Chapter 5 - Preparation of Master Budget 2

Learning Objectives
Upon finishing this lecture, you are expected to:
1. Know and explain the basic concept involving financial forecasting, corporate planning and budgeting.
2. Explain what are the pro-forma financial statements.
3. Construct a master budget.

Introduction and Core Values Integration

Budgeting is part of every organization. A budget serves as a financial plan that shows the revenues and expenditures of
an organization. A budget is supposed to provide a clear picture on how organizations will be using their financial
resources. Budgeting is a process that allows organizations both public and private, to see what financial resources need
to be allocated in order to achieve organizational goals and objectives. Budgeting involve the process of examining past
financial information to see how resources have been used in the past and what goals and objectives were met.

To be able to achieve the goals of organizations, its members should be one with its objectives and engage themselves
with competence and accountability, treating the organization as their own, and wanting it to succeed as they want
themselves to.

Aside from the fact that we, the Wesleyan University - Philippines as a whole, wants you to learn how to be the best
finance and accounting people out there, we want to remind you first to be a good servant of God and conquer the
world with integrity and credibility with so much wisdom from God in every decision you will make.

Cash Budget
One of the final stages in the preparation of a budget is making the cash budget. A cash budget is an estimation of the
cash flows for a business over a specific period of time. This budget is used to assess whether the entity has sufficient
cash to operate.

The cash budget is composed of four major sections:

1. The cash receipts section lists all the cash inflows, except for financing, during the covered period of the budget.
Cash receipts start with the beginning balance where the cash collections from sales are added.
2. The cash payments section consists of all cash outflows in the budget period. Included in the cash payments are
direct material purchases, direct labor, factory overhead, and other cash payments.
3. The cash surplus or deficit section simply shows the difference between the cash receipts section and the cash
payments section. This section indicates if the firm needs to borrow funds to support the operations of the
company or use the excess money for paying their obligations or investing in other profitable activities.
4. The financing section shows the borrowings and payments made by the company.

How a Cash Budget Works

Companies use sales and production forecasts to create a cash budget, along with assumptions about necessary
spending and accounts receivable collections. A cash budget is necessary to assess whether a company will have enough
cash to continue operations. If a company does not have enough liquidity to operate, it must raise more capital by
issuing stock or taking on more debt.

A cash roll forward computes the cash inflows and outflows for a month, and it uses the ending balance as the beginning
balance for the following month. This process allows the company to forecast cash needs throughout the year, and
changes to the roll forward adjust the cash balances for all future months.

Sample Problem:

To prepare the cash budget of CBA Merchandising, further assume the following information:
1. The cash balance at the beginning of the first quarter is P10,000.
2. The management desires to maintain a P10,000 minimum cash balance at the end of each quarter.
3. CBA Merchandising has a credit line with RCBC that enables it to borrow at an interest rate of 12% per year. All
borrowings and repayments must be in multiples of P1,000 and take place at the beginning and at the end of each
quarter, respectively.
4. Additional equipment amounting to P25,000 is to be acquired in the third quarter
5. The board of directors approved a cash dividend of P1,500 per quarter.
6. The income tax payable amounting to P6,000 was paid in March of the period.

Answer:
CBA Merchandising
Cash Budget
For the year ended Dec. 31, 20xx

Q1 Q2 Q3 Q4 Total

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 Q1 Q2 Q3 Q4 Total
Cash balance, beginning P10,000 10,251 10,459 10,265 P10,000
Add: Cash receipts
Accounts receivable collections 93,600 125,100 143,100 161,700 523,500
Total cash available 103,600 135,351 153,559 171,965 533,500
Less:
Direct materials 7,867 10,287 11,839 12,666 42,659
Direct labor 56,544 52,560 65,520 68,784 243,408
Factory overhead 27,238 25,495 31,165 32,593 116,491
Selling and administrative expense 19,200 18,300 20,100 20,700 78,300
Purchase of equipment 25,000 25,000
Cash dividend 1,500 1,500 1,500 1,500 6,000
Income tax payment 6,000 6,000
Total cash payments 118,349 108,142 155,124 136,243 517,858
Cash surplus (deficit) (14,749) 27,209 (2,435) 35,722 46,687 This is to cover the cash
Financing deficit of each quarter and
maintain a minimum cash of
Borrowing 25,000 9,000 22,000 56,000 P10,000.
Repayment (25,000) (9,000) (22,000) (56,000)
Interest (750) (300) (660) (1,710)
Total Financing 25,000 (16,750) 12,700 (22,660) (1,710) The interest is computed
Cash balance, ending P10,251 P10,459 P10,265 P13,062 P13,062 based on the interest rate
and the period covered
before it is repaid.
Let's have another example:
In this particular problem,
it is computed as:
Albania Company expects its June sales to be P300,000, which is 25% higher than its May sales. Purchases were
For the Q1, ((25,000 x
P200,000 in May and are expected to be P240,000 in June. All sales are on credit and are collected as follows: 80% in the
12%)/4) since it is paid at
month of the sale and 20% in the following month. All payments in the month of sales are given 2% discount. Sixty
the end of the quarter.
percent of purchases are paid in the month of purchase to take advantage of purchase term of 1/10, n/40. The
remaining amount is paid in the following month. The beginning cash balance on June 1 is P20,000. The ending cash
balance on June 30 would be:

References:
Fundamentals of Financial Management by Ma. Flordeliza L. Anastacio
https://www.investopedia.com/terms/c/cashbudget.asp

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