MASTER BUDGET - EXAMPLE

MASTER BUDGET - EXAMPLE Sales IN UNITS for the previous two months (of last quarter), as well as the sales forecast for next quarter are as follows: Sales Budget Units May sales (ACTUAL) 20 June sales (ACTUAL) 30 July sales (FORECAST) 30 August sales (FORECAST) 40 September sales (FORECAST) 50 The company forecasts that it will be able to sell its units for $10 each, as it did in May and June Therefore, the actual and forecasted sales IN DOLLARS per above are: Dollars May sales (ACTUAL) $200 June sales (ACTUAL) $300 July sales (FORECAST) $300 August sales (FORECAST) $400 September sales (FORECAST) $500

The company assumes it will collect sales (Cash!!) as follows: 70% in the month of sales, 20% in the month following sales, and the final 10% two months following sales (This causes the "diagonal" appearance in the table below) All sales are assumed to be on account Based the above information, collections are budgeted as follows for the next quarter: Expected Cash Collections July August Sept Total Qtr May sales ($200) 20 [10%] 20 June sales ($300) 60 [20%] 30 [10%] 90 July sales ($300) 210 [70%] 60 [20%] 30 [10%] 300 August sales ($400) 280 [70%] 80 [20%] 360 September sales ($500) 350 [70%] 350 TOTALS $290 $370 $460 $1,120 (This bottom cash "TOTALS" row will be carried forward onto the "Cash Budget")

The company would like to maintain 10% of the next month's sales in inventory The inventory balance at the end of June was 3 units Therefore, based on the sales forecast and inventory requirements, the production (purchases) budget is as follows: Merchandise Purchases Budget (in units) Units July August Sept Sales Requirement 30 40 50 add: Ending Inventory 4 [10%] 5 [10%] 4 * 34 45 54 less: Beginning Inventory 3 4 5 UNITS to produce/purch 31 41 49 * Assume the sales forecast for October is 40 units, so the September desired Ending Inventory = (40 units) x (10%) = 4 units Let's assume the company is a merchandising entity, for simplicity Therefore, the above represents purchases of units (rather than manufactured units)

The company assumes that units will cost $6 each, as was the case in the past quarter Therefore, purchases IN DOLLARS for the next quarter, as well as purchases made in June are as follows: Merchandise Purchases Budget (in dollars) June (actual) $180 July: 31 x $6 186 August: 41 x $6 246 September: 49 x $6 294 The company assumes that it will pay (cash!) for the above purchases as follows: 50% in the month of purchases, and 50% in the month following the purchases Therefore, cash payments will be as follows next quarter: Cash Payments for Merchandise Purchases Payments July August Sept Total Qtr [$180] June purchases $90 [50%] n/a n/a $90 [186] July purchases 93 [50%] $93 [50%] n/a 186 [246] Aug purchases n/a 123 [50%] $123 [50%] 246 [294] Sept purchases n/a n/a 147 [50%] 147 Totals $183 $216 $270 $669 (This bottom cash "Totals" row will be carried forward onto the "Cash Budget")

Following is the Selling & Administrative Expense Budget for the next quarter (all expenses are expected to be paid in the same month incurred): Selling & Administrative Expense Budget July August September Total Qtr Selling expense $27 $34 $39 $100 Administrative expense 38 46 51 135 Total expense* $65 $80 $90 $235 * Total expenses include depreciation and other non-cash expenses as follows: July August September Total Qtr Depreciation $10 $10 $10 $30 Other non-cash expenses 5 10 20 35 Total non-cash expenses $15 $20 $30 $65 Therefore, expected cash payments for selling & administrative expenses for the next quarter are: July August September Total Qtr Cash selling & admin exp $50 $60 $60 $170 (The bottom row, "Cash selling & admin exp", will be carried forward onto the "Cash Budget")

Now we collect the "cash totals" ending rows of the above schedules, and place them into the Cash Budget Assuming that the company wishes to maintain a minimum cash balance =$200, and that the ending cash balance at June 30 was $210, the company's Cash Budget for the next quarter is as follows: Cash Budget July August September Total Qtr Cash beginning balance $210 (given) $202 $200 $210 add: cash collections 290 370 460 1120 Cash inflow 500 572 660 $1330 Cash payments: Purchases 183 216 270 669 Selling & admin 50 60 60 170 Dividends 25 25 25 75 Plant, Prop & Equip 0 121 15 136 Taxes * 40 0 0 40 Cash outflow 298 422 370 1090 Net cash inflow (outflow) $202 $150 $290 $240 Financing: Loan 50 50 Interest ** [1] [1] Repayments [50] [50] Cash ending balance $202 $200 $239 $239 * Income tax from the prior quarter is paid this quarter (in the first month - July) ** Interest accrues for the full month and is paid when loan(s) mature The interest rate is 12% (The cash Interest from this schedule, plus any accrued-but-not-yet-paid Interest, will be carried forward onto the Income Statement)

Now we collect "Total Quarter" account balances from several of the above schedules to build the Budgeted Income Statement for the next quarter ending September 30, as follows: Budgeted Income Statement Sales ($300 + 400 + 500) $1,200 COGS: Beg Inv (3 x $6) 18 add: Purchases ($186 + 246 + 294) 726 Cost of Goods Avail for Sale 744 less: End Inv (4 X $6) 24 720 * Gross Margin 480 Selling & Admin Expenses ($65 + 80 + 90) 235 Income Before Interest and Taxes 245 Interest Expense ($50 x 12% x 2/12) 1 Income Before Taxes 244 Income Tax Expense (244 x 25%) 61 Net Income $183 * from 120 units sold x $6 cost per unit

We must prepare the Budgeted Statement of Retained Earnings next, so that we then can carry its new number for Retained Earnings forward onto the Budgeted Balance Sheet The Budgeted Statement of Retained Earnings for the next quarter ending Sept 30 is as follows: Budgeted Statement of Retained Earnings Retained Earnings at July 1 (given) $ 100 add: budgeted net income for third quarter 183 283 less: budgeted dividends for the third quarter 75 Retained Earnings at Sept 30 $208 (continued)

Lastly, we collect the quarter-ending balances of Asset, Liability, and Equity accounts from the above schedules to build the Budgeted Balance Sheet for the next quarter ended Sept 30, as follows: Assets Budgeted Balance Sheet Liabilities & Stockholders' Equity Cash $239 Liabilities: Accts Receivable* 190 Accounts Payable** $147 Current Assets 429 Income Tax Payable 61 Beg Net PP& E 144 (given) Current Liabilities 208 + Additions 136 - Depreciation 30 Long-Term Liabilities 0 Net Plant, Prop & Equip 250 Total Liabilities 208 Stockholders' Equity: Capital Stock (given) 263 Retained Earnings 208 Total Stockholders' Equity 471 Total Assets $679 Total Liab & S/E $679 * Accts Receivable = $400 x 10% for Aug sales + $500 x 30% for Sept sales ** Accts Payable = $294 September Purchases x 50% (the end)