Chapter 41
Managerial Accounting
Financial Budgeting
Prepared by Diane Tanner
University of North Florida
Financial Budgets
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 ‘Pro-forma’ financial statements
 Includes
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Budgeted income statement
Budgeted balance sheet
Budgeted statement of stockholders’ equity
Budgeted statement of cash flows
 Often replaced by the cash budget
 Cash flows categorized by cash receipts and
cash disbursements
Budgeted Income Statement
• Helps a company determine if its projections are feasible
• Prepared after the operating budgets are complete
 Sales revenue
 From the sales budget
 Cost of goods sold based on unit costs from
manufacturing budgets
 From materials purchases budget
 Per unit cost of materials to be used in production
 Key point  Materials purchased differ from materials to be used
 From direct labor budget
 Per unit cost of labor to produce each product
 From the manufacturing overhead budget
 Per unit cost of overhead to be applied
 Selling and administrative costs
 From the selling and administrative costs budget
 Income tax expense
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 Based on the effective tax rate
Budgeted Income Statement
Johnson, Inc.
Budgeted Income Statement
For the Three Months Ended June 30
Sales
$600,000
Cost of goods sold
390,000
Gross margin
210,000
Selling and administrative expenses
160,000
Operating income
50,000
Income tax expense
15,000
Net income
$ 35,000
Format parallels a GAAP
multiple step income
statement
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Budgeted Income Statement Example
Prepare Paradune’s budgeted income statement for May based on the following:
Projected sales
Projected merchandise purchases
April
$160,000
$78,000
May
$163,000
$88,000
June
$175,000
$91,000
• Operating expenses are budgeted to be $29,200 in April, then increase by $1,000 per
month. Of this amount is depreciation of $2,800. (Paid in the month incurred.)
• The company pays income taxes the month after accrual. The tax rate is 30%.
• The company plans to purchase a truck for $32,000 on May 1 by signing a 6% note.
Payments are due on the last day of each month at $1,200 each.
• The budgeted gross profit rate is 35%.
Begin with budgeted
sales revenue.
Budgeted sales revenue
Determine budgeted
cost of goods sold.
Cost of goods sold (65% x $163,000)
Determine budgeted
gross profit.
Gross profit
$163,000
105,950
57,050
Continued
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Budgeted Income Statement Example
Prepare Paradune’s budgeted income statement for May based on the following:
Projected sales
Projected merchandise purchases
April
$160,000
$78,000
May
$163,000
$88,000
June
$175,000
$91,000
• Operating expenses are budgeted to be $29,200 in April, then increase by $1,000 per
month. Of this amount is depreciation of $2,800. (Paid in the month incurred.)
• The company pays income taxes the month after accrual. The tax rate is 30%.
• The company plans to purchase a truck for $32,000 on May 1 by signing a 6% note.
Payments are due on the last day of each month at $1,200 each.
• The budgeted gross profit rate is 35%.
From previous slide
List all operating
expenses.
Calculate income from
operations.
Gross profit
$57,050
Operating expenses ($29,200 + $1,000)
30,200
Income from operations
26,850
Calculate interest
expense.
Other expenses:
Interest expense ($32,000 x 6% x 1/12)
Determine income
before taxes.
Income before taxes
160
26,690
Continued
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Budgeted Income Statement Example
Prepare Paradune’s budgeted income statement for May based on the following:
Projected sales
Projected merchandise purchases
April
$160,000
$78,000
May
$163,000
$88,000
June
$175,000
$91,000
• Operating expenses are budgeted to be $32,000 in April, then increase by $1,000 per
month. Of this amount is depreciation of $2,800. (Paid in the month incurred.)
• The company pays income taxes the month after accrual. The tax rate is 30%.
• The company plans to purchase a truck for $32,000 on May 1 by signing a 5% note.
Payments are due on the last day of each month at $1,200 each.
• The budgeted gross profit rate is 35%.
From previous slide
Calculate income
taxes.
Determine budgeted
net income.
Income before taxes
Income tax expense ($26,690 x 30%)
Budgeted net income
Key point: The income statement is accrual-based,
while the cash flows appear on the cash budget.
$26,690
8,007
$18,683
Budgeted Balance Sheet
 Last component of the master budget
 A function of all of the other budgets
 Also called a pro-forma balance sheet
 Presented in the same format as a historical
based balance sheet using a classified format
 Used to assess the effect of planned decisions
on future financial position
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Only the preparation of the current asset and
current liability sections of the budgeted
balance sheet will be covered. The complete
coverage of a budgeted balance sheet is
beyond the scope of this course.
Information Sources
Current
Assets
Cash budget
Cash
Sales budget
Accounts receivable
Materials purchases budget
Inventories
Current
Liabilities
Production budget & product
cost analysis
Purchases budget
Accounts payable
Selling and
administrative
expense budget
Salaries payable
Accrued expenses
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Partial Budgeted Balance Sheet Example
– Current Assets Section –
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Ernest Inc. distributes a single product which sells for $5 each. Each unit costs $2.
The budgeted cash balance at June 30 is $21,400. Additional information:
 End-of-month inventory equal to 20% of the next month's projected sales
 Sales--all on credit; 25% collected in the sale month, 75% in the month after sale
 Operating expenses total $12,000 per month; Paid in the month after incurred
 Purchases are paid 70% in the month purchased and 30% the month after
 Budgeted monthly unit sales are: May = 20,000; June = 24,000; July = 28,000
Prepare the current assets section of the balance sheet at June 30.
Current assets
Begin with the June 30
Cash
cash balance.
Calculate receivables:
75% x 24,000 x $5
Calculate inventory:
20% x 28,000 x $2
$21,400
Accounts receivable
90,000
Inventory
11,200
Total current assets
$122,600
Partial Budgeted Balance Sheet Example
– Current Liabilities Section –
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Ernest Inc. distributes a single product which sells for $5 each. Each unit costs $2.
The budgeted cash balance at June 30 is $21,400. Additional information:
 Purchases are estimated at $25,700 for May, $22,000 for June, and $29,500 for
July. They are paid 70% in the month purchased and 30% the month after
 Operating expenses total $12,000 per month, which includes $2,100 of
depreciation; They are paid in the month after they are incurred.
 Income taxes are budgeted at $9,600 for May, $11,300 for June, $10,400 for July.
They are paid the month after accrual.
Prepare the current liabilities section of the balance sheet at June 30.
Calculate accounts payable:
30% x $22,000
Current liabilities
Accounts payable
Calculate accrued expenses:
$12,000 - $2,100
Accrued operating expenses
List income taxes due
$6,600
9,900
Income taxes payable
11,300
Total current liabilities
$29,600
The End
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