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Business Finance: Preparation of Budget
Business Finance: Preparation of Budget
HIGH
Finance SCHOOL
Self-Learning
8
Quarter 3
Business Finance
Quarter 3 – Module 8: Preparation of Budget
First Edition, 2020
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Finance SCHOOL
Self-Learning
Module
8
Quarter 3
Preparation of Budget
Introductory Message
This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.
In addition to the material in the main text, you will also see this box in the
body of the module:
As a facilitator you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their own learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.
For the Learner:
This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.
Posttest - This measures how much you have learned from the
entire module.
EXPECTATIONS
PRETEST
Directions. Read the questions. Write the letter of your answer before the number.
______1. In preparing the sales forecast need to identify how much would be the cash
collection in the cash budget period. The sales may be made in cash or
credit.
A. True C. Maybe
B. False D. None of the above
______ 2. This an amount received for the use of money that is to be repaid in full
at a specified time or on-demand.
A. Interest rate C. Accounts Receivable
B. Interest received D. Accounts Payable
_____ 4. The amount of money that company generates when initially sold its
common and preferred stock in the open market to investors. Know as:
A. Interest received C. Issuance of capital stock
B. Non-operating asset D. Proceeds from sales of assets
_____ 5. Which of the following budget need to know the cash disbursements?
A. Cash budget C. Production budget
B. Sales budget D. Operations budget
RECAP
You learned from previous lessons that budgeting is an important and useful
tool in making the company financially secure. What are the types of budget?
LESSON
Situations:
Let’s assume selling price is P100 per unit. The sales for each month are expected
to be collected as follows:
a) The month of sales is 20%
b) A month after sales is 50%
c) 2 months after sales is 30%
Collection from
current months sales 40,000 44,000 50,000 56,000 60,000 250,000
(a)
Collection from
previous months 100,000 110,000 125,000 140,000 150,000
sales (b)
Total Collections
40,000 144,000 220,000 247,000 275,000 926,000
from Sales
3. From the Production Budget, identify how much of the purchases made will be
paid by the company on the cash budget period. Like sales, purchases may be made
in cash or on credit depending on the supplier’s credit terms.
Month
Jan Feb Mar Apr May Total
Projected Sales 2,000 2,200 2,500 2,800 3,000 12,500
Target level of ending 100 100 100 100 100 100
inventories
Total 2,100 2,300 2,600 2,900 3,100 12,600
Less: beginning inventories 50 100 100 100 100 50
Required Production 2,050 2,200 2,500 2,800 3,000 12,550
4. From the operations budget, identify which expenses will be paid in cash during
the cash budget period.
The following expense items will be paid based on the following periods:
a. Rent payments: Rent of PHP5,000 will be paid each month.
b. Wages and salaries: Fixed salaries for the year are PHP96,000, or PHP8,000 per
month. Wages are estimated as 10% of monthly sales.
c. Tax payments: PHP25,000 must be paid in April.
4. Identify all other cash payments to be made. Examples are fixed-asset purchased
in cash, cash dividend payments, principal payments, repurchase of common stock,
and purchase of stock/bond investments. It is important to recognize that
depreciation and other non-cash charges are not included in the cash budget.
The following items will be paid based on the following periods:
a. Fixed-asset outlays: New machinery costing PHP130,000 will be purchased
and paid for in April.
b. Interest payments: An interest payment of PHP10,000 is due in May.
c. Cash dividend payments: Cash dividends of PHP20,000 will be paid in January.
d. Principal payments (loans): A PHP20,000 principal payment is due in February.
Answers:
Jan Feb Mar Apr May Total
Total Payments for
- 102,500 110,000 125,000 140,000 477,500
Purchases
Total Cash
53,000 157,500 148,000 321,000 193,000 872,500
Disbursements
Situation:
XYZ Company has a beginning cash balance of PHP80,000 and would like to
maintain an ending cash balance of PHP100,000 per month.
Prepare XYZ Company’s Cash Budget for the month of January to May.
Answers:
XYZ Company
Cash Budget
For the Month of Jan - May 2020
Less: Minimum Cash Balance 100,000 100,000 100,000 100,000 100,000 100,000
Evaluate the cash budget. If the ending cash balance after payment of all required
disbursements is less than the required ending balance, the company needs to
borrow additional cash from the short term loans or any financial institution or
withdraw investment to meet its required ending balance. The ending cash balance
should exceed the company minimum cash requirement for the next period. In this
case, the company can able to repay the loan plus accrued interest. And the excess
cash above its required maintaining cash balance, the company can invest this cash
on short term investment to have an opportunity to earn additional profits.
Definitions of Terms:
• Disbursement is the act of paying out or disbursing money.
• Interest payment represents the rate charged for being lent funds.
• Cash dividends is the distribution of funds or money paid to stockholders.
• (Fixed assets) outlay is when the company spent money to acquire some types of
tangible assets.
• Interest received an amount received for the use of money that is to be repaid in
full at a specified time or on-demand.
• Issuance of capital stock is the amount of money that company generates when
a company initially sold its common and preferred stock on the open market to
investors.
• Non-operating assets is a class of assets that are not essential to the ongoing
operations of a business but may still generate income or provide a return on
investment (ROI).
• Proceeds from borrowings or borrowing proceeds means the cash proceeds of any
debt
• Return on principal capital (investments) refers to principal payments back to
capital owners (shareholders, partners, unit holders) that exceed the growth of a
business or investment.
ACTIVITIES
Situation:
Mamang Chicken Inasal owner forecasts sales in units for his 3 branch store in
Pasig City for January to May are as follows:
The owner would like to maintain 300 pieces whole chicken in its ending inventory
at the end of each month. The beginning inventory at the start of January amounts
to 150 units.
Question:
How many pieces of whole chicken inasal to produce in order to fulfill the expected
sales of the stores?
Answer:
WRAP-UP
VALUING
Directions. Read the questions and encircle the letter of your answer.
1. Malinao Bakery forecast sales 2100 loaves of bread for the month of
January. The owner would like to maintain 150 loaves of bread in its
ending inventory at the end of each month. The beginning inventory at the
start of January is 50 loaves of bread. How many loaves of bread should
Malinao Bakery produce for January?
A. 2,300 loaves C. 2,200 loaves
B. 2,050 loaves D. 2,250 loaves
2. If the projected or forecasted sales of Malinao Bakery for the month of January
is 2100 loaves of bread, beginning inventory 50 loaves and the selling price is
P50 per loaves. How much are the projected sales in peso of Malinao Bakery
for January?
A. P100,000. C. P107,500.
B. P100,500. D. P105,000.
4. _______ is the act of paying out includes money paid out to run a
business, cash expenditure and etc.
A. Disbursements C. Payment
B. Issuance of capital D. Payout
5. This is a class of asset that are not essentials in the on going operations of the
business.
A. Fixed Assets C. Non-Operating Assets
B. Current Assets D. None of the above
Activity
Jan Feb Mar Apr May Total
Projected Sales 3,000 3,400 3,600 3,800 4,000 17,800
Add: Target level of
300 300 300 300 300 300
ending inventories
Total 3,300 3,700 3,900 4,100 4,300 18,100
Less: Beginning
150 300 300 300 300 150
inventories
Required Production 3,150 3,400 3,600 3,800 4,000 17,950
Post-Test Pre-Test
1. C 1. A
2. D 2. B
3. D 3. C
4. A 4. C
5. C 5. A
1. D
KEY TO CORRECTION
References
Business Finance Teachers Guide
https://financial-dictionary.thefreedictionary.com>
https://www.investopedia.com>terms
https://ycharts.com>glossary>terms
https://www.lawinsider.com>borrow….