`

12
Business Finance
(Quarter 1-Module 4/Week 4)

Preparation of Budget and Projection of

Financial Statements

Department of Education
SDO- City of San Fernando (LU)
Region 1
 12
Business Finance
(Quarter 1-Module 4/Week 4)

Preparation of Budget and Projection of

Financial Statements

MOST ESSENTIAL LEARNING COMPETENCY

 illustrate the formula and format for the preparation of budgets
and projected financial statements. (ABM_BF12-IIIcd-11)
 the learners shall be able to explain the tools in managing cash,
receivables, and inventory. (ABM_BF12-IIIc-d-12)


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Guide to Parents:
Get the module from your child’s subject teacher.
2. Read and understand together with your child.
3. Guide your child in reading the module.
4. If there are questions regarding the lesson/module, feel free to call/text the teacher using
this cellphone numbers 09385918457.
5. The module shall be returned to the designated area/teacher every Friday of the week.
6. Place the checked answer sheets in your child’s portfolio.
7. Thank you parent partners. We’re hoping for your full support.

Guide to Learners:
1. Read and understand the module together with your parents.
2. Do not leave any activity sheets unanswered.
3. Work on the activity sheets independently and BE HONEST at all times for you to maximize
learning.
4. Write your answers clearly.
5. If you are done with the module, give it to your parents/guardian so they can give it back to
the designated area/teacher for checking.

Health Tips:
1. Always wear your face mask and face shield.
2. Wash your hands with soap and water regularly.
3. Use alcohol or hand sanitizer when needed.
4. Practice social distancing to stop the spread of COVID-19 virus.

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 Business Finance Self-Learning Module has been developed for you to be
equipped with the knowledge of business and finance. It prepares you to work in
corporate and government financial management, banking, and financial planning.
And because finance revolves around planning and analysis, studying finance and
becoming more financially literate enables you to make better personal financial
decisions in the future.

Business Finance Self-Learning Module attains all the competencies outlined in

the K to 12 curriculum guide. Each lesson is packed with varied strategies and
activities and applies different instructional approaches to ensure that lifelong
learning is achieved. Furthermore, this module includes the following components:

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 Introduction
This module has been developed for you to be equipped with the knowledge of
business and finance. It prepares you to work in corporate and government
financial management, banking, and financial planning. And because finance
revolves around planning and analysis, studying finance and becoming more
financially literate enables you to make better personal financial decisions.

Besides improving a person's chances, Finance can also help you hone your
critical-thinking and problem-solving skills, which you can then use to make sound
financial decisions.

Therefore, this module will help you to add value to your learning phase by
proper understanding of time value of money; taking better financing decision;
being aware of the valuation of financial resources; understanding the requirement
of evaluation of investment opportunities; able to analyze each and every
opportunity cost; putting efforts for maximization of wealth; acquiring maximum
return of your investment; increasing your analytical skills; managing their
personal and professional life in a better way; deep analysis of sources of funds;
understand the investors life cycle to choose right investment time; understand key
success factors of financing and know how to get their cost capital and analyze it.

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 What I Need To Know
Learning Competencies:
 Illustrate the formula and format for the preparation of budgets and
projected financial statements. (ABM_BF12-IIIcd-11)
 The learners shall be able to explain the tools in managing cash, receivables,
and inventory. (ABM_BF12-IIIc-d-12)

Learning Objectives:
1. Know and apply the tools used in planning and forecasting.
2. Know and apply the tools used in budgeting.

What I Know

Instructions: Read the following questions carefully and encircle the letter that
best
describes the answer.

1. Set the direction of the company.

a.) Long term goal
b.) Short term goal
c.) Limited goal
2. The most important account in the financial statement in making a forecast
is _______since most of the expenses are correlated with this.
a.) Stocks
b.) Sales
c.) Merchandise
3. A ____________ is represented through budgets and projected or pro-forma
financial statements.
a.) quantified plan
b.) qualified plan
c.) quantified cash
4. A negative value for EFN (External Funds Needed), means that the company
has ________________
a.) Excess cash
b.) Less cash
c.) No cash
5. An EFN with a positive value means
a.) The company does not need funding
b.) The company needs funding
c.) The company has good standing in terms of cash.
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6. The willingness of the borrower to repay the loan
a.) Character
b.) Capacity
c.) Collateral
7. Security pledged for payment of the loan.
a.) Character
b.) Capacity
c.) Collateral
8. The firm’s _______________ is found by subtracting the cash disbursements
from cash receipts in each period.
a.) Beginning cash flow
b.) Ending cash flow
c.) Net cash flow
9. This include all of a firm’s inflows of cash in a given financial period.
a.) Sales flows
b.) Cash flows
c.) Credit flows
10.Refer to shortterm financial instruments with a maximum tenor of one year.
a.) Money market placements
b.) Sales market placements
c.) Strategic market placements
 3

What’s In

Characteristics of an Effective Plan.

 In planning, the goal of maximizing shareholders’ wealth must always be put
in mind.
 The following criteria may be used for effective planning:
 Specific – target a specific area for improvement.
 Measurable – quantify or at least suggest an indicator of progress.
 Assignable – specify who will do it.
 Realistic – state what results can realistically be achieved, given available
 resources.
 Time-related – specify when the result(s) can be achieved.

"There's a S.M.A.R.T. way to write management's goals and

objectives".

 A plan is useless if it is not quantified. A quantified plan is represented

through budgets and projected or pro-forma financial statements.
 These budgets and pro-forma financial statements are useful for controlling.
They serve as the basis for monitoring actual performance.
 Tell the students that meeting the plans is good. However, failing to meet the
plans is not equivalent to failure if the reasons for not meeting such plans
can be justified especially when the reasons are fortuitous in nature and are
beyond the control of management. (Measuring actual performance vis a vis
the plans even at the early start of the year allows the management to assess
the company’s performance and come up with remedial actions if warranted)

What’s New
Sales Budget-
 How sales budget is formulated?
o The most important account in the financial statement in making a
forecast is sales since most of the expenses are correlated with sales.

o Given the importance of the sales forecast, the financial manager

must be able to support this figure with reasonable assumptions. The
following external and internal factors should be considered in
forecasting sales
 4

External Internal
Gross Domestic Product growth Production capacity
rate
Inflation Manpower requirements
Interest rate Management style of managers
Foreign Exchange Rate Financial resources of the
company

Income Tax Rates Reputation and network of the

controlling stockholders
Developments in the industry
Competition
Economic Crisis
Political Crisis

External and internal factors influencing sale

Macroeconomic Variables (external)
Macroeconomic variables such as the GDP rate, inflation rate, and interest
rates, among others play an important role in forecasting sales because it tells
us how much the consumers are willing to spend. A low GDP rate coupled by a
high inflation rate means that consumers are spending less on their purchases
of goods and services. This means that we should not forecast high sales of the
periods of low GDP.
Developments in the Industry (external)
Products and services which have more developments in its industry would
likely have a higher sales forecast than a product or service in slow moving
industry. Consumer trends are always changing, thus the industry should be
competitive to be able to appeal to more customers and stay in the market.
Competition (external)
Suppose you are selling bread and you know that each person in your
community eats an average of one loaf of bread a day. The population of your
community is 500 people. If you are the only person selling bread in your town,
then your sales forecast is 500 units
of bread. However, you also have to take account your competition. What if
there are 4 other sellers of bread? You will need to have to divide the sales
between the 5 of you. Does this mean your new forecast should be 100 units of
bread? Not necessary. You should also know the preference of your consumers.
If more of them would prefer to buy more bread from you, then you should
increase your sales forecast.
Production Capacity and man power (internal)
Suppose that you have already evaluated the macroeconomic factors and
identified that there is a very strong market for your product and consumers
are

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 very likely to buy from you. You forecasted that you will be able to sell 1,000
units of your product. However, you only have 20 employees who are able to
produce 20 units each. Your capacity cannot cover your expected demand
hence, you are limited by it. To be able to increase capacity, you should be able
to expand your operations.
 The implications if 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.

Production Budget
 What a production budget is and how it is formulated?
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.
It is computed as follows:

Required production in units = Expected Sales + Target Ending Inventories - Beginning

Inventories

Note: Ending inventory of current period is beginning inventory of next

period.
Example:
Company A forecasts sales in units for January to May as follows:
January February March April May
Units 2,000 2,200 2,500 2,800 3,000
 Moreover, Company A would like to maintain 100 units in its ending
inventory at the end of each month.
 Beginning inventory at the start of January amounts to 50 units.
 How many units should Company A produce in order to fulfill the expected
sales of the company?
Months
Jan Feb March April 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 50 100 100 100 100 100
Inventories
Required 2,050 2,200 2,500 2,800 3,000 12,500
production

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 What Is It

Budgeting Cash
 What is an Operation Budget and how it is formulated?
 Operations budget refers to the variable and fixed costs needed to run the operations of
the company but are not directly attributable to the generation of sales.

Operations budget refers to the variable and fixed costs needed to run the
operations of the company but are not directly attributable to the generation of
sales.

Examples of this are the following:

 Rent payments
• Wages and Salaries of selling and administrative personnel
• Administrative Costs
• Travel and representation expenses
• Professional fees
• Interest Payments
• Tax Payments

Cash Budget/Cash Forecast

 Importance of a Cash Budget and how it is formulated.
 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.

What the cash budget aims to do?

 For a business enterprise, having the right amount of cash is
important since cash is used to make payments for purchases, for
operational expenses, to creditors, and for other transactions. - The
cash budget forecasts the timing of these cash outflows and matches
them with cash inflows from sales and other receipts. The cash
budget is also a control tool to monitor the way the company handles
cash

The following are the steps in formulating a cash budget:

 Form the sales forecast, identify how much would be collected in the
cash budget period. Sales may be made in cash or for credit. Cash
sales are translated to cash at the point of sale while credit sales are
collected depending on the credit period. Credit periods may range
from 10 days to more than a month depending on the strategy of the
company.
 Continuing from previous example, assume selling price is
PHP100/unit. Sales for each month are expected to be collected as
follows: ‣
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o Month of sales : 20% ‣
o A month after sales: 50% ‣
o 2 months after sales: 30%
 How much is total receipts from sales?
Cash Budget
Jan Feb March April 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 1,250,00
0
Collection from 40,000 44,000 50,000 56,000 60,000 250,000
current months
sales
Collection from 100,000 110,000 125,000 140,000 150,000
previous
months sales
Collection from 60,000 66,000 75,000 84,000
two months
prior sales
Total 40,000 144,000 220,000 247,000 275,000 926,000
Collections
from sales
 Identify other receipts
Examples:
o interest received
o return on principal investments
o proceeds from sale of non-operating assets
o issuance of capital stock
o proceeds from borrowings
Add these receipts to the collections from sales to get total receipts.
 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.
o Assume that cost per unit is 50.
o All purchases this month are paid the following month. How much is
total cash disbursements for purchases.
Jan Feb March April May Total
Required 2,050 2,200 2,500 2,800 3,000 12,550
production
Cost in Peso 102,50 110,000 125,000 140,000 150,000 627,500
0
Payment from 102,500 110,000 125,000 140,000 477,500
current months
sales
Payment from 150,000
previous months
sales
Payment from
two months prior
sales
 Total Payments 0 102,500 110,000 125,000 140,000 477,500
for Purchases
8
 From the operations budget, identify which expenses will be paid in cash
during the cash budget period.
o Rent payments: Rent of PHP5,000 will be paid each month. ‣
o Wages and salaries: Fixed salaries for the year are PHP96,000, or
PHP8,000 per month.
o Wages are estimated as 10% of monthly sales.
o Tax payments: Taxes of PHP25,000 must be paid in April.
 It is important to recognize that depreciation and other noncash charges are
NOT included in the cash budget.
The following items will be paid based on the following periods:
‣ Fixed-asset outlays: New machinery costing PHP130,000 will be purchased and
paid for in April.
‣ Interest payments: An interest payment of PHP10,000 is due in May.
‣ Cash dividend payments: Cash dividends of PHP20,000 will be paid in January.
‣ Principal payments (loans): A PHP20,000 principal payment is due in February.

Jan Feb March April May Total

Total payments for
purchases 102,00 110,00 125,000 140,00 477,500
0 0 0
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 53,000 157,500 148,000 321,000 193,000 872,500
Disbursements
 Match the receipts and disbursements on the periods they become collectible
and payable, respectively.
 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.
 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, the company should make a short term borrowing during that period.
 Moreover, [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
Company A’s Cash Budget for January to May. Prepare a cash budget
 9

Jan Feb March April May Total

Cash Receipts 40,000 144,000 220,000 247,000 275,000 926,000
Less: Cash
Disbursement (53,000) (157,500 (148,000 (321,000 (193,000 (872,500
s ) ) ) ) )
Net Cash Flow (13,000) (13,500) 72,000 (74,000) 82,000 53,500
Add:
Beginning 80,000 67,000 53,500 125,500 51,500 80,000
Cash
Ending Cash
Balance 67,000 53,500 125,500 51,500 133,500 133,500
Less:
Minimum (100,000 (100,000 (100,000 (100,000 (100,000 (100,000
Cash Balance ) ) ) ) ) )
Cumulative
excess cash (33,000) (46,500) 25,500 (48,500) 33,500 33,500
balance
(cumulative
required
financing)

 Evaluating the Cash Budget:

o 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 short term borrowings to meet its required ending
balance. Should the ending cash balance exceed the company’s minimum
cash requirement the next period, the company may be able to repay the
loan plus accrued interest.
o If the Company have excess cash above its required maintaining cash
balance, the company may invest this cash on short term investments so
that it will have an opportunity to earn additional profits. If the company’s
cash balance would
then fall below its minimum cash requirement, the company may
withdraw the investment to be able to meet the required cash balance.

What’s More

Projected Financial Statements

Purpose of 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. The following reports may be forecasted:
o Projected Income Statement
 o Projected Statement of Financial Position
o Projected Statement of Cash Flows

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Example:

Company A
Income Statements
For the years ended December 31
2014 2013 2012 2011 2010
Net Sales 5,250,000 4,770,00 4,310,00 3,910,000 3,547,00
0 0 0
Cost of Sales 4,305,000 3,959,10 3,663,50 3,128,000 2,979,48
0 0 0
Gross Profit 945,000 810,900 646,500 782,000 567,520
Operating 314,750 297,890 246,231 221,500 217,538
expenses
Operating income 630,250 513,010 400,259 560,500 349,982
Interest 250,000 250,000 250,000 450,000 300,000
expense
Income before 380,250 263,010 150,259 110,500 49,982
taxes
Taxes 114,075 78,903 45,078 33,150 14,995
Net Income 266,175 184,107 105,181 77,350 34,987

Company A
Statement of Financial Positions
For the years ended December 31
2014 2013 2012 2011 2010
ASSETS
Current
Assets
Cash 1,060,000 990,000 770,000 760,000 880,000
Receivables 2,300,500 1,921,000 1,722,000 1,454,000 1,396,000
Inventories 4,850,000 4,500,000 3,797,000 3,290,000 3,350,000
Other current 1,050,000 980,000 984,000 735,000 998,000
assets
Total 9,260,50 8,391,00 7,273,00 6,239,00 6,624,00
Current 0 0 0 0 0
Assets
Non-Current
Assets
Property,
plant, and 2,440,000 2,260,000 1,810,000 1,870,000 1,900,000
equipment
11
Other 835,689 925,681 896,842 876,235 827,490
noncurrent
assets
Total Non-
Current Assets 3,275,689 3,185,68 1,706,84 2,746,23 2,727,49
1 2 5 0
TOTAL ASSETS 12,536,18 11,575,68 9,979,84 8,985,23 9,351,49
9 1 2 5 0

LIABILITIES
AND EQUITIES
Current
Liabilities
Notes Payable
Trade Payables 5,050,000 4,756,000 4,130,00 3,300,00 2,870,00
0 0 0
Income taxes
payable 28,520 19,725 11,270 8,290 3,750
Current portion
of long-term 2,250,000 2,500,000 1,000,00 2,000,00 2,000,00
debt 0 0 0
Other current
liabilities 85,600 28,700 40,990 30,688 37,890
Total Current 7,414,120 7,304,425 5,182,26 5,338,97 4,911,64
Liabilities 0 8 0
Non-Current
Liabilities
Long-term debt 2,000,000.0 1,250,000 ----- 1,000,00 3,000,00
0 0 0
TOTAL
LIABILITIES 9,414,120 8,554,425 5,182,26 6,338,97 7,911,64
0 8 0

STOCKHOLDER
’S EQUITY
Capital Stock 1,000,000 1,000,000 1,000,00 1,000,00 1,000,00
0 0 0
Retained 2,122,069 2,022,256 3,797,58 1,646,25 439,850
Earnings 2 7
TOTAL
STOCKHOLDER
’S EQUITY 3,122,069 3,022,256 4,797,58 2,646,25 1,439,85
2 7 0
TOTAL
LIABILITIES 12,536,18 11,575,68 9,979,84 8,985,23 9,351,49
AND 9 1 2 5 0
STOCKHOLDER
’S EQUITY

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Steps on Financial Statement Projection.
1.) Forecast Sales
 Sales is very important in forecasting financial statement.

Example exercise in financial statement projection. Take the information

 Sales are expected to increase by 10% in 2015 from the 2014 sales level.
 This growth assumption is based on the assessment of the external and
internal factors related to the Company and the historical growth of the
company.
 The company’s sales grew by 10.3% annually from 2010 to 2014.
below:

Compute for Projected Sales:

Projected Sales in 2015 = 5,250,000 x (1 + 10%) = 5,775,000

2.) Forecast Cost of Sales and Operating Expenses

 In determining the cost of sales and operating expenses, variable and
fixed costs should be identified.
 Cost of sales are direct costs associated in the generation of sales.
One way of projecting cost of sales is using the cost of sales ratio.
Companies would generally have a consistent historical cost of sales
ratio. The company may use this as a starting point.
 Suppose that the company has an average of 60% cost of sales ratio.
In doing projections, the financial manager may use the same average
ratio or, if the company is pushing for efficiency, the financial
manager may reduce this ratio to say 57% depending on his
judgment.
 Operation costs are a mix of variable and fixed costs. Variable costs
usually vary with sales. To project these costs, the percentage of sales
method may be used. On the other hand, fixed costs remain the same
no matter how the volume of sales has changed.


The Company wants to maintain the same gross profit per year as 2014.
Variable operating expense is 5% of sales. Depreciation expense is 5% of
the gross beginning balance of property, plant and equipment. As of
December 31, 2014, the gross balance of PPE is PHP5,200,000.
For January 2015, PHP1,000,000 new PPE will be acquired. It is the
policy of the company that PPE acquired in the first half of the year will
be depreciated for one full year.
Compute for Cost of Sales, Variable Operating Expense, and Depreciation
Expense
 Cost of sales percentage in 2014 = 4,305,000 ÷ 5,250,000) x
100%
 Cost of sales percentage in 2014 = 82%

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 Projected cost of sales in 2015 = 82% x 5,775,000
  Projected cost of sales in 2015 = 4,735,500
 Variable (5% x Sales of 5,775,000) =288,750
 Fixed (depreciation expense) (5,200,000 + 1,000,000) x 5% =310,000
 Total operating expenses (VC+FC=TOE)(288,750+310,000)=598,750

 Compute for net PPE

PPE net, beginning 2,440,000
Additions 1,000,000
Less: Depreciation (310,000)
PPE net, end 3,130,000

3.) Forecast Net Income and Retained Earnings.

 To forecast net income, interest expense and income tax expense
should also be considered using the relevant interest and tax rates.
Retained earnings is arrived at by adding projected net income to
beginning retained earnings then deducting dividends to be declared
during the year.
 Just note this information. Return to this when all income statement
items are complete.

4.) Income tax rate is 30% of the income before taxes. 75% of the income tax
expense will be paid in 2015 while the balance will be paid in 2016.

Determine balance sheet items that will vary with sales or whose balances
will be highly correlated to sales.
 Balance sheet items that may vary with sales or will be highly
correlated with sales are cash, accounts receivable, inventories,
accounts payable, and accrues expenses payable.
 Compute as follows:

The following financial statement accounts are expected to vary with

sales based on the 2014 financial statements:
A. Cash
B. Trade accounts receivable
C. Inventories
D. Other current assets
E. Trade accounts payable

Cash
 Cash as a percentage of sales in 2014 = ( 1,060,000 ÷ 5,200,000)
x 100%
 Cash as a percentage of sales in 2014 = 20.19%
 Projected cash in 2015 = 20.19 % x 5,775,000
 Projected cash in 2015 = 1,165,973
Accounts Receivable
 Accounts receivable as a % of sales in 2014 = (2,300,500 ÷
5,200,000) x 100%

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 Accounts receivable as a % of sales in 2014 = 43.82%
  Projected accounts receivable in 2015 = 43.82% x 5,775,000
 Projected accounts receivable in 2015 = 2,530,605

Inventories
 Inventories as a % of sales in 2014 = ( 4,850,000 ÷ 5,200,000) x 100%
 Inventories as a % of sales in 2014 = 92.38%
 Projected inventories in 2015 = 92.38% x 5,775,000
 Projected inventories in 2015 = 5,334,945

Other Current Assets

 Other current assets as a % of sales in 2014 = (1,050,000 ÷ 5,200,000) x
100%
 Other current assets as a % of sales in 2014 = 20%
 Projected other current assets in 2015 = 20% x 5,775,000
 Projected other current assets in 2015 = 1,155,000

Accounts Payable
 Accounts payable as a % of sales in 2014 = (5,050,000.00 ÷ 5,200,000) x
100%
 Accounts payable as a % of sales in 2014 = 96.19%
 Projected accounts payable in 2015 = 96.19% x 5,775,000
 Projected accounts payable in 2015 = 5,554,973

5.) Determine payment schedule for loans.

Compute for interest expense:

As of December 31, 2014, there are two long-term loans. Both have an
annual interest rate of 8%.
A. The first loan will mature on June 30, 2015 and the remaining principal
balance to be paid on June 30, 2015 is PHP1,250,000.
B. The second loan which was incurred on December 31, 2014 is paid at
the rate of PHP500,000 principal balance every June 30 and December
31.
New loans of PHP3,500,000 will be incurred on December 31, 2015
payable at the rate of PHP500,000 every June 30 and December 31. Annual
interest rate is expected at 8%.

First Loan
Interest from January 1 to June 30, 2015
1,250,000 x 8% x (6 mos ÷ 12 mos) 50,000
Second Loan
Interest from January 1 to June 30, 2015
(1,000,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos) 120,000
Interest from July 1 to December 31, 2015 100,000
(500,000 + 2,000,000) x 8% x (6 mos ÷ 12 mos)
Total interest expense for 2015 270,000
15

- Complete projected income statement as follows:

 Company A
Projected Statement of Profit or Loss
For the year ending December 31
Net Sales 5,775,000
Cost of Sales 4,735,500
Gross Profit 1,039,500
Operating Expenses 598,750
Operating Income 440,750
Interest Expense 270,000

Income before taxes 170,750

Taxes 51,225
Net Income 119,525

Compute for Income Tax Payable

Projected Income Tax Payable in 2015: 51,225 x (1 – 75%) = 12,806
Compute for current and non-current portion of long term assets:
Loan Current portion Long-term Total
portion
Loan incurred on 1,000,000 1,000,000 2,000,000
December 31, 2014 of
PHP3 million
Loan of PHP3.5 million 1,000,000 2,500,000 3,500,000
to be incurred on
December 31, 2015
Total 2,000,000 3,500,000 5,500,000

6.) Check for other information

Cash dividends of PHP300,000 will be paid for 2015.

Other non-current assets and other current liabilities will remain
unchanged.

Compute for retained earnings

Retained earnings, beginning 2,122,069
Add: Net Income 119,525
Less: Dividents (300,000)
Retained earnings, end 1,941,594
7.) Determine external funds needed (EFN).
8.) Determine how external funds needed may be financed.
-External Funds Needed is a plug figure to make projected assets equal
projected
liabilities and shareholders’ equity.
EFN = change in total assets – (change in total liabilities + total change in
stockholders’ equity)
16
 2015 Balances 2014 Balances Change
Without EFN
Total Assets 14,152,212 12,536,189 1,616,023
Total Liabilities 11,153,379 9,414,120 1,739,259
Total stockholder’s 2,941,594 3,122,069 (180,475)
equity
EFN 57,239

Implication of a positive or negative EFN is.

 A positive value for EFN, means that the company needs more funds
equivalent to the positive value of EFN. As to how this will be raised
depends on the management and the company’s ability to access
funds. This EFN can be raised in the form of short term borrowing,
long term borrowing or equity, or a combination of all sources. The
projected balance sheet which generated this EFN is just the first
iteration in preparing a pro-forma balance sheet.
 A negative value for EFN, means that the company has excess cash.
As to how this excess cash will be distributed will be the subject of the
next iteration for the pro-forma balance sheet. This can be disposed
by adding it to the projected cash balance or it can be used to retire
some of the debt if pre-termination is allowed.

Company A
Projected Statement of Financial Position
December 31, 2015
ASSETS
Current Assets
Cash 1,165,973
Receivables 2,530,605
Inventories 5,334,945
Other current assets 1,155,000
Total Current Assets 10,186,523
Non-Current Assets
Property, plant, and equipment 3,130,000
Other noncurrent assets 835,689
Total Non-Current Assets 3,965,689
TOTAL ASSETS 13,152,212

LIABILITIES AND EQUITIES

Current Liabilities
Notes Payable 57,239
Trade Payables 5,554,973
Income taxes payable 12,806
Current portion of long-term debt 2,000,000
Other current liabilities 85,600
Total Current Liabilities 7,710,618
Non-Current Liabilities
Long-term debt 3,500,000
TOTAL LIABILITIES 11,210,618
STOCKHOLDER’S EQUITY
Capital Stock 1,000,000
Retained Earnings 1,941,594
TOTAL STOCKHOLDER’S EQUITY 2,941,594
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY 13,152,212
17
 Company A
Projected Statement of Cash Flows
For the Year Ending December 31, 2015
Cash flows from operating activities
Income before taxes 170,750
Adjustments
Depreciation 310,000
Changes in the following accounts
Decrease (Increase) in accounts receivable (230,105)
Decrease (Increase) in inventories (484,945)
Decrease (Increase) in other current assets (105,000)
Increase (Decrease) in accounts payable 504,973
Increase (Decrease) in other current liabilities
Income taxes paid (66,939)
Cash flows from operating activities 98,734

Cash flows from investing activities Acquisitions of PPE (1,000,000)

Acquisition of other non-current assets -----------------

Cash flows from investing activities (1,000,000)

Cash flows from financing activities

Payment of cash dividents (300,000)
Short-term notes payable (EFN) 57,239
Loans, net of payments 1,250,000
Cash flows from financing activities 1,007,239
Net change in cash 105,973
Cash, beginning 1,060,000
Cash, ending 1,165,973

What I have learned

To generalize our lesson, we discussed about the tools used in budgeting

and financial forecasting. We said that budgeting and financial forecasting are tools
that companies use to establish a plan for where management wants to take the
company—budgeting—and whether it is heading in the right direction—financial
forecasting. Budgeting is the financial direction of where management wants to
take the company, helping quantify the expectation of revenues that a business
wants to achieve for a future period while forecasting is used to determine how
companies should allocate their budgets for a future period, but unlike budgeting,
financial forecasting does not analyze the variance between financial forecasts and
actual performance. Aside from that we also learned about the tools used in
managing cash, receivables and inventory. Cash management is the proper use of
an entity's cash resources. It assists to keep an organization functioning by making
the best use of cash or liquid resources of the organization while a management of
receivable means
 18
forms of investment in any enterprise manufacturing and selling goods on credit
basis, large sums of funds are tied up in trade debtors. When company sells its
products, services on credit, and it does not receive cash for it immediately, but
would be collected in near future, it is termed as receivables. The aim of receivable
management is to promote sales and profits until that point is reached where the
return on investment in further funding receivables is less than the cost of funds
raised to finance that additional credit cost of capita. Inventory management is task
of controlling the assets that are produced to be sold in the normal course of the
firm's procedures. Its aim is to carry inventories to separate the operations of the
firm. It means to make each function of the business independent of each other
function so that delays or closures in one area do not affect the production and sale
of the final product.

Assessment

Instructions: Read the following questions carefully and encircle the letter that
best
describes the answer.

1. It is the most liquid asset.

a.) Property, Plant and Equipment
b.) Accounts Receivable
c.) Cash
2. This is the cash used for paying expenses such as salaries, utilities, rent and
taxes, among others.
a.) Compensating balance
b.) Precautionary
c.) Transactional
3. This is the cash held to meet bank requirements such as the minimum cash
balance you maintain for checking accounts and if you have existing loans,
banks may also require a minimum amount of deposit with them. 
a.) Compensating balance
b.) Precautionary
c.) Transactional
4. This is the cash maintained for emergencies.
a.) Compensating balance
b.) Precautionary
c.) Transactional
5. Provides information regarding the company’s expected cash receipts and
Disbursements over a given period.
a.) Cash budget
b.) Sales budget
c.) Credit budget
6. It include all outlays of cash by the firm during a given financial period
a.) Cash disbursements
b.) Purchase disbursements
c.) Sales disbursements
 19

7. It involves the formulation and administration of plans and

policies to efficiently and satisfactorily meet production and merchandising
requirements and minimize costs relative to inventories
a.) Sales management
b.) Credit management
c.) Inventory management
8. One way to control inventory is to classify inventory into a classification
system called
a.) CBA Analysis
b.) SWOT Analysis
c.) ABC Analysis
9. These are purchased materials not yet put into production.
a.) Raw materials
b.) Work in process
c.) Finished goods
10. These are goods and labor put into production but not yet finished.
a.) Raw materials
b.) Work in process
c.) Finished good

ADDITIONAL ACTIVITIES

TRUE OR FALSE TEST:

Directions: Write T if the statement is True and write F if otherwise. Write the
letter of your answer on the blank provided at the right side of the test paper.
(10 pts.)

1. Inventories classified as “A” are high valued items which

should be safeguarded the most.
2. One way to control inventory is to classify inventory into a
classification system called CAB Analysis.
3. Finished goods – these are goods put into production and
finished. These are ready to be sold.
4. Inventory management involves the formulation and
administration of plans and policies to efficiently and
satisfactorily meet production and merchandising requirements
and minimize costs relative to inventories.
5. Poor management of accounts receivable entails having a good
billing and collection system.
6. Aging of receivables is also a control measure to determine the
amount of receivables that are still outstanding and past due.
7. The collectability of accounts receivables depends largely on the
quality of customers.
8. Accounts receivables spring out of the need to sell merchandise.
9. The firm’s net cash flow is found by subtracting the cash
disbursements from cash receipts in each period.
10.Receipt disbursements include all outlays of cash by the firm
during a given financial period.
Enumerate and explain. Read the case of Maria Luna and answer the question
after.

Maria Luna, a 25-year-old nurse, works at a hospital that pays her every 2 weeks
by direct deposit into her checking account which pays no interest and has no
minimum balance requirement. She takes home about PHP9,000 every 2 weeks or
about PHP18,000 per month.
She maintains a checking account in the bank that does not earn any interest
income with a balance of around PHP7,500. Whenever it exceeds that amount she
transfers the excess into her savings account, which currently pays 1.5% annual
interest.
She currently has a savings account balance of PHP85,000 and estimates that she
transfers about PHP3,000 per month from her checking account into her savings
account.
Maria pays her bills immediately when she receives them. Her monthly bills
average about PHP9,500, and her monthly cash outlays for food and transportation
cost total about PHP4,500.
An analysis of Maria’s bill payments indicates that on average she pays her bills 10
days early. Bank Time Deposit are currently yielding about 4.2% annual interest.
Maria is interested in learning how she might better manage her cash balances.
Give three ways for Maria to better manage her cash balance.
Answer Key
Practice Exercise 1 Practice Exercise 2
True/False Multiple Choice
1. F 1. C
2. T 2. A
3. T 3. A
4. T 4. A
5. F 5. C
6. T 6. B
7. T 7. B
8. T 8. C
9. T 9. A
10. T 10. A

Enrichment Activity-(enumerate and explain)

1. Invest current balances. Maria can transfer her current savings account
balances into a Time Deposit, thereby increasing the rate of interest earned
from 1.5% to about 4.2%. On her current P17,000 balance, she will
immediately increase her annual interest earnings by about PHP2,295. (0.042 -
0.015) X P85,000
2. Invest monthly surpluses. Maria can transfer monthly the PHP3,000 from her
checking account to the Time Deposit, thereby increasing the annual earnings
on each monthly transfer by about PHP81(0.042 - 0.015) X PHP3,000 which,
for the 12 transfers, would generate additional annual earnings of about
PHP972 (12 months X PHP81).
3. Slow down payments. Rather than paying her bills immediately on receipt,
Maria can pay her bills nearer their due date. By doing this she can gain 10
days of disbursement float each month, or 120 days per year (10 days per
month over12 months), on an average of PHP9,500 of bills. Assuming she can
earn 4.2% annual interest on the PHP9,500, slowing down her payments would
save about P133 annually (120/360) X 0.042 X P9,500 .
 Answer Key Pre-Test and Post-Test
Pre-Test: Multiple Choice
1. a
2. b
3. a
4. a
5. b
6. a
7. c
8. c
9. b
10.a

Post-Test: Multiple Choice

1. c
2. c
3. a
4. b
5. a
6. a
7. c
8. c
9. a
10. b
 References

Image Sources:
1. https://www.flaticon.com/free-icon/megaphone_314441
2. https://www.flaticon.com/free-icon/objective_1632633
3. https://www.iconfinder.com/icons/1297845/
message_note_noted_notes_report_statement_write_icon
4. https://en.m.wikipedia.org/wiki/File:VisualEditor_-_Icon_-_Open-book-
2.svg
5. https://icon-library.com/tags/writing.html
6. https://freeiconshop.com/icon/edit-document-icon-flat/
7. https://commons.wikimedia.org/wiki/
File:Checklist_Noun_project_5166_yellow.svg
8. https://www.clipartmax.com/middle/m2H7H7m2d3K9K9N4_illustration-
of-a-hand-writing-on-paper-representing-things-to-do-icon/

Bibliography:

Bernstein, Leopold. Financial Statement Analysis, 4th Ed. Illinois: Irwin, 2014.
Brealey, Richard A., Myers, Stewart.C. and Marcus, Alan .J. Fundamentals of
Corporate Finance, 3rd Edition. New York: Mc-Graw Hill Co., 2014.
Cabrera, Elenita B. Management Advisory Services. Manila: Conanan, 2015.

Development Team of the Module

Writer: Jusie C. Apilado, Teacher II

EPS In-charge: Dr. Lorena C. Salvador
Management Team: Dr. Rowena C. Banzon, CESO V, SDS
Dr. Agnes B. Cacap, Chief- CID
Dr. Jose Mari P. Almeida, Chief- SGOD
Genevieve B. Ugay, EPS- LRMS
Hazel JaneB. Libatique, Librarian II
Aurelio C. Dayag, Jr. , PDO II
40