ACC 118 Strategic Business Analysis

Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

Lesson title: FINANCIAL PLANNING AND BUDGETING (CONT.) Materials:

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Lesson Objectives: SAS

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At the end of this module, I should be able to: References:
1. prepare the ending finished goods inventory budget and cost Timbang, F. L. (2015). Financial
of goods sold budget Management, Part 1. Quezon City:

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2. accomplish the budgeted income statement C & E Publishing, Inc.
3. prepare the cash budget, budgeted balance sheet and budget

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for capital expenditures Managerial Accounting: The
4. use budgets for performance evaluation Cornerstone of Business

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Decisions, 4e. by Mowen, M. and

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Hansen D. (2012)

COC Teacher’s Guide

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Productivity Tip: Schedule doing practice drills similar to the ones in this module two more times this week.
Spacing your practice time will help you master the process!
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A. LESSON PREVIEW/REVIEW
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1) Introduction
Based on your recollection of your Basic Accounting lessons, can you state the different items
that can be found in an income statement? What does the income statement tell us about?
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In this module, we will learn about some of the components or supporting schedules of
operating budget and financial budget, such as the cash budget, budgeted balance sheet and
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other financial budget. Along with the other schedules previously discussed, we will be able to
accomplish the budgeted income statement.
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2) Activity 1: What I Know Chart, part 1 (3 mins)

Do you know anything about operating budget? Try answering the questions below by writing
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your ideas under the first column What I Know. It’s okay if you write key words or phrases that
you think are related to the questions.
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What I Know Questions: What I Learned (Activity 4)

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What is a budgeted income

statement?
What information do we get by
accomplishing a budgeted
income statement?

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

Are ending finished goods

inventory budget and cost of

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goods sold budget related?
What is a financial budget?

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What are its components?
May we use budgets for

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performance evaluation?

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B.MAIN LESSON
1) Activity 2: Content Notes

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⮚ supplies information needed for the balance sheet
⮚ serves as an important input for the preparation of the cost of
Ending finished goods sold budget
goods inventory
budget A
⮚ to prepare, the unit cost of producing finished goods must be
calculated by using information from the direct materials, direct
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labor, and overhead budgets
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Cost of goods ⮚ reveals the expected cost of the goods to be sold

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sold budget
Budgeted Income ⮚ the ultimate outcome of the operating budgets
Statement
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Cash budget ⮚ because cash flow is the lifeblood of an organization, the cash
budget is one of the most important budgets in the master
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budget
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⮚ basic structure includes cash receipts, disbursements, any

excess or deficiency of cash, and financing as shown below:
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Expected beginning balance PXX

Add cash receipts XX
Cash available PXX
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Less disbursements XX
Expected ending balance PXXX
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Cash budget: ⮚ consists of the beginning cash balance and the expected cash
Cash Available receipts
⮚ expected cash receipts include all sources of cash for the
period being considered
⮚ principal source is from sales

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 ACC 118 Strategic Business Analysis
Module #7

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Section: ____________ Schedule: __________________________________ Date: ___________

⮚ since a large proportion of sales is usually on account, a major

task of an organization is to determine the pattern of collection

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for its accounts receivable

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⮚ past experience can be used to determine what percentage of
credit sales are paid in the month of and months following sales,

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and create a schedule of cash collections on accounts
receivable

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Cash budget: ⮚ lists all planned cash outlays for the period

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Cash ⮚ all expenses that do not require a cash outlay are excluded
Disbursements

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⮚ may require care in handling payments on account

Cash budget: ⮚ Some companies expand the basic cash budget format by
Cash Excess or adding lines to show any borrowing or repayment necessary to
Deficiency
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achieve a minimum desired cash amount.
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⮚ the preliminary ending cash balance is called cash excess or
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deficiency
⮚ The cash excess or deficiency line is compared to the minimum
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cash balance (or lowest amount of cash acceptable as noted by

company policy).
⮚ If a cash deficiency exists with less cash on hand than is
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needed, the company usually obtains a short-term loan.

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⮚ A cash excess is usually used to repay loans or used to make

temporary investments.
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Cash Budget:
Borrowings and Borrowings and Repayments:
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Repayments, ⮚ If a company converts its preliminary cash balance line to a cash

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Ending Cash excess (deficiency) line, it may be borrowing or repaying money.

Balance
⮚ If there is a deficiency, this section shows the necessary amount
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to be borrowed.
⮚ When excess cash is available, this section shows planned
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repayments, including interest expense.

Ending Cash Balance:

⮚ last line of the cash budget

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

⮚ the planned amount of cash to be on hand at the end of the

period after all receipts and disbursements, as well as

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borrowings and repayments, are considered

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Budgeted ⮚ depends on information contained in the current balance sheet
Balance Sheet

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and in the other budgets in the master budget
⮚ explanations for the budgeted figures are typically provided in
the footnotes

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Using Budgets for Performance Evaluation

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Budgets are often used to judge the performance of managers. Bonuses, salary
increases, and promotions are all affected by a manager’s ability to achieve or beat budgeted
goals.

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Positive behaviour occurs when the goals of each manager are aligned with the goals
of the organization and each manager has the drive to achieve them.
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The alignment of managerial and organizational goals is often referred to as goal
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congruence. If the budget is improperly administered, subordinate managers may subvert the
organization’s goals.
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Dysfunctional behaviour is individual behaviour that is in basic conflict with the goals of
the organization.

Key features that promote a reasonable degree of positive behaviour include:

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Frequent Frequent, timely performance reports allow managers to know how

feedback on successful their efforts have been, to take corrective actions, and to change
performance plans as necessary
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Monetary and Incentives are the means an organization uses to influence a manager to
nonmonetary exert effort to achieve an organization’s goal.
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incentives Traditional organizational theory assumes that employees are primarily

motivated by monetary rewards, they resist work, and they are inefficient
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and wasteful.
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Monetary incentives are used to control a manager’s tendency to shirk and

waste resources by relating budgetary performance to salary increases,
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bonuses, and promotions.

Nonmonetary incentives, including job enrichment, increased responsibility

and autonomy, and recognition programs can be used to enhance a
budgetary control system.
Participative Allows subordinate managers considerable say in how the budgets are
budgeting established

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

Increased responsibility and challenge inherent in the process provide

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nonmonetary incentives that lead to a higher level of performance

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Three potential problems:
● setting standards that are either too high or too low

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● building slack into the budget (often referred to as padding the
budget)

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- exists when a manager deliberately underestimates revenues or

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overestimates costs in an effort to make the future period appear
less attractive in the budget than they think it will be in reality

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● pseudoparticipation
- top management assumes total control of the budgeting process,
seeking only superficial participation from lower-level managers;
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simply obtains formal acceptance of the budget from subordinate
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managers, not seeking real input
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Realistic Budgets should reflect operating realities, including the following:

standards ● Actual Levels of Activity
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● Seasonal Variations
● Efficiencies
● General Economic Trends
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Controllability Costs whose level a manager can influence

of costs
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If noncontrollable costs are put in the budgets of subordinate managers to

help them understand that these costs also need to be covered, then they
should be separated from controllable costs and labeled as noncontrollable.
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Multiple While financial measures of performance are important, overemphasis can

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measures of lead to a form of dysfunctional behavior called milking the firm or myopia.
performance
Myopic behavior occurs when a manager takes actions that improve
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budgetary performance in the short run but bring long-run harm to the firm.
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Budgetary measures alone cannot prevent myopic behavior.

As follows are the format of the budgets mentioned above:

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

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2) Activity 3: Skill-building Activities

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Let’s practice! After completing each exercise, you may refer to the Key to Corrections for
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feedback. Try to complete each exercise before looking at the feedback.

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Use the given budgets below to answer Exercises 1-3.

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Exercise 1: Prepare an ending finished goods inventory budget assuming that the company
plans to have 200 units of finished goods at period end. The company uses 5 ounces of ink for
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each unit of its finished product.

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

Exercise 2: Prepare the cost of goods sold budget assuming the company has direct materials

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used of P22,880 and beginning finished goods inventory of P1,251.

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Exercise 3: Prepare the budgeted income statement of the company. Assume that the tax rate is

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40%.

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

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Exercise 4: From past experience, Texas Rex expects that, on average, 25 percent of total sales
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are on cash and 75 percent of total sales are on credit. Of the credit sales, Texas Rex expects
that 90 percent will be paid in cash during the quarter of sale, and the remaining 10 percent will
be paid in the following quarter. Texas Rex Inc. expects the following total sales:
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Quarter 1 P10,000
Quarter 2 P12,000
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Quarter 3 P15,000
Quarter 4 P20,000
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The balance in accounts receivable as of the last quarter of 2011 was P1,350. This will be
collected in cash during the first quarter of 2012. Prepare a schedule showing cash receipts
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from sales expected in each quarter of 2012.

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

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Exercise 5: Tierro Company budgeted the following information for 2020:

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May June July August
Budgeted Purchases P104,000 p110,000 P102,000 P100,000

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● Cost of goods sold is 40% of sales. Accounts payable is used only for inventory
acquisitions.

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● Tierro Co purchases and pays for merchandise 60% in the month of acquisition and 40%

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in the following month.
● Selling and administrative expenses are budgeted at P40,000 for May and are expected

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to increase at 5% per month. They are paid during the month of acquisition. In addition,
budgeted depreciation is P10,000 per month.
● Tierro Co pays P4,500 per month for its 6% note payable and interest.
●
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Income taxes are P38,400 for July and are paid in the month incurred.
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How much are the budgeted cash disbursements for July?
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Exercise 6: Visual Inc. has asked Allan and Maebeth for a budgeted balance sheet for the year
ended December 31, 2020. The following information is available:
a. The cash budget shows an expected cash balance of P26,000 at December 31, 2020.
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b. The 2020 sales budget shows total annual sales of P500,000. All sales are made on
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account and accounts receivable at December 2020 are expected to be 8%of annual
sales.
c. The merchandise purchases budget shows budgeted cost of goods sold for2020 of
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P210,000 and ending merchandise inventory of P21,000. 20% of the ending inventory is
expected to have not yet been paid at December 31, 2020.
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d. The December 31, 2020 balance sheet includes the following balances: Equipment
P127,000, Accumulated Depreciation P52,000, Common Stock P68,000, and Retained
Earnings P21,000.
e. The budgeted income statement for 2020 includes the following: depreciation on
equipment P6,000, federal income taxes P21,000, and net income P41,800. The income
taxes will not be paid until 2024.

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

f. In 2020, management does not expect to purchase additional equipment or to declare

any dividends. It does expect to pay all operating expenses, other than depreciation, in

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cash.

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Prepare an unclassified budgeted balance sheet at December 31, 2020.

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3) Activity 4: What I Know Chart, part 2

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It’s time to answer the questions in the What I Know chart in Activity 1. Log in your answers in
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the table.
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4) Activity 5: Check for Understanding

1. Encircle the letter of your choice. Which of the following is an operating budget?

a. budgeted statement of cash flows

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b. capital expenditures budget

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c. budgeted income statement

d. cash budget
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2. Describe some problems with participative budgeting.

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C. LESSON WRAP-UP
Activity 6: Thinking about Learning

Congratulations for finishing this module! Shade the number of the module that you finished.

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

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Did you have challenges learning the concepts in this module? If none, which parts of the module

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helped you learn the concepts?

__________________________________________________________________________________

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Some question/s I want to ask my teacher about this module is/are:

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__________________________________________________________________________________
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FAQs
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1. Is the ending inventory related to the amount of profit for a certain period?
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⮚ Yes, ending inventory and profit have direct relationship. In the computation of the Cost of
Goods Sold, high ending inventory results to low cost of goods sold, which in effect, results to
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high gross income.

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Homework:
Study in advance:
● Financial budget
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KEY TO CORRECTIONS
Answers to Skill-Building Exercises
Exercise 1: Ending finished goods inventory budget
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Quarter
Source 1 2 3 4
Received on account from: P2,500 P3,000 P3,750 P5,000
Quarter 4, 2011 1,350

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 ACC 118 Strategic Business Analysis
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Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

Quarter 1, 2012 6750a 750b

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Quarter 2, 2012 8,100c 900d
Quarter 3, 2012 10,125e 1,125f

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Quarter 4, 2012 13,500g

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P10,600 P11,850 P14,775 P19,625

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a d g
(P10,000 x 0.75)(0.9) (P12,000 x 0.75)(0.1) (P20,000 x 0.75)(0.9)

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b e
(P10,000 x 0.75)(0.1) (P15,000 x 0.75)(0.9)
c f

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(P12,000 x 0.75)(0.9) (P15,000 x 0.75)(0.1)

Exercise 2: Cost of goods sold budget

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Answer: Cash disbursements:

Cash paid for July purchases (60% x P102,000) P 61,200
Cash paid for June purchases (40% x P110,000) 44,000
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Cash paid for July selling and admin (P40,000 x 1.05 x 1.05) 44,100
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Cash paid for note payment and interest 4,500

Cash paid for income taxes 38,400
Total cash disbursements P192,200
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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

Exercise 3: Budgeted Income Statement

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Allan and Maebeth
Budgeted Balance Sheet
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December 31, 2020

Assets
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Cash P26,000
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Accounts Receivable (8% x P500,000) 40,000

Merchandise Inventory 21,000
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Equipment P127,000
Less: Accumulated Depreciation 58,000 69,000
Total assets P156,000
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Liabilities and Stockholder’s Equity

Accounts Payable (20% x P21,000) P 4,200
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Income taxes payable 21,000

Common stock 68,000
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Retained earnings (P21,000 + P41,800) 62,800

Total liabilities and stockholder’s equity P156,000

Activity 5: Check for Understanding

1. C

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 ACC 118 Strategic Business Analysis
Module #7

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

2. Answers may slightly vary

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1. Standards may be set too high. This can discourage managers/employees from even trying to
meet the standards. Alternatively, standards can be set too low. This will not encourage workers to

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stretch to meet achievable (yet higher) standards.

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2. Managers may pad the budget. Managers know that the budget sets the standards against which
their work will be measures. Not surprisingly, managers may prefer an easier standard, with
budgetary slack built in.

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3. Pseudoparticipation may be more the rule than participation. Here, top management sets the
budget and does not seek or use input from lower level managers. The so-called participation is

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simply the opportunity for lower level managers to formally acknowledge the budget.

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