NAME: TEACHER:

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STRAND AND SECTION: DATE:

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Business Finance - Grade 12-Week 3-4

ILLUSTRATING THE FORMULA AND FORMAT FOR THE PREPARATION OF

BUDGETS

BACKGROUND INFORMATION FOR LEARNERS

A budget is a financial plan of the resources needed to carry out tasks and meet
financial goals. It is also a quantitative expression of the goals the organization wishes
to achieve and the cost of attaining these goals.

A master budget represents summary of all of management’s plans and goals for
the future (covering a period of one year or less), and outlines the way in which the
plans are to be accomplished.

FORMULA AND FORMAT FOR THE PREPARATION OF BUDGET STATEMENTS

INCLUDED IN THE MASTER BUDGET

a. Sales Budget

The most important account in the financial statement in making a forecast is sales since
most of the expenses are correlated with sales. Considering sales budget is not correct if
understated, there can be lost opportunities in the form of forgone sales. If it is too optimistic,
the management may decide to unnecessarily increase capacity or hire more employees and
end up with more inventories. A Company Forecasts sales / projected sales in Units for
January to May as follows:
Units Jan Feb Mar Apr May Total
Projected Sales 2,000 2,200 2,500 2,800 3,000 12,500

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To compute Sales in Pesos
Units to be sold xx
Multiplied by: Unit selling price xx
Sales revenue/Sales in Pesos xx

b. Production Budget
A production budget provides information regarding the number of units that should
be produced over a given accounting period based on expected sales and targeted
level of ending inventories.

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 inventories 100 100 100 100 100 100
--------- -------- ------- -------- -------- ---------
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 12,500

C. Cash Budget
Cash budget or cash forecast is a statement of the firm’s planned inflows and outflows
of cash. It is used by the firm to estimate its short-term cash requirements with particular
attention being paid to planning for surplus cash and for cash shortages.

Example of Total Collection from Sales

Assume selling price is PHP100/unit. Sales for each month are expected to be collected as
follows:
‣ Month of sales: 20%
‣ A month after sales: 50%
‣ 2 months after sales: 30%
- How much is total receipt from sales?

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 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
Collection from previous months sales 100,000 110,000 125,000 140,000 150,000
Collection from two months prior sales 60,000 66,000 75,000 84,000
Total Collections from Sales 40,000 144,000 220,000 247,000 275,000 ₱926,000

Example of Total Payments:

‣ Assume that cost per unit is PHP50.
‣ All purchases this month are paid the following month.
How much is total cash disbursements for purchases?

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 months sales 102,500 110,000 125,000 140,000 477,500
Payment from previous months sales 150,000
Payment from two months prior sales -- -- -- -- -- --
Total Payments for Purchases 0 102,500 110,000 125,000 140,000 ₱477,500

Example of all other cash payments to be made:

Jan Feb Mar Apr May Total

Total Payments for Purchases -- ₱102,500 ₱110,000 ₱125,000 ₱140,000 ₱ 477,500
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
Total Cash Disbursements ₱53,000 ₱157,500 ₱148,000 ₱321,000 ₱193,000 ₱872,500

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A Company has a beginning cash balance of PHP80,000 and would like to maintain an
ending cash balance of PHP100,000 per month. Prepare [A] Company’s Cash Budget
for January to May. Prepare a cash budget.
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 required financing) (₱33,000) (₱46,500) ₱ 25,500 (₱48,500) ₱33,500 ₱33,500

PROJECTED FINANCIAL STATEMENTS

Projected financial statements is a tool of the company to set an overall goal of what
the company’s performance and position will be for and as of the end of the year. It sets targets
to control and monitor the activities of the company.
Financial forecasts assist businesses in the attainment of their goals. They are the
future predictions of finances which provide details of actual the results or progress of
performances. Predicting the financial future of a business needs a lot of considerations
especially if the business has not yet been established and has none financial history. The
forecasting and making adjustments will enable a business to become more precise and
accurate in numbers in the future.

Illustrative Case:
The Mellinial Company has the following statements representative of the company’s historical
average.

Mellinial Company
Income Statement
For the year ended Dec. 31, 2019

Sales ₱ 2,000,000
Cost of Sales (1,200,000)
Gross profit 800,000
Operating expenses (380,000)
Earnings before interest and taxes 420,000
Interest expense 70,000
Earnings before taxes 350,000
Taxes (35%) (122,500)
Net Income/Earnings after taxes ₱ 227,500

Dividends ₱ 136,500

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 Mellinial Company
Statement of Financial Position
For the year ended Dec. 31, 2019

Assets
Cash ₱ 50,000
Accounts receivable 400,000
Inventory 750,000
Total Current Assets ₱1,200,000
Fixed Assets (net) 800,000
Total Assets ₱ 2,000,000
Liabilities and Stockholder’s equity
Accounts payable ₱ 250,000
Accrued Expenses 10,000
Accrued Taxes 20,000
Total Current Liabilities ₱ 280,000
Notes Payable-bank 70,000
Long-term debt 150,000
Total Liabilities ₱ 500,000
Ordinary shares 1,200,000
Retained Earnings 300,000
Total Shareholder’s equity 1,500,000
Total liabilities and equity ₱ 200,000

The firm is expecting 20% increase in sales next year, and management is concerned about
the company’s need for external funds. The increase in sales expected to carry out without
any expansion of fixed assets but rather through more efficient asset utilization in the existing
store. Among liabilities, only current liabilities vary directly with sales.

Solution:

Step 1. Forecast the Income Statement.

The projected income statement will show the following:

Sales (P2M x 120%) ₱ 2,400,000

Cost of Sales (P2.4M x 60%) (1,440,000)
Gross Profit 960,000
Operating expenses (P2.4M x 19%) 456,000
Earnings before interest and taxes 504,000
Interest expense (70,000)
Earnings before taxes 434,000
Taxes (35%) (151,900)
Earnings after taxes ₱ 282,100_

Dividends (36% payment) ₱ 101,600

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Step 2. Forecast the Statement of Financial Position
The projected statement of financial position will show the following:

Assets

Cash (1) ₱ 60, 000

Accounts receivable (2) 480,000
Inventory (3) 900,000
Total current assets ₱ 1, 440,000

Fixed assets (net) (4) 800,000

Total Assets ₱ 2, 240,000

Liabilities and Equity

Accounts Payable (5) ₱ 300,000

Accrued Wages (6) 12,000
Accrued taxes (7) 24,000
Total Current liabilities ₱ 336,000
Notes payable-bank (4) 70,000
Long-term debt (4) 150,000
Ordinary shares (4) 1,200,000
Retained Earnings (8) 480,000
Total ₱ 2, 236,500
Additional Financing required 3,500
Total ₱ 2, 240,000

Supporting computations:

(1) Cash = 2.5% x ₱ 2,400,000 sales

(2) Accounts receivable = 20% of ₱ 2,400,000
(3) Inventory = 37.5% x ₱ 2,400,000
(4) No percentages computed for fixed assets, notes payable, long-term debt, ordinary
shares and retained earnings because they are not assumed to maintain a direct
relationship with sales volume. For simplicity, depreciation is not explicitly considered.
(5) Accounts payable = 12.5% of ₱ 2,400,000
(6) Accrued expenses = 0.5% of ₱ 2,400,000
(7) Accrued taxes = 1% of ₱ 2,400,000
(8) Retained earnings = ₱ 300,000 + ₱ 282,100 – ₱ 101,600

LEARNING COMPETENCY

Illustrate the Formula and Format for the Preparation of Budgets and Projected Financial
Statement (ABM_BF12-IIIc-d-11)

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 ACTIVITIES

Activity 1. Production Budget

Direction: Given the following data, calculate the production budget (Php) of Company X.
Year 1 Year 2 Year 3
Sales (in units) 5,000 10,000 15,000
Add: Ending 1,500 2,500 4,000
Inventory
Total 6,500 12,500 19,000
Less: Beginning 3,000 5,000 7,000
Inventory
Production Budget 1.)___ __________ 2.) ___ __________ 3.) ______________

Activity 2. Sales Budget

Directions: Read and understand the case below. Complete the projected sales budget for
each quarter and answer the given question.
XYZ Merchandising, which is engaged in the reselling of branded bags, is in the process of
preparing its budgets for the calendar year 2016. Last year, XYZ was able to sell 1,500 bags
with a selling price of 2,500 per bag. For the current year, the basis of both external and
internal information, first quarter sales expected to be 400 bags. The firm also expects that
unit sales per quarter would increase by 10%. Selling price is also expected to increase by
5% for 2016.

XYZ Merchandising
Sales Budget
For the year ended December 31, 2016

1 quarter
st
2 quarter
nd
3 quarter
rd
4 quarter
th
Total
Expected Sales in Units Ex. 400
Unit Sales price ₱ 2,625
Total Sales 1,050,000

• How much is the total projected sales budget?

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Activity 3. Projections.
Direction: Forecast the Income statement using percent of Sales Method and answer the
questions below on a separate sheet of paper.
The Gospel Company has the following statements which are representative of the
company’s historical average.

Gospel Company
Income Statement
For the year ended Dec. 31, 2018

Sales P 2,500,000
Cost of Sales (1,500,000)
Gross profit 1,000,000
Operating expenses (380,000)
Earnings before interest and taxes 620,000
Interest expense 80,000
Earnings before taxes 540,000
Taxes (35%) (189,500)
Net Income/Earnings after taxes P 350,500

Dividends P 140,200

Additional Information:
1. The firm is expecting 25% increase in sales next year.
2. The company expecting to declare 30% of dividend.

Questions:
1. How much is the net income?
2. How much is the dividend?

LET’S LEVEL UP

Directions. Read and analyse the given data. Answer the questions below on a separate
sheet of paper.

The January 31. 202x Statement of Financial Position of Shelpat Corporation follows:

Cash ₱ 8,000
Accounts receivable (net of allowance for uncollectible
Accounts of P2,000) 38,000
Inventory 16,000

Property, plant and equipment (net of allowance for

Accumulated depreciation of P60,000) 40 000
Total Assets ₱. 102,000

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Additional information:
• Sales are budgeted as follows:
February ₱110,000
March 120 000
• Collections are expected to be 60% in the month of sale. 38% the next
month and 2 % uncollectible.
• The gross margin is 25% of sales. Purchases each month are 75% of the
next month’s projected sales. The purchases are paid in full the following
month.
• Other expenses for each month, paid in cash, are expected to be P16,500.
Depreciation each month is P5,000.

1. What are the budgeted cash collections for February 202x?

a. P63,800 c. P101,800
b. P66,000 d. P104,000

2. What is the pro-forma income (loss) before income taxes for February 202x?
a. P(3,700) c. P3,800
b. P(1,500) d. P6,000

GUIDE QUESTIONS

Direction: The following questions will serve as your guide to reflect your learning in this
lesson but not intended to be answered on a separate sheet of paper.
1. How will you illustrate the formula and format for the Preparation of Budgets?
2. How will you illustrate the preparation of Projected Financial Statement?

RUBRIC FOR SCORING

Criteria Good (1 point) Better (3 Points) Best (5 Points)

Completeness and Able to give the Able to give the Able to give the formula
Accuracy formula formula but show an and show the complete
incomplete solution solution

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 REFLECTION

Direction: Rate yourself by checking the column that corresponds to your reaction for each
question.

Have you learned the lesson?

What do you feel about the topic?
How do you find the lesson?

REFERENCES

• Cabrera, M.E. (2017) Business Finance Principles and Applications for Senior
High School-BM Track
• Teaching Guide for Senior High School. Business Finance. Commission on
Higher Education
• Cayanan, A.S. (2017). Business Finance. Rex Book store, Inc. Rex Printing
Company.
• https://www.youtube.com/watch?v=loWMaa5TM1s

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44
ROV_Business Finance_Grade 12_Q1_Wk3-4_LP 5
PNHS SHS-Teacher
LOURDES M. BATALLER
Prepared by:
Activity 1. Production Budget
Directions: Calculate the production budget (Php) of Company X, given the following data:
Year 1 Year 2 Year 3
Sales (in units) 5,000 10,000 15,000
Add: Ending 1,500 2,500 4,000
Inventory
Total 6,500 12,500 19,000
Less: Beginning 3,000 5,000 7,000
Inventory
Production Budget 1.)___ 3,500_____ 2.) ___ 7,500______ 3.) ___12,000____
Activity 2. Sales Budget
XYZ Merchandising
Sales Budget
For the year ended December 31, 2016
st nd rd th
1 quarter 2 quarter 3 quarter 4 quarter Total
Expected Sales Ex. 400 440 484 532 1,856
in Units
Unit Sales price 2,625 2,625 2,625 2,625 2,625
Total Sales ₱1,050,000 ₱1,155,000 ₱1,270,500 ₱1,396,500 ₱4,872,000
Activity 3. Projections.
Gospel Company
Income Statement
For the year ended Dec. 31, 2019
Sales P 3,125,000
Cost of Sales (1,875,000)
Gross profit 1,250,000
Operating expenses (475,000)
Earnings before interest and taxes 775,000
Interest expense 100,000
Earnings before taxes 675,000
Taxes (35%) (236,250)
Net Income/Earnings after taxes P 438,750
Dividends P 131,625
ANSWER KEY