Business SENIOR

HIGH
Finance SCHOOL

Self-Learning

Preparation of Budget Module

8
Quarter 3
Business Finance
Quarter 3 – Module 8: Preparation of Budget
First Edition, 2020

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Business SENIOR
HIGH

Finance SCHOOL

Self-Learning
Module

8
Quarter 3

Preparation of Budget
Introductory Message

For the Facilitator:

Welcome to the Business Finance Self-Learning Module on Preparation of

Budget!

This Self-Learning Module was collaboratively designed, developed and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

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:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

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:

Welcome to the Business Finance Self-Learning Module on Preparation on

Budget!

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.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.
 EXPECTATIONS

At the end of this module, you are expected to:

1. identify the steps in formulating the budgets;
2. know how to use and evaluate tools for budgeting; and
3. apply the tools used in different types of business.

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

______ 3. Which expenses should be paid in cash?

A. Sales on credit C. Salaries and Wages
B. Accounts payable D. None of the above

_____ 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

The following are the steps in formulating a cash budget:

1. Form the sales forecast and identify how much would be collected in the cash
budget period. The sales may be made in cash or for credit. The cash sales are
translated to cash at the point of sale while credit sales are collected depending on
the credit period. The credit periods may range from 10 days to more than a month
depending on the strategy of the company.
Example:
XYZ Company forecasts sales in units for January to May are as follows:

Jan Feb Mar Apr May

Units 2000 2200 2500 2800 3000

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%

Question: How much is the total receipts from sales?

Answers:

Jan Feb Mar Apr May Total

Units 2,000 2,200 2,500 2,800 3,000 12,500

Sales in Pesos 200,000 220,000 250,000 280,000 300,000 1,250,000

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)

Collection from two

60,000 66,000 75,000 84,000
months prior sales (c)

Total Collections
40,000 144,000 220,000 247,000 275,000 926,000
from Sales

2. Identify other receipts. The following example of receipts is interest received,

return on principal investments, proceeds from the sale of non-operating assets,
issuance of capital stock, and proceeds from borrowings. Add all these receipts to
the collections from sales to get the total receipts.

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

a. Assume that cost per unit is PHP50.

b. All purchases this month are paid the following month.
Question:
How much is total cash disbursements for purchases?
Answers:

Jan Feb Mar Apr May Total

Required production 2,050 2,200 2,500 2,800 3,000 12,550

Cost in Peso 102,500 110,000 125,000 140,000 150,000 627,500

Payment from current

102,500 110,000 125,000 140,000 477,500
months sales

Payment from previous

150,000
months sales

Payment from two

months prior sales

Total Payments for

0 102,500 110,000 125,000 140,000 477,500
Purchases

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

Rent Payments 5,000 5,000 5,000 5,000 5,000 25,000

Wages 20,000 22,000 25,000 28,000 30,000 125,000

Salaries 8,000 8,000 8,000 8,000 8,000 40,000

Tax Payment 25,000 25,000

Fixed Asset Outlay 130,000 130,000

Interest Payment - 10,000 10,000

Cash Dividend 20,000 20,000

Principal Payment
20,000 20,000
(loans)

Total Cash
53,000 157,500 148,000 321,000 193,000 872,500
Disbursements

6. Match the receipts and disbursements on the periods they become

collected and payable, respectively.
7. Set a minimum required cash balance. This balance is maintained in case
contingencies arise. Recall from the steps in planning that we should also plan for
contingencies.
8. If the net cash flow is above the minimum cash balance, the company is in excess
cash and may consider putting it in short term investments. If it is below minimum
cash balance, the company should make a short term borrowing during that period.

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

Jan Feb Mar Apr May Total

Cash Receipts 40,000 144,000 220,000 247,000 275,000 926,000

Less: Cash Disbursements 53,000 157,500 148,000 321,000 193,000 872,500

Net Cash Flow (13,000) (13,500) 72,000 (74,000) 82,000 53,500

Add: Beginning Cash 80,000 67,000 53,500 125,500 51,500 80,000

Ending Cash Balance 67,000 53,500 125,500 51,500 133,500 133,500

Less: Minimum Cash Balance 100,000 100,000 100,000 100,000 100,000 100,000

Cumulative excess cash

balance (Cumulative (33,000) (46,500) 25,500 (48,500) 33,500 33,500
required financing)

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

Directions. Prepare a projected Production Budget of Mamang Chicken

Inasal at space provided below.

Situation:
Mamang Chicken Inasal owner forecasts sales in units for his 3 branch store in
Pasig City for January to May are as follows:

Jan Feb Mar Apr May

Units 3000 3400 3600 3800 4000

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

In this lesson, you learned:

1. What are the steps in formulating the budget?

2. How to prepare different types of budget?
3. What are the different transaction or items to be included in the budget
preparations?

VALUING

1. Do you think a company or a business will run successfully without using

different tools of budgeting?
2. As a student, do you think you need these tools?
 POSTTEST

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.

3. What is the possible suggestion of the Accountant or Financial Officer to the

owner of the company, if there is excess cash above its required maintaining
cash balance?
A. Pay all credits
B. Buy brand new car
C. Purchase additional machine
D. Invest in short term investments to earn additional profits.

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….