COURSE
ESSENTIAL
STANDARD
OBJECTIVE
ESSENTIAL
QUESTIONS
6312 Accounting II
Unit B
Departmentalized, Corporate, and
Managerial Accounting
5.00
C4
21%
Analyze financial data to make
managerial decisions.
5.01
B2
4%
Understand concepts and
practices related to budgeting.
 What budgets and budgeting tools provide information to assist
managers make sound financial business decisions?
 What financial data can be gained from a budgeted income
statement and its schedules?
 How are cash budgets and performance reports used in analyzing
the financial operations of a business?
UNPACKED CONTENT
I.
Budget Planning
A. Financial planning is one tool managers use to improve profitability.
B. Planning the financial operations of a business is called budgeting.
C. A written financial plan of a business for a specific period of time (stated in
dollars) is called a budget.
D. Budgets provide managers with information about a specific area of the
business’s operations.
E. Budget preparation begins with identifying company goals. Examples of
company goals might be to:
1. Increase sales.
2. Reduce cost of merchandise sold.
3. Increase net income.
F. Two commonly prepared budgets
1. Budgeted income statement
a. Projection of a business’s sales, costs, expenses and net income
b. Similar to regular income statement
c. Known as the operating budget
2. Cash budget
a. Projection of a business’s cash receipts and payments
b. Used to manage estimated cash shortages and overages
G. Budget functions
1. Planning
2. Operational control
3. Department coordination
H. Budget period
1. Length of time covered by a budget
2. Annual budget is prepared for a company’s fiscal year.
I. Sources of budget information
1. Company records
2. General economic information
3. Company staff and managers
4. Good judgment
J. Comparative income statement
1. Analysis of previous years’ sales, cost, and expense amounts
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2. Income statement containing sales, cost, and expense information for two
or more years
3. Highlights items that may be increasing or decreasing at a higher rate than
other items on the statement
K. Interpreting the comparative income statement
1. First column shows actual sales, costs, and expenses for the current year.
2. Second column shows actual amounts for the prior year.
3. Third column shows the amount of increase or decrease from the prior year.
4. Fourth column shows the percentage by which the current year amount
increased or decreased from the prior year amount.
5. The percentage change indicates whether the change is:
a. Favorable to Net Income percentage
(1) Percentage increase in expenses or costs is less than percentage
increase in sales.
(2) Percentage decrease in expenses or costs is more than percentage
decrease in sales.
b. Unfavorable to Net Income percentage
(1) Percentage increase in expenses or costs is greater than
percentage increase in sales.
(2) Percentage decrease in expenses or costs is less than percentage
decrease in sales.
c. Normal – no change to Net Income percentage
(1) Percentage increase in expenses or costs is equal to percentage
increase in sales.
(2) Percentage decrease in expenses or costs is equal to percentage
decrease in sales.
II.
Budgeted Income Statement
A. Businesses set goals, develop operational plans, and project sales, expenses,
and costs.
B. Operational plan provides general guidelines for achieving the company’s
goals.
C. Operational plan is converted into a more precise plan expressed in dollars by
preparing a budgeted income statement.
D. Separate schedules are prepared to assist management in evaluating
operations and goals.
1. Sales budget schedule
2. Purchases budget schedule
3. Selling expenses budget schedule
4. Administrative expenses budget schedule
5. Other revenue and expenses budget schedule
E. Budgeted income statement shows a company’s projected sales, costs,
expenses, and net income.
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III.
Cash Budgets and Performance Reports
A. Good cash management requires planning and controlling cash so that it will
be available to meet obligations when they come due.
B. Cash budgets help analyze cash inflows and outflows.
C. Cash receipts budget schedule reports projected cash receipts for a budget
period.
D. Cash payments budget schedule reports projected cash payments for a
budget period.
E. Analysis of actual cash balance is used to determine how actual cash
compares to projected cash.
1. If actual cash is less than projected cash, management must determine the
reason and take action to correct.
2. Decrease could be caused by customers not paying.
3. Decrease could be caused by expenses exceeding budget projections.
4. If decrease continues, business may have to borrow money until receipts
and expenses are brought into balance.
F. Performance Reports
1. Compares actual amounts with the budgeted income statement
2. Shows variations between actual and projected items
3. Management reviews performance reports to identify areas that need to be
reviewed.
4. First column shows amounts projected.
5. Second column shows actual sales, costs, and expenses.
6. Third column shows the difference between actual and projected.
7. Fourth column shows the percentage of the amount increased or
decreased from the projected amount.
8. Management should determine what causes unfavorable results and how
to correct those situations.
9. Management should also determine what causes favorable results and
encourage continuation of those actions.
Key Terms
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Budget
Budgeting
Budget period
Budgeted income statement
Comparative income statement
Purchases budget
Sales budget
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Selling expenses budget
Administrative expenses budget
Performance report
Cash receipts budget
Other revenue and expenses budget
Cash payments budget
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5.01 Budget Planning Notes – Page 1 – KEY
Financial planning is one tool managers use to improve profitability.
Planning the financial operations of the business is called budgeting .
A written financial plan expressed in dollars is called a budget
.
Two budgets commonly prepared in businesses are:
1. Budgeted income statement – projection of a business’s sales,
costs, expenses and net income for a fiscal period; often called an
operating budget.
2. Cash budget
– projection of a
business’s cash receipts and payments for a fiscal period. Used to
manage estimated cash shortages and overages.
A budget serves three important functions:
1.
Planning
actions to meet goals
– managers make projections, plan
Operational control
– management compares
actual amounts to budgeted amounts to determine how well a
business is performing
3.
Department coordination
– all management
personnel must help plan and use budget as a guide to manage
sales, costs, and expenses.
2.
Budget Period – the length of time covered by a budget; usually one
year
Companies use many sources to prepare budgets.
 Company records
– accounting and
sales records from prior periods are used to determine trends
 General economic information – changes in the national economy
affect budget decisions
 Company staff and managers
– department managers project
budget items for their areas of responsibility of the business

Good judgment
– final budget decisions must be based
on good judgment
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5.01 Budget Planning Notes – Page 2 – KEY
Comparative
Income Statement - provides an analysis of previous
years’ sales, cost, and expense amounts; highlights items that may be
increasing or decreasing at a higher rate than other items on the statement
Interpreting the Comparative Income Statement
1.
First column shows actual sales
, costs
, and
expenses
for the current year
2.
Second column shows actual amounts for the prior year
3.
Third column shows the amount of increase
or decrease
from the
prior
year
4.
Fourth column shows the percentage
by which the
current year amount increased or decreased from the prior year
amount
The percentage change indicates whether the change is:
1. Favorable
 Percentage increase in expenses or costs is less than percentage
increase in sales

Percentage decrease in expenses or costs is more than
percentage decrease in sales
2. Unfavorable
 Percentage increase in expenses or costs is greater than
percentage increase in sales

Percentage decrease in expenses or costs is less than percentage
decrease in sales
3. Normal
 Percentage increase in expenses or costs is equal to percentage
increase in sales
 Percentage decrease in expenses or costs is equal to percentage
decrease in sales
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5.01 Budget Planning Activity
The comparative income statement for Michael’s Craft Store shows a
percentage increase for net sales of 12.9%. Indicate whether the following
percentage change in cost and expense items is favorable or unfavorable.
Cost/Expense Item
% Increase (Decrease)
Cost of Merchandise Sold
9.8%
Salary Expense
10.2%
Advertising Expense
16.7%
Rent Expense
4.6%
Favorable/Unfavorable
The comparative income statement for Kathy’s Dress Shop shows a
percentage increase for net sales of 6.3%. Indicate whether the following
percentage change in cost and expense items is favorable or unfavorable.
Cost/Expense Item
% Increase (Decrease)
Cost of Merchandise Sold
9.2%
Insurance Expense
3.5%
Utilities Expense
7.9%
Office Expense
4.2%
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Favorable/Unfavorable
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5.01 Budget Planning Activity – KEY
The comparative income statement for Michael’s Craft Store shows a
percentage increase for net sales of 12.9%. Indicate whether the following
percentage change in cost and expense items is favorable or unfavorable.
Cost/Expense Item
% Increase (Decrease)
Favorable/Unfavorable
Cost of Merchandise Sold
9.8%
Favorable
Salary Expense
10.2%
Favorable
Advertising Expense
16.7%
Unfavorable
Rent Expense
4.6%
Favorable
The comparative income statement for Kathy’s Dress Shop shows a
percentage increase for net sales of 6.3%. Indicate whether the following
percentage change in cost and expense items is favorable or unfavorable.
Cost/Expense Item
% Increase (Decrease)
Favorable/Unfavorable
Cost of Merchandise Sold
9.2%
Unfavorable
Insurance Expense
3.5%
Favorable
Utilities Expense
7.9%
Unfavorable
Office Expense
4.2%
Favorable
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5.01 Budgeted Income Statement Notes – KEY
Businesses set goals
, develop
project sales, expenses and costs
operational
plans, and
Operational plan
achieving the company’s goals.
provides general guidelines for
Separate schedules are prepared to assist management in evaluating
operations and goals.
 Sales budget schedule

Purchases budget schedule

Selling expenses budget schedule

Administrative expenses budget schedule

Other revenue and expenses budget schedule
Budgeted Income Statement shows a company’s projected sales, costs,
expenses, and net income.
Sales
Budget Schedule-Prepared first because other
budget schedules are affected by the projected net sales
Purchases
Budget Schedule-Shows the projected
amount of purchases that will be required during a budget period
Selling Expenses
Budget ScheduleShows projected expenditures directly related to selling operations
Administrative Expenses
Budget ScheduleShows the projected expenses for all operating expenses not directly
related to selling operations
Other revenue and expenses
Budget Schedule-Shows
projections for revenue and expenses from activities other than normal
operations
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5.01 Budgeted Income Statement Activity – KEY
The Paint Store has actual unit sales of 25,000 for 2011. Management projects a 5% increase
in unit sales for 2012 and projects that 10% of all sales will occur during the first quarter.
1. How many units are projected to be sold during the first quarter of 2012? If unit sales
price is $15.00, what is the projected sales amount for the first quarter of 2012?
2625 units for first qtr.
$39,375.00 for first qtr.
2. If the desired ending inventory for the first quarter of 2012 is 5,000 units, determine the
number of units needed to meet the ending inventory and sales goals for the first
quarter.
7,625 units
3. If the beginning inventory for the first quarter of 2012 equals 3,500 units, how many units
should be purchased to meet the inventory and sales goals for the first quarter?
4,125 units
4. Material costs per unit are expected to be $8.00. What is the projected cost of
purchases?
$33,000.00
Treads Tire Store has actual unit sales of 15,000 for 2011. Management projects a 10%
increase in unit sales for 2012 and projects that 20% of all sales will occur during the first
quarter.
1. How many units are projected to be sold during the first quarter of 2012? If unit sales
price is $50.00, what is the projected sales amount for the first quarter of 2012?
3,300 units for first qtr.
$165,000.00 for first qtr.
2. If the desired ending inventory for the first quarter of 2012 is 2,000 units, determine the
number of units needed to meet the ending inventory and sales goals for the first
quarter.
5,300units
3. If the beginning inventory for the first quarter of 2012 equals 5,000 units, how many units
should be purchased to meet the inventory and sales goals for the first quarter?
300 units
4. Material costs per unit are expected to be $30.00. What is the projected cost of
purchases?
$9,000.00
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5.01 Cash Budgets and Performance Reports Notes – KEY
Cash budgets help analyze cash inflows
and outflows
.
Cash receipts
budget schedule reports projected cash
receipts for a budget period.
Cash payments
budget schedule reports projected cash
payments for a budget period.
Analysis of actual cash balance is used to determine how actual cash
compares to projected cash.
If actual cash is less than projected cash, management must determine the
reason and take action to correct.
If decrease continues, business may have to borrow money until receipts
and expenses are brought into balance.
Performance
Reports - compares actual amounts with the
budgeted income statement; shows variations between actual and
projected items
Performance Reports
 First column shows amounts
projected
 Second column shows actual
sales, costs, and
expenses
 Third column shows the difference between actual
and projected
 Fourth column shows the percentage
of
the amount increased or decreased from the projected amount
Management should determine what causes unfavorable results and how
to correct those situations.
Management should also determine what causes favorable results and
encourage continuation of those actions.
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5.01 Cash Budgets and Performance Reports – KEY
Outdoor Trading Company’s sales for the previous years show that of total sales,
approximately 25% are cash sales, 50% are sales on account collected in the same
quarter, 23% are sales on account collected in the next quarter, and 2% prove to be
uncollectible. For the current year, net sales for the second quarter are $125,000 and
for the third quarter are $145,000.
The cash payment budget schedule shows the following cash payments during the third
quarter: total purchases, $75,000; total operating expenses, $30,000; federal income
tax expense, $5,000; and cash dividend, $3,000.
1. What is the total amount of cash received during the third quarter?
$137,500.00
2. What are the total cash payments for the third quarter?
$113,000.00
3. The beginning cash balance for the third quarter equals $20,000. What is the
ending cash balance for the third quarter?
$44,500.00
Athletic Shoe Company’s sales for the previous years show that of total sales,
approximately 30% are cash sales, 55% are sales on account collected in the same
quarter, 19% are sales on account collected in the next quarter, and 1% prove to be
uncollectible. For the current year, net sales for the second quarter are $75,000 and for
the third quarter are $120,000.
The cash payment budget schedule shows the following cash payments during the third
quarter: total purchases, $45,000; total operating expenses, $15,000; federal income
tax expense, $2,000; and cash dividend, $4,000.
1. What is the total amount of cash received during the third quarter?
$116,250.00
2. What are the total cash payments for the third quarter?
$66,000.00
3. The beginning cash balance for the third quarter equals $20,000. What is the
ending cash balance for the third quarter?
$70,250.00
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5.01 Key Terms – DEFINED
Term
Definition
Budget
Written financial plan of a business for a specific period of
time, expressed in dollars
Budgeting
Planning the financial operations of a business
Budget period
Length of time covered by a budget
Budgeted income
statement
Statement that shows a company’s projected sales, costs,
expenses, and net income
Comparative income
statement
Income statement containing sales, cost, and expense
information for two or more years
Sales budget
Statement that shows the projected net sales for a budget
period
Purchases budget
Statement prepared to show the projected amount of
purchases that will be required during a budget period
Selling expenses budget
Statement prepared to show projected expenditures related
directly to the selling operations
Administrative expenses
budget
Statement that shows the projected expenses for all operating
expenses not directly related to selling operations
Performance report
Report showing a comparison of projected and actual amounts
for a specific period of time
Cash receipts budget
Statement that reports projected cash receipts for a budget
period
Other revenue and
expenses budget
Statement showing budgeted income and expenses from
activities other than normal operations
Cash payments budget
Statement that reports projected cash payments for a budget
period
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5.01 Prototype Assessment Items
These prototype assessment items illustrate the types of items used in the item bank for
this objective. All items have been written to match the cognitive process of the
understand verb in the objective. These exact questions will not be used on the secure
postassessment, but questions in similar formats will be used.
1. Joseph wants to know his company’s anticipated cash inflows for the upcoming
year. Which schedule would give Joseph this information?
A.
B.
C.
D.
Budgeted income statement
Cash payments budget schedule
Cash receipts budget schedule
Sales budget schedule
Answer:
2. Sweet Frog Yogurt projected cash of $6,000 for the period. Actual cash was $4,500.
Which could be the cause for the decrease in cash?
A.
B.
C.
D.
Actual cost of merchandise is less than budgeted cost of merchandise
Actual operating expenses are less than budgeted operating expenses
Customers are not paying
Customers are paying too quickly
Answer:
3. The Sock Shop had an increase in net sales of 15%. Cost of merchandise sold
increased by 17%. Which is correct about the change in cost of merchandise sold?
A. Favorable change because the difference in the increase in net sales and the
increase in cost of merchandise sold was less than 5%.
B. Favorable change because the increase in net sales was less than the increase
in cost of merchandise sold.
C. Normal change because net sales increased and cost of merchandise sold
increased.
D. Unfavorable change because net sales increased less than cost of merchandise
sold.
Answer:
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