sales, 38 centavos of additional
financing is required for the purchase of additional assets. The projected profit margin is
20%,and60%ofprofitswillberetainedforreinvestmentinthecompany.Theamountof
additional external financing needed by the company in the coming yearis
a. 0
b. P38, 000
c. P86, 000
d. P110, 000
19. A downward-sloping yield curve depicting the team structure of interest rates impliesthat
a. Interest rates have declined over recentyears
b. Interest rates have increased over recentyears
c. Prevailing short-term interest rates are lower than prevailing long-term interest
rates
d. Prevailing short-term interest rates are higher than prevailing long-term interest
rates
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III. PROBLEMS
Problem 1.
Odette Electronics has 90 operating plants in seven southwestern states. Sales for
last year were P100 million, and the statement of financial position at year-end is
similar in percentage of sales to that of previous years (and this will continue in the
future). All assets (including fixed assets) and current liabilities will vary directly with
sales.
Odette’s has an after-tax profit margin of 7 percent and a dividend payout ratio of 40
percent.
If sales grow by 10 percent next year, determine how much of new funds are needed to
finance the growth.
34
Problem 2
Tess’ Shop, Inc., a national clothing chain, had sales of P300 millions last year.
The business has a steady net profit margin of 8 percent and a dividend payout ratio of 25
percent. The statement of last year is shown below.
Statement of Financial Position
End of Year
(P millions)
Assets Liabilities &Equity
Cash……………………..….P20 Accountspayable........................... P70
Accountsreceivable………...25 Accruedexpenses… ......................... 20
Inventory………………….... 75 Otherpayables… ..............................30
Plant andequipment………...120 Ordinary shares… ........................... 40
Retainedearnings… ....................... 80
Totalassets…………………P240 Total liabilitiesandequity… .......... P240
The firm’s marketing staff has told the president that in the coming year there will be a large
increase in demand for overcoats and wool stacks. A sales increase of 15 percent is
forecasted for the company.
All statement of financial position items are expected to maintain the same percent-of-sales
relationships as last year, except for ordinary shares and retained earnings. No change is
scheduled in the number of ordinary shares outstanding, and retained earnings will change
as dictated by the profits and dividend policy of the firm. (Remember the net profit margin is
8 percent.)
a. Will external financing be required for the company during the comingyear?
b. Whatwouldbethe need forexternalfinancing ifthenetprofit margin wentup to9.5
percent and the dividend payout ratio was increased to 50 percent?Explain.
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Summary
Financial forecast estimates future revenue and expenditure for a company. Theyare
used to develop projections for income statement, balance sheets and other cash flow
forecasts.
The forecasted financial statement method begins with the projected sales, and then
the statement of comprehensive income should be ready to estimate the net loss or
net income generated by thecompany.
Based on the sales forecast, the amounts of assets necessary to support this sales
level are determined. Certain current assets as well as accruals and accounts payable will
increase spontaneously as the sales increases.
Itisnotsufficientonlytofindsourcesoffinance;thetimingofinflowoffundsmustalso be
synchronized with the outflow of investment expenditures. Cost of production and other
expenditures. Therefore, it is necessary to prepare a cash flow table showing the inflow and
outflowfinance.
Reference
36
MODULE 4
PLANNING AND BUDGETING
Introduction
It is true that the very foundation of the business’ success is through the effective
planning.Intheplanningstage,themanagementmaybeabletoidentifytheeventsthatneed to be
prioritized. In this stage, the budgeting process is also included. The events that the
business will implement in the future needs fund thus, it is a must that the management must
incorporate the budget as early aspossible.
Inthismodule,the introductionofthedifferentbudgetsnamely:operating,capitaland
financial budgets as well as the different terminologies are to bediscussed.
Learning Outcomes
3
7
Lesson 1. Budgeting (Cabrera, E. and Cabrera, G., 2017)
BudgetingTerminologies
a. Budget – a plan demonstrated in quantifiable form on the acquisition and use of an
entity's resources over a certain duration of time in thefuture.
b. Profitplanning–inabroaderperspective,itisawellthought-outoperationalplanwhich
involves setting of goal and objectives , as well as the methods in programs by which
such goals are to beachieved
c. Budgeting - tool of profit planning; act of preparing abudget
d. Budgeted Income Statement - refers to projection of revenues, expenses and
operating results for a specified period oftime.
e. Cash Budget – a period by period cash statement at the beginning of the budgeting
process, predicted cash receipts categorized by source; anticipated cash
disbursements, classified by structure, liability and form; and the resulting cash
position at the end of the fiscalperiod.
f. Financial Budget - Reference is made to the spending plan of the financial resources
as represented in the budgetary statement of the financial position and the cash
budget.
g. Fixed budget -projection of costs at a specific and one level of output (normally at
normal capacity) over a certain period oftime.
h. Flexible (variable) budget - Projection of costs at different stages of production over a
defined period oftime.
i. Participative budget – a budget designed using staff at all organizationallevels
j. Physical budget - budget expressed in material units, number of staff or number of
service units, rather than inpesos.
k. Planning budget (static budget) - another term for masterbudget.
l. Productionbudget-productionplanoftheresourcesrequiredtomeetcurrentdemand for
sales and guarantee a sufficient level ofinventory.
m. Program budget - budget for the major projects that the company intends topursue.
n. Operating budget - refers to business plans for the planning phase; involves the
budgeted revenue statement with all its supportingbudgets.
o. Responsibility budget - budget of the responsibilitycenter.
38
p. Rolling (continuous, progressive) budget - the budget that is formulated through the
year, that is to say, as one month passes, will be prepared for another month in the
future.
q. Sales budget - budget showing the amount of each good or service and the income
predicted to besold.
r. Traditional budgeting - a budgeting system that focuses on the incremental progress
from the prior year, implying that the operations of the prior year are vital and it must
becontinued.
s. Zero-based budgeting – a system for creating financial plans, starting with the
assumption that there is no action and justification for each program isneeded.
t. Imposed budgeting – a process in which top management prepares the budget with
no or little insight from staffmembers.
u. Budget committee – a group of key managers accountable for all policy issues
pertaining to the budget program and for organizing the preparation of thebudget.
v. Budget manual - this explains how the budget is being prepared and includes a
planning calendar and a distribution guidelines for all budgetschedules.
w. Budget report - actual performance is compared to budgetedperformance.
x. Life-cycle budget – approximate the incomes and expenditures of products over the
entire lifespan, starting with research and development, proceeding thru the phase of
introduction and growth, and then to the point of harvesting ordecline.
y. Activity-basedbudgeting–appliestothebudgetingofactivity-basedcostingprinciples.
z. Kaizenbudgeting-itassumesconstantimprovementofproductsorprocesses,usually
through many simple innovations instead of significant changes.
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Lesson 2. Advantages and Limitations of budgeting (Bagayao, 2019)
MASTER BUDGET
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Operating Budget – contains the projected revenues, cost and expenses, as well as the
forecasted net Income figure for a certain budget period.
Financial budget – usually composed of the budgeted balance sheet, cash budget and
budgeted cash-flow statement
a. Cash budget – shows the expected cash balance at the start of the budget period, the
projectedreceiptsanddisbursementofcashduringtheperiod,andtheexpectedending
cashbalance.
b. Budgeted balance sheet – Shows the projected balance of all the assets liability and
capital accounts at the end of the budgetperiod
c. Budgeted Statement of Changes in Owner’s Equity provided from the information in the
budgeted income statements and the changes between the projected balance sheet at
the start of the budgetary period and the budgeted balance sheet at the end of same
duration.
Capital expenditure budget – Contains planned acquisition of major items like plant and
equipment
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Assessment Task 4
I. QUESTIONS
1. ―As a practical matter, planning and control mean exactly the same thing.‖ Doyou
agree?Explain.
2. Budgets are half-used if they serve only as a planning device?Explain.
3. Whatarethe twomajorfeaturesofabudgetaryprogram?Whichfeature ismore
important?why?
4. Explain briefly how a budget can be used in costingproducts.
5. Why must sales and production becoordinated?
6. How can a labor hour budget be translated into a labor costbudget?
7. How are long-range plans for the acquisition of plant assets included incurrent
budgets?
8. What is the budget period? Is a budget prepared for a month, fora year, or for
some other interval of time?Explain.
9. What is rolling, continuous, or progressive budget?
10. Explain how a comparison of actual results with a budget can be applied inthe
control ofoperations.
11. Can a comparison of actual results with a budget lead to better futurebudget?
Explain.
12. What is a self-imposed budget? What are the major advantages of self-imposed
budgets? What cautions must be exercised in theiruse?
13. ―The principal purpose of the cash budget is to see how much cash the company
will have in the bank at the end of the year.‖ Do you agree?Explain.
14. How does zero-based budgeting differ from traditionalbudgeting?
15. What is a budget? What is budgetarycontrol?
16. Discuss some of the major benefits to be gained frombudgeting.
17. What is master budget? Briefly describe itscontents.
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18. Describe the flow of budget? Data in an organization. Who are the participants in
the budgeting process, and how do theyparticipate?
19. How can budgeting assist a company in planning its workforce staffinglevels?
II. MATCHINGTYPE.
Match the definitions enumerated on the right column with the terms on the left
column.
1. Salesforecast A. A quantitative benchmark for measuring
company achievement.
2. Managementbyexception B. A budget reflecting long-rangedecisions
of the company.
3. Responsibilityaccounting C. The most important input forbudget
preparation. All estimates of activity
depend upon this information.
4. Statement offinancialposition D. An integrated plan of action for thefirm
as a whole, expressed in financial term.
5. Performancebudget E. A system that relates costs to
organizational structure.
6. Objective F. An integrated statement ofresource
levels and theirsources.
7. Capitalexpendituresbudget G. A set of statements providingbroad
direction for the firm.
8. Profitplan I. The practice of focusing attention on
those activities where the actual
performance differs significantly from
plannedperformance.
9. Masterbudget J. A budget prepared after the fact,
showing what cost should have beenat
the actual level ofactivity.
10. Goals K. An operating budget for a specific
future period oftime
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III. EXERCISES
Exercise 1 (Schedule of expected Cash Collection)
Peak sales for Mideast Products, Inc., occur in August. The company's sales
budget for the third quarter showing these peak sales is given below:
July August September Total
Budgeted sales ................ P600,000 P900,000 P2,000,000 P2,000.000
From past experience, the company has learned that 20% of a month’s sales are
collected in the month of sale, that another 70% is collected in the month following
sale, and that the remaining 10% is collected in the second month following sale.
Bad debts are negligible and can be ignored. May sales totaled P430,000 and
June sales totaled P540,000.
Required:
1. Prepare a schedule of expected cash collections from sales, bymonth
and in total, for the thirdquarter.
2. Assume that the company will prepare a budgeted statement of financial
position as of September 30. Compute the accounts receivable as ofthat
date.
The company is now in the process of preparing a production budget for the third
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quarter. Past experience has shown that end-of-month inventories of finished goods
must equal 10% of the next month's sales. The inventory at the end of June was
3,000 units.
Required:
Prepare a production budget for the third quarter showing the number of units
to be produced each month and for the quarter in total.
Year2 Year3
First Second Third Fourth First
Budgeted production
incalculators........ 60,000 90,000 150,000 100,000 80,000
Required:
Prepare a materials purchases budget for chips, by quarter and in total, for
Year 2. At the bottom of your budget, show the peso amount of purchases for
each quarter and for the year in total.
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Exercise 4 (Direct Labor Budget)
The Production Department of the Laguna Plant of JC Corporation has submitted
the following forecast of units to be produced at the plant for each quarter of the
upcoming fiscal year. The plant produces high-end outdoor barbeque grills.
Each unit requires 0.40 direct labor-hours and direct labor-hour workers paid P11
per hour.
Required:
1. Construct the company's direct labor budget for the upcoming fiscal year,
assuming that the direct labor work force is adjusted each quarter to
match the number of hours required to produce the forecasted numberof
unitsproduced.
2. Construct the company's direct labor budget for the upcoming fiscal year,
assuming that the direct labor work force is not adjusted each quarter.
Instead, assume that the company's direct labor work force consists of \
permanent employees who are guaranteed to be paid for at least 1,800
hours of work each quarter. If the number of required direct labor-hours is
less than this number, the workers are paid for 1,800 hours anyway. Any
hours worked in excess of 1,800 hours in a quarter are paid at the rateof
1.5 times the normal hourly rate for direct labor.
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The company's variable manufacturing overhead rate is P1.75 per direct labor-
hour and the company's fixed manufacturing overhead is P35,000 per quarter.
The only noncash item included in the fixed manufacturing overhead is
depreciation, which is P15,000 per quarter.
Required:
1. Construct the company’s manufacturing overhead budget forthe
upcoming fiscalYear.
2. Compute the company’s manufacturing overhead rate (including both
variable and fixed manufacturing overhead) for the upcoming fiscalyear.
Round off to the nearest wholecentavos.
The company's variable selling and administrative expenses per unit are P2.75.
Fixed selling and administrative expenses include advertising expenses of
P12,000 per quarter, executive salaries of P40,000 per quarter, and depreciation
of P16,000 per quarter. In addition, the company will make insurance payments
of P6,000 in the 2nd Quarter and P6,000 in the 4thQuarter. Finally, property
taxes of P6,000 will be paid in the 3rd Quarter.
Required:
Prepare the company's selling and administrative expense budget for the
upcoming fiscal year.
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Exercise 7 (Cash Budget Analysis)
A cash budget, by quarters, is given below for a retail company. (000 omitted).
The company requires a minimum cash balance of P5,000 to start each quarter.
Quarter
_
1 2 3 4 Year
Cashbalance,beginning ..................... P9 P? P? P? P?
Add collectionsfromcustomers….. ? ? 125 ? 391
Totalcash available………………. 85 ? ? ? ?
Less disbursements:
Purchaseofinventory… .................. 40 58 ? 32 ?
Operatingexpenses…………... ? 42 54 ? 180
Equipmentpurchases… ................ 10 8 8 ? 36
Dividends…………………….. 2 2 2 2 ?
Totaldisbursement……………….. ? 110 ? ? ?
Excess (deficiency) of cash available
Ordisbursements… ...................... (3) ? 30 ? ?
Financing:
Borrowings……………………. ? 20 - - ?
Repayments (including interest)*.. - - (?) (7) (?)
Total financing……………………. ? ? (?) (?) ?
Cash balance, ending…………….... P? P? P? P? P?
Required:
Fill in the missing amounts in the table above.
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Summary
Budgeting is planning how to use the assets of the firm during the budgetingprocess.
Budgeting requires periodic planning; improves communication, coordination
and cooperation; pushes the quantitative measurement of plans and propositions; creates a
basis for performance assessment and directs the company's activities towards the
accomplishment of the goalsobjective.
The implementation of the budgetary program does not stop with the creation of the
master budget plan. Once the master budget plan has been prepared, follow-ups are
necessary to compare actual results with planned in budgeted figures. This is accomplished
throughthebudgetperformancereports,whichhighlightdeviationinvariancesthatmayserve as
guides for making the necessary correctiveactions.
References
Cabrera, E.B., & Cabrera, G.A., (2017). Management Accounting: Concepts and
Applications. Manila, Philippines: ConananEnterprises.
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