Statement of Cash Flows and

Budgets
 Topics to be Covered

⚫ Purpose of the CFS

⚫ Preparation of the CFS
⚫ Cash flows from operating activities
⚫Direct and indirect methods

⚫ Cash flows from investing activities

⚫ Cash flows from financing activities
⚫ Budgets – main concepts
2
 Why do we need the CFS?

Provides information to help assess:

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and obligations.

3. Reasons for difference between net income and net

cash flow from operating activities.
4. Cash and noncash investing and financing
transactions.
 Purpose of SCF
Why do we care about differences between operating
cash flows and net income ?
Non-cash write-offs
A big loss implies long-term problems; yet positive cash flows indicate that
the business can continue for the time being.
Quality of Earnings
When earnings are manipulated, cash flows become important in evaluating
a company.
Information about a firm’s status
How do cash flows patterns over the life of a company differ between a start-
up, high growth firm and a steady-state firm?
 Statement of cash flows
• Explains why a firm’s cash position changed between successive
balance sheet dates. Here’s a balance sheet equation:

Cash + Non-cash assets = Liabilities + Stockholders’ equity

Cash = Liabilities - Non-cash assets + Stockholder’s equity

ΔCash = Δ Liabilities - Δ Non-cash assets + Δ Stockholders’ equity

◼ At the same time, it explains why non-cash assets,

liabilities, and stockholders’ equity have changed.
 Statement format
Result from events or transactions that enter into the
Operating
determination of net income; i.e., the cash-based
cash flows revenues and expenses of a company.

Result from the purchase or sale of productive assets like

Investing
plant and equipment, marketable securities, and from
cash flows acquisitions and divestitures.

Result when a company sells its own stocks or bonds,

Financing
pays dividends or buys back its own shares, or borrows
cash flows money and repays the amounts borrowed.

Changes in cash
 Two Formats for Statement of Cash
Flows
Indirect Method
– Reconciles net income to operating cash flow
– Difficult to initially understand underlying intuition, but
much easier to actually prepare

Direct method
– Lists cash received from specific operating activities and
cash paid for each major operating activity
– Easier to understand, but much more difficult to
prepare

They differ mainly in the manner of reporting cash flows from operating
activities. 7
 Classification of Cash Flows

1. Cash received from interest and dividend revenues

operating
generated by investments in securities
2. Interest expense on debt operating

3. Dividends paid to shareholders financing

4. Purchase and sale of AFS marketable securities investing

5. Cash payment on a long-term note payable to suppliers for

materials used in the production of goods operating

6. Cash payment on a short term bank loan. The loan was

financing
used to finance the purchase of raw materials used in the
production of goods
 Steps in Preparation

Three Sources of Information:

1. Comparative balance sheets
2. Current income statement
3. Selected transaction data

Three Major Steps:

Step 1. Determine change in cash.
Step 2. Determine net cash flow from operating activities.
Step 3. Determine net cash flows from investing and
financing activities.
Cash Flows from Operating Activities
 Preparing the SCF using the Indirect
Approach
1. Start by calculating the changes in every balance
sheet account and understanding why the
account changes.

2. Then put each account change in the proper

category (operating, investing or financing).

3. When completed, make sure the sum of cash

flow from operating, investing, and financing
activities equals the change in cash account
during the year.
11
 Statement format:
Indirect approach
Accrual net income

Items included in Non-cash revenues and gains

accrual net income -
but did not affect +
cash in the period Non-cash expenses and losses

Cash inflows received but not

Items excluded from recognized as earned
+
accrual net income
but did affect operating
-
cash in the period Cash outflows paid but not recognized
for accrual purposes

Operating cash flows

 Intuition behind the indirect approach
NI Our starting point
- Gains To avoid double counting, because total amount of cash received
from disposing long-term assets is recorded in CFI.
+Losses Same as above.
+Dep. Exp. An expense that does not involve the use of cash
Thus, add it back to net income
- OCA Increase in non cash assets represent revenues from which we
did not get cash (Account receivables), or use of cash that still
have not been expensed (inventory). Thus, subtracted from net
income
+ CL Increase in current liabilities represent expenses that did not use
cash. Thus, add it back.
__________
Operating Cash Flows
Deriving cash flows from operations:
Indirect approach
 SCF – how to treat gains and losses

Ex. Sales of Property, Plant and Equipment (PPE)

Suppose you sold a building for $1 million and

had a gain of 0.25 million (i.e., the net book
value of the building is 0.75). How does the
sale affect statement of cash flows?
 SCF – how to treat gains and losses

How is the sale of PPE classified on the cash flow

statement?

The total cash receipts from the sale are classified as cash provided from
investing activities.

What are the total cash receipts?

Selling price = Book value + Gain (Loss)

But... Net income already includes the Gain (Loss) portion of these cash
receipts. Thus, for the indirect SCF we must subtract (add) the gain (loss)
from net income so that cash receipts are not double counted in both the
operating and investment activities' sections.
 Operating Activities – Indirect Method

Adjusts net income for items not affecting cash.

Common adjustments to Net Income (Loss):

Depreciation and amortization expense (noncash).
Gain or loss on disposition of long-term assets (noncash).
Change in current assets and current liabilities (related to NI).
 Operating Activities – Indirect Method
Krauss Company’s financial statements for the year ended December 31,
2007, contained the following condensed information.
2011 2010 Change
Revenues from fees $ 840,000
Operating expenses 624,000 Assume accounts payable
relates to operating
Depreciation expense 60,000
expenses, income tax
Loss on sale of equipment 26,000 expense relates to taxes
Income before income tax 130,000 payable, and no bad debt
Income tax 40,000 allowance and writeoff.
Net income $ 90,000

Accounts receivable $ 37,000 $ 54,000 $ (17,000)

Accounts payable 41,000 31,000 10,000
Income taxes payable 4,000 8,500 (4,500)
 Operating Activities – Indirect Method
Prepare the operating activities section of the statement
of cash flows using the indirect method (Step 2).
Cash flows from operating activities
Net income $ 90,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation expense
Loss on sale of equipment
Decrease in accounts receivable
Increase in accounts payable
Decrease in income taxes payable
Net cash provided by operating activities
 Operating Activities – Indirect Method
Prepare the operating activities section of the statement of
cash flows using the indirect method (Step 2).

Cash flows from operating activities

Net income $ 90,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation expense 60,000
Loss on sale of equipment 26,000
Decrease in accounts receivable 17,000
Increase in accounts payable 10,000
Decrease in income taxes payable (4,500)
Net cash provided by operating activities 198,500
 Preparing (Indirect) SCF – Step 2

Cash flows from Investing Activities:

Increases in long-term assets

→Acquisition of PP&E, intangibles, investments
→ Cash outflow from investing activities

Decreases in long-term assets

→Sale of PP&E, intangibles, investments
→ Cash inflow from investing activities
 Computation of Cash Flows from Investing Activities

PP&E
Purchase of new Sale of
Beginning PP&E - = Ending
+ PP&E existing
PP&E
PP&E

Accumulated Depreciation
Accumulated
Depreciation - =
Beginning Depre of sold Ending
+ expense
assets

PP&E net
Beginning Acquisition Depre Net book value of
+ - - = Ending
PP&E, net cost Exp sold PP&E PP&E, net

22
 Preparing (Indirect) SCF – Step 3

Cash flows from Financing Activities:

Cash proceeds received from issuing debt or stock less dividends less
the amount of cash paid to retire debt or stock.

Analyze the changes in long-term debt or notes payable to determine

whether more debt was issued or whether some was repaid.

Similarly, analyze the changes in stockholders' equity accounts to

determine whether capital stock was issued or repurchased, or whether
dividends were paid.
 Computation of Cash Flows from Financing Activities

Long-term Debt
Cash received Ending
Beginning long- - Cash = long-term
+ from issuance of
term debt payment of debt
long-term debt
debt

Common Stock
Cash received Cash payments Ending
Beginning from issuance of - to repurchase = stock
+
stock new stock stock

For dividends Ending

Beginning Dividend retained
+ Net income - =
retained declared earnings
earnings

24
 Determining Net Cash Flow from
Investing and Financing Activities
Example 1: Plant assets that had cost $20,000 6 years before
and were being depreciated on a straight-line basis over 10
years with no estimated scrap value were sold for $5,300.

Plant assets (cost) $ 20,000

Accumulated depreciation ([$20,000 / 10] x 6) 12,000
Book value at date of sale 8,000
Sale proceeds (5,300)
Loss on sale $ 2,700

How does this transaction affect the CFS?

 Example 1

Statement of Cash Flows

Cash flow from operating activities
Net income $
O Adjustment to reconcile net income to cash:
Loss on sale
Cash from operations
Cash flow from investing activities
I Proceeds from sale of plant asset
Cash from investing activities
Cash flow from financing activities
F
Cash from financing activities
Net Change in Cash $
 Example 1
Statement of Cash Flows
Cash flow from operating activities
Net income $
O Adjustment to reconcile net income to cash:
Loss on sale 2,700
Cash from operations
Cash flow from investing activities
I Proceeds from sale of plant asset 5,300
Cash from investing activities
Cash flow from financing activities
F
Cash from financing activities
Net Change in Cash $
 Example 2

Example 2: During the year, 10,000 shares of common

stock with a par value of $10 a share were issued for
$43 a share.

Shares sold 10,000

Market value per share $ 43
Value of shares $430,000
 Example 2
Statement of Cash Flows
Cash flow from operating activities
Net income $
O Adjustment to reconcile net income to cash:

Cash from operations

Cash flow from investing activities
I
Cash from investing activities
Cash flow from financing activities
F Sale of common stock
Cash from financing activities
Net Change in Cash $
 Example 2
Statement of Cash Flows
Cash flow from operating activities
Net income $
O Adjustment to reconcile net income to cash:

Cash from operations

Cash flow from investing activities
I
Cash from investing activities
Cash flow from financing activities
F Sale of common stock 430,000
Cash from financing activities
Net Change in Cash $
 Example 3

Example 3: The company sustained a net loss for the

year of $50,000. Depreciation amounted to $22,000,
and a gain of $9,000 was realized on the sale of land for
$39,000 cash.
 Example 3
Statement of Cash Flows
Cash flow from operating activities
Net loss
O Adjustment to reconcile net income to cash:
Depreciation expense
Gain on sale
Cash from operations
Cash flow from investing activities
I Sale of land
Cash from investing activities
Cash flow from financing activities
F
Cash from financing activities
Net Change in Cash $
 Example 3
Statement of Cash Flows
Cash flow from operating activities
Net loss $ (50,000)
O Adjustment to reconcile net income to cash:
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations
Cash flow from investing activities
I Sale of land 39,000
Cash from investing activities
Cash flow from financing activities
F
Cash from financing activities
Net Change in Cash $
 Example 4

Example 4: During the year, treasury stock costing

$47,000 was purchased.
 Example 4
Statement of Cash Flows
Cash flow from operating activities
Net income (loss)
O Adjustment to reconcile net income to cash:

Cash from operations

Cash flow from investing activities
I
Cash from investing activities
Cash flow from financing activities
F Purchase of company stock
Cash from financing activities
Net Change in Cash $
 Example 4
Statement of Cash Flows
Cash flow from operating activities
Net income (loss)
O Adjustment to reconcile net income to cash:

Cash from operations

Cash flow from investing activities
I
Cash from investing activities
Cash flow from financing activities
F Purchase of company stock (47,000)
Cash from financing activities
Net Change in Cash $
 Statement of CF – Example 1-4
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Depreciation expense 22,000
Loss on sale 2,700
Gain on sale (9,000)
Cash from operations (34,300)
Cash flow from investing activities

I Sale of plant assets

Sale of land
5,400
39,000
Cash from investing activities 44,400
Cash flow from financing activities
F Sale of common stock 430,000
Purchase of company stock (47,000)
Cash from financing activities 383,000
Net Change in Cash $ 393,100
 FAQs

• Does change in depreciation change the CFO?

– NO
– The add-back of depreciation simply reverses the non-cash
expense charged in computing net income
• Does a change in accounting principle change the CFO?
– NO (Generally)
– Change in accounting principle does not change cash flows.
However, it could result in a change in classification of
Operating, Investing, or Financing flow
• How to treat loss or gain on sale of assets
– Adjust the loss or gain in the OCF. Report gross proceeds (i.e.
cash received) as inflow from investing
 FAQs (Contd…)

• Where are the returns on capital (interest and dividends) reported

– Interest is reported as part of OCF while dividends are reported
under financing activities

• Where are non-cash transactions reported?

• In the supplemental cash flow statement
• Includes barter transactions, financing asset acquisitions
using stock, and retirement of debt by issuing stock
 Cash Flow Classification Issues

• While the classification of cash flows into the three

main categories is important, we must recognize that
classification guidelines can be arbitrary.

• Although total cash flow is not subject to manipulation

CFO (and CFF and CFI) is affected by reporting methods
that alter the classification of cash flows among
operating, investing, and financing categories
• WorldCom
 WorldCom – earnings manipulation
• In June 2002, WorldCom says $3.8
billion in line cost expenses were
wrongly transferred to the balance
sheet.

• Shares fall to $0.06.

• $11 billion of improper transfers are

eventually uncovered. In July 2002,
the company declares bankruptcy.

FUTURE
ASSET
BENEFITS

$3.8 b ?

NO FUTURE
EXPENSE BENEFITS
41
 Excerpts from “Can Investors Believe Cash Flow Numbers?”
by Floyd Norris
The New York Times - February 15, 2002

“You can't fake cash flow."

Well, actually, you can.
As corporate America became better at managing earnings in the 1990's — normally using tactics
that corporate officials regarded as proper but sometimes pushing on to methods that auditors
knew would outrage the Securities and Exchange Commission if it found out about them —
investors reassured themselves that if they only looked at cash flow, they would be safe.
Now we know that accountants rose to the challenge. If investors wanted to see operating cash
flow, well, by jiggery, they would see it. Cash flow mirages are crucial parts of what went on
at Enron and Global Crossing.
Enron found ways to borrow money and report the cash as if it were real operating cash
flow. The S.E.C. will decide whether Enron found clever ways around accounting rules, or whether
it flouted the rules. Either way, investors were misled.
At Global Crossing, the company traded capacity with other fiber optics companies. In
reality, almost nothing happened, but both companies involved in a swap were able to report
revenue without offsetting expenses. They treated their purchases as capital investments.
So the companies reported profits and operating cash flows. Global Crossing was careful to
structure the transactions so that the money it spent would not show up in its cash flow number.
Global Crossing's accounting appears to be within the rules — so long as the transactions were not
shams. Whether or not they are viewed that way will probably be the major issue the S.E.C. will
face in determining if fraud charges are warranted. But for investors, the big issue is that they did
not know just how unreal the cash flow was. 42
 Enron – cash flow manipulation
• Enron raised some cash by borrowing from Merrill Lynch using power
plant barges anchored off the coast of Nigeria as collateral

• Rather than execute a note payable and explicitly borrow money from ML,
Enron sold the barges to ML for cash with an unwritten understanding that
Enron would repurchase these barges at a later date at a price that would
be equivalent to the original sales price plus an amount of interest.

• Enron treated this as a sale of operating assets (like inventory) and showed
the proceeds as operating cash flows rather than financing cash inflows.

• Merrill Lynch paid $80 million fine

– Executives found guilty in jury trial but overturned on appeal

43
 Cash flow statements :
Additional Considerations

Two important issues must still be addressed:

• Changes in operating accounts shown on the Statement of Cash
Flows usually do not equal the balance sheet changes. What
accounts for this difference?

• In addition to cash flows from operations, investing and financing

activities, the Statement of Cash Flows (often) contains an
additional classification : the effect of exchange rate changes on
cash. What does it represent?
Reported Versus Operating Changes in Assets
and Liabilities

The discrepancies between the changes in

accounts reported on the balance sheet and those
reported in the cash flow statement are primarily
due to two factors:

i. Acquisitions and divestitures

ii. Foreign subsidiaries
 i. Acquisitions and Divestitures

Changes in reported balances of operating asset and

liability accounts may include the effects of both operating
activities and acquisitions (divestitures.) For example, the
inventory account may have increased as a result of:

1. Purchase of inventory from a supplier (operating activity)

2. Acquisition of (merger with) another firm that has

inventory (investing activity)
 Acquisitions and Divestitures (Continued)

SFAS 95 requires that CFO include only operating transactions and

events. Thus, for firms that acquire the operating assets and liabilities of
another company, the changes reported in the statement of cash flows
as adjustments to income to arrive at CFO will not match the increase
or decrease reported on the balance sheet.

The difference between the changes reported in the two statements

provides useful information to the analyst. The analyst can
reconstruct the assets and liabilities obtained by the firm through
an acquisition. This information is generally not provided anywhere
else.

The trend in cash flows for subsequent periods may be distorted!!

 Open Dec 31 (11 PM)
Cash 1,000 925
A/R 100 150
Inventory 300 375
PP&E (net) 1,000 1,100
2,400 2,550

Debt 400 400

Equity 2,000 2,150
2,400 2,550

Income statement Direct Cash Flow

Sales 1,000 Cash from customers 950
COGS (800) Cash for inventory (875)
Deprec. (50) CFO 75
150
CFI capital expenditures (150)
(75)

Indirect Cash Flow

Net income 150
Depreciation 50
change in A/R (50)
change in inventory (75)
CFO 75

CFI capital expenditures (150)

(75)
dec 31 --11:01:== buys subsidiary
Subsidiary
A/R 10
Inventory 25
PP&E (net) 100
Pays cash 135

Open Dec 31 (11 PM) Dec 31 (12 PM)

Cash 1,000 925 790
A/R 100 150 160
Inventory 300 375 400
PP&E (net) 1,000 1,100 1,200
2,400 2,550 2,550

Debt 400 400 400

Equity 2,000 2,150 2,150
2,400 2,550 2,550

Income Statement
Sales 1,000
COGS (800)
Depreciation (50)
150

Direct Cash Flow Indirect Cash Flow

Cash from customers 950 Net income 150
Cash for inventory (875) Depreciation 50 ≠ to Δ b/s
CFO 75 change in A/R (50) ≠ to Δ b/s
change in inventory(75) ≠ to Δ b/s
Capital expenditures (150) CFO 75
Acquisition (135)
CFI (285) (150) ≠ to Δ b/s
Capital expenditures
Acquisition (135)
Change in cash (210) CFI (285)

Change in cash (210)

 Manipulation of Cash Flow
Statement
• Cash flows are less susceptible to manipulation than
accruals.
– The amount of cash is a relatively easy number to audit.

• However, management may be strategic in choosing

what section a cash flows is reported

• Management may also make real operating

decisions so that cash flows appear favorable
– Potential real negative consequences of delaying payment to vendors or
creditors, selling investments, selling receivables
– Will make cash flow look worse in the future
– Easy to do for one period but hard to sustain which is why FASB required
three years of cash flow information

50
Reasons for Budgeting

• Compel planning
• Require people to think about the future
• Move a company from a reactive to a proactive style of management
• Improve communication and coordination
• Provide a guide to action
• Provide a basis of performance evaluation
• Aid in risk management

1
The Master Budget

• The culmination of the budgeting process

• Groups all budgets and supporting schedules together
• Coordinates all financial and operational activities
• The master budget is complex; contents depend on the
business, products, and processes.

A Major Goal
Ensure the smooth functioning of a business throughout the budget
period and the organization’s operation cycle

2
Operating Cycle of a Manufacturing
or Merchandising Operation

Involves the conversion of cash into other assets, which are

intended to produce revenues in excess of their costs.

3
Budget Process for a Merchandiser
Sales Budget

Selling Expense General &

Purchases Budget
Budget Administrative
Expense Budget

Cash Budget
Special
Budgets
Pro Forma Statements
Income Statement
Balance Sheet

4
Sales Budget
Example
• Includes a forecast of unit sales and sales revenue
• Include market conditions, advertising plans, expected cost
BC Carts distributes plastic carts to retailers. For June, estimated sales are 9,000
carts at a selling price of $10 each with an estimated cost of $4 per cart.

BC Carts
Sales Budget
For Month of June
Sales in units 9,000
Selling price per unit $ 10.00
Sales revenue $90,000

Budget revenue for June is $90,000.

5
Purchases Budget

• Forecasts the merchandise to be purchased to meet sales needs and ending inventory
requirements
• Considers
• Budgeted sales
• Desired ending inventory
• Planned beginning inventory

6
Purchases Budget
Example
BC Carts desires to have 20% of the carts needed for the next month’s sales in
stock at the end of each month. At the beginning of June, 1,800 carts are on
hand. Each cart costs $4. Sales are planned to increase 10% per month.

BC Carts
Purchases Budget
For Month of June
Units Dollars
Sales needs 9,000. $36,000.
Desired ending inventory 1,980. 7,920.
Total 10,980. 43,920.
Less beginning inventory (1,800) (7,200)
Purchases 9,180. $36,720.

Sales for July: 9,000 + (9,000 × 0.10) = 9,900 carts Number of units times the cost
Ending inventory = 9,900 × 0.20 = 1,980 carts per unit of $4

7
Selling Expense Budget
Example
BC Carts
Selling Expense Budget
For Month of June
Budgeted sales $90,000
Variable selling expenses
Commissions (4%) $3,600
Miscellaneous (1.5%) 1,350
Total variable expenses 4,950
Fixed selling expenses
Depreciation 3,500
Advertising 2,000
Miscellaneous 1,200
Total fixed expenses 6,700
Total selling expenses $11,650

Commissions: $90,000 x 0.04 = $3,600

Miscellaneous: $90,000 x 0.015 = $1,350
8
General and Administrative Expense
Budget―Example
• Presents the expenses planned in connection with the general
administration of the organization
BC Carts estimates the following monthly general and administrative costs:
$5,000 for salaries, $800 for insurance, $1,100 for depreciation, $600 for
utilities, and $900 for miscellaneous.

BC Carts
General and Administrative Expense Budget
For Month of June
Salaries $5,000
Insurance 800
Depreciation 1,100
Utilities 600
Miscellaneous 900
Total general and administrative expenses $8,400
9
Cash Budget
• Summarizes all cash receipts and disbursements expected to
occur during the budget period
• Because of issues related to the timing of sales and collections
on account
• Collections on sales may not equal sales revenue
• Because of issues related to the timing of payments for
purchases and other expense items
• Disbursements may not equal expenses

Cash is critical to survival.

10
Cash Receipts Budget
Example
BC Carts budgeted its June sales at $90,000. It estimates that 40% of sales are
cash and 60% are on credit. 30% of credit sales are collected in the month of
sale and 70% are collected in the following month. Beginning cash balance is
$15,000 and sales during May were $86,000.

Cash Receipts Budget for June:

Collections on sales $90,000 x 0.40
Cash sales $36,000
Credit sales $90,000 x 0.60 x 0.30 = $16,200
Current month (30% of credit sales) 16,200
Prior month (70% of credit sales) 36,120 $86,000 x 0.60 x 0.70 = $36,120
Total $88,320

40% Cash Sales 30% Collected current month

Sales
60% Credit Sales 70% Collected following month
11
Cash Receipts Budget
Example
BC Carts estimates that 25% of its current month inventory purchases will be
paid during the month incurred and 75% are paid in the following month.
During May, purchases were $32,000. Budgeted purchases for June are
$36,720 (from the purchases budget.)

Inventory purchases section of the cash disbursements section of the cash

budget:

Cash Disbursements Budget for June:

Disbursements
Purchases
$36,720 x 0.25 = $9,180
Current month (25% of purchases) $ 9,180
Prior month (75% of purchases) 24,000
$32,000 x 0.75 = $24,000
Total $33,180

12
Cash Disbursements Budget
Example
BC Carts’ general and administrative costs were $8,200 during May, and
$8,400 during June, $1,100 of each which is depreciation. Income taxes were
$15,500 during May. The company pays for selling costs in the month incurred,
and 60% of the general and administrative costs in the month incurred with
the remaining 40% the following month. Income taxes are taxed at 30% of
income before taxes and are paid the month following accrual.

Cash Disbursements Budget for June:

Selling expenses $ 8,150
General and administrative expenses 0.60 x ($8,400 - $1,100) =
$4,380
Current month (60%) $4,380
Prior month (40%) 2,840
0.40 x ($8,200 - $1,100) =
Income taxes 15,500
$2,840
General and administrative expenses $22,720

13
Financing Section of Cash Budget
BC Carts’ repays $5,000 of the principal on its bank loan on June 30 and
December 31, and any accrued interest.

Cash Disbursements Budget for June:

Short-term financing
Loan repayments $5,000
Interest 750 $25,000 x 0.06 x 1/2
Net cash used for financing $5,750

14
Complete Cash Budget
BC Carts
Cash Budget
For Month of June
Cash balance, beginning $15,000.
Collections on sales
Cash sales (40%) $36,000
Credit sales
Cash receipts section Current month (30% of credit sales) 16,200
Prior month (70% of credit sales) 36,120
Total 88,320.
Cash available for operations 103,320.
Disbursements
Purchases
Current month (25% of purchases) 9,180
Prior month (75% of purchases) 24,000
Total 33,180.
Cash disbursements Selling expenses 8,150.
General and administrative expenses
section Current month (60%) 4,380
Prior month (40%) 2,840
Income taxes 15,500
General and administrative expenses 22,720.
Total cash disbursements 64,050.
Excess cash available over disbursements 39,270.
Short-term financing
Loan repayments 5,000
Financing section Interest ($25,000 × 0.06 × 1/2) 750
Net cash used for financing (5,750)
Cash balance, ending $33,520.
15
Production Budget

• Additional steps are required to develop master budgets for manufacturing

organizations
• Due to conversion of raw materials into finished goods
• Must determine production volume
• To support sales
• To meet finished goods inventory

16