BUSINESS FINANCE

Module 4 (Week 4)
Formula and Budget
Preparation
About the Module
This module was designed and written with you in mind. It is here to help you to
prepare the budget such as projected collection, sales budget, production budget,
project statement of comprehensive income, projected statement of financial position,
and projected cash flow statement.

This module is good for one (1) week.

Lesson 1 – Budgeting and Financial Statement Projection

After going through this module, you are expected to:

1. know and apply the tools used in planning and forecasting
2. know and apply the tools used in budgeting

What I Know (Pre-test)

Direction. Read the statements carefully. Choose the correct answer and write it on
a separate sheet of paper.
1. A budget is NOT a ___________.
A. forecast B. plan C. process D. statement

2. A forecast is NOT a/an___________.

A. budget plan C. extrapolation of data
B. based on expert opinion D. prediction of future events

For Items Number 3- 5, please refer the problem below:

The company was able to sell 2000 units of paper cups in a month the selling price
of PHP2.50/unit. It is expected to increase its 20% a month after and 2 months after
will be 30%.
3. What is the sales in a month?
A. 5, 250 B. 5, 520 C. 6,250 D. 6,260

4. What is the projected sales a month after?

A. 7,500 B. 7, 550 C. 8,205 D. 9,690

5. What is the projected sales 2 months after?

A. 8,500 B. 8,560 C. 9,750 D. 9,850

For Items Number 6- 9, please refer the problem below:

For the year ending December 2018, Windows Company has the following activities.
Sales = 6,817,000
Cost of Sales 5,763,500

2
Operating Expenses 256, 831
Interest Expense 250,000
Taxes 56,078
6. What is the gross profit of Windows Company?
A. 1,045,000 B. 1,053,500 C. 1,115, 900 D. 1,945,000

7. What is its operating income?

A. 630, 250 B. 796,669 C. 850, 400 D. 976,792

8. What is its income before taxes?

A. 546,669 B. 698, C380 C. 760, 668 D. 834,893

9. What is its net income?

A. 367,867 B. 490,591 C. 567, 569 D. 633,871

10. Which of the following is a finance budget?

A. Cash budget B. Direct materials purchasing budget
C. Production budget D. Tax budget

11. The most common budget is prepared for a ________.

A. Week B. Month C. Quarter D. Year

12. The direct materials budget is prepared using which budget’s information?
A. Cash payments budget B. Cash receipts budget
C. Production budget D. Raw materials budget

13. Which of the following statements is NOT correct?

A. The sales budget is typically the first budget prepared.
B. The production budget begins with the sales estimated for each period.
C. The direct materials budget begins with the sales estimated for each period.
D. The sales budget is computed by multiplying estimated sales by the sales price.

14. The cash budget is part of which category of budgets?

A. sales budget B. cash payments budget C. financial budget D. operating budget

15. Which budget is the starting point in preparing financial budgets?

A. budgeted balance sheet B. budgeted income statement
C. capital expense budget D. cash receipts budget

3
 Lesson
Budgeting and Financial
1 Statement Projection

What I Need to Know

At the end of this lesson, you are expected to:
• know and apply the tools used in planning and forecasting; and
• know and apply the tools used in budgeting

What’s In

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.
In making sales forecast, the financial manager must consider external and internal
factors to support the figures with reasonable assumptions. Putting the maximum efforts
for expanding the sales volume to sustain growth in sales and it is the key to survival in
the market.
External Factors such as Gross Domestic Product (GDP), Growth Rate, Inflation,
Interest Rate, Foreign Exchange Rate, Income Tax rates, Developments in the industry,
competition, economic crisis, regulatory environment and political crisis.
Internal Factors are the following company’s product, man power requirements,
production capacity, reputation and network of the controlling stockholders and
financial resources of the company. (Bhasin, 2020)

Production Budget
It 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 the beginning inventory of the next period.
Example:
A company forecasts sale in units for January to May. Moreover, the company wants to
maintain the 100 units in its ending inventory at the end of each month. Beginning
inventory at the start of January reached to 50 units. How many units should a company
produce to fulfill the expected sales of the company?

4
 Months January February March April May
Units 2,000 2,200 2,500 2,800 3,000

Solution:
Months
January February March April 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 12,500

Operations Budget refers to the variable and fixed cost needed to run the operations of
the company but are not directly attributable to the generation of sales. Variables such
as rent payments, wages and salaries selling and administrative personnel,
administrative costs, travel and representation expenses, professional fees, interest
payments and tax payments.

The 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 for cash shortages ( Gitman
& Zutter, 2012)

GENERAL FORM OF CASH BUDGET

(Adapted from: Teaching Guide for Senior High School Business Finance, 2016)
J F M A M J J A S O N D T
Cash Receipts X X X X X X X X X X X X X
Less: Cash Disbursement X X X X X X X X X X X X X
Net Cash Flow X X X X X X X X X X X X X
Add: Beginning Cash X X X X X X X X X X X X X
Ending Cash X X X X X X X X X X X X X
Required Ending Cash X X X X X X X X X X X X X
Balance
Required total Financing (X) (X) X
Excess Cash Balance X X X X X X X X X X X

Example:
Identify how much would be collected in the cash budget period. Sales may be made in
cash or 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.

5
From the above example, assume that the selling price is PHP 100/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 the total receipts from sales?

Months
January February March April May Total
Projected Sales 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
40,000 44,000 50,000 56,000 60,000 250,000
current month sales
Collection from
100,000 110,000 125,000 140,000 150,000
previous month sales
Collection from two
60,000 66,000 75,000 84,000
months prior sales
Total 40,000 144,000 220,000 247,000 275,000 926,000

From the operation 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;
Rent payments paid each month PHP 5,000, Fixed salaries for the year PHP 96,000 wages
are estimated as 10% of monthly sales. Taxes must be paid in April PHP 25,000. It is
important to recognize that the depreciation and other non-cash charges are NOT
included in the cash budget. Fixed assets outlays. New machinery costing PHP 130,000
will be purchased and paid in April. An interest payment of PHP 10,000 is due in May.
Cash dividends of PHP 20,000 will be paid in January. PHP 20,000 principal payment is
due in February.

Jan Feb Mar Apr May Total

Total Payments for
40,000 144,000 220,000 247,000 275,000 926,000
Purchase
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
93,000 199,000 258,000 443,00 328,000 1,321,000
Disbursement

6
Moreover, A Company has a beginning cash balance of PHP80,000 and would like to
maintain an ending cash balance of PHP 100,000 per month. Prepare the company’s
Cash Budget for January to May.

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) (157,5000) (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 (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)
Balance
Cumulative Excess cash (33,000) (46,500) 25,500 (48,500) 33,500 33,500
balance (cumulative
required financing)

Evaluation:

If the ending balance after repayment of all the required disbursements is less than the
required ending balance, the company needs to borrow additional cash from short-term
borrowings to meet the required ending balance.

If the ending cash balance exceeds the company’s minimum cash requirement the next
period, the company may be able to repay the loan plus the accrued interest.

If there is an excess of a company’s cash required maintaining balance, the company

may invest cash on short-term investments to have an opportunity to earn additional
profits.

If cash balance falls below the minimum cash requirement, the company may withdraw
the investment to be able to meet the required cash balance.

What’s New

Projected Financial Statement is a financial 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.
(Adapted from: Teaching Guide for Senior High School Business Finance, 2016)

(A) COMPANY
Projected Income Statement
For the year Ending December 31, 20XX
Net Sales XXX
Less: Cost of Sales XXX
Gross Profit XXX
Less: Operating Expenses XXX
Operating Income XXX

7
Less: Interest Expenses XXX
Income Before taxes XXX
Less: Taxes XXX
Net Income XXX

(A) COMPANY
Projected Statement of Financial Position
December 31, 20XX
Assets
Current Assets
Cash XXX
Receivables XXX
Inventories XXX
Other Current Assets XXX
Total Current Assets XXX
Non-Current Assets XXX
Property, plant, and equipment, net XXX
Other Non-Current Asset XXX
Total Non-Current Assets XXX
Total Assets XXX
Liabilities and Equity
Current Liabilities XXX
Notes payable (external funds needed) XXX
Trade Payables XXX
Income taxes payable XXX
Current portion of long term debt XXX
Other Current liabilities XXX
Non-current Liabilities XXX
Long-term debt, net of current portion XXX
Total Liabilities XXX
Stockholder’s Equity
Capital Stock XXX
Retained Earnings XXX
Total Stockholder’s Equity XXX
Total liabilities and stockholder’s equity XXX

(A) COMPANY
Projected Statement of Cashflows
For the year Ending December 31, 20XX
Cash flows from operating activities
Income before taxes XXX
Adjustments:
Depreciation XXX

8
 Changes in the following accounts
Decrease (Increase) in account receivables XXX
Decrease (Increase) in inventories XXX
Decrease (Increase) in other current assets XXX
Decrease (Increase) in account payable XXX
Decrease (Increase) in other current XXX
liabilities
Income taxes paid XXX
Cash flow from operating activities XXX
Cash flows from investing activities XXX
acquisitions of PPE
Acquisition of other non-current assets XXX
Cash flows from investing activities XXX
Payments of cash dividends XXX
Short-term notes payable (EFN) XXX
Loans, Net of payments XXX
Cash Flows from financing activities XXX
Net Change in cash XXX
Cash, Beginning XXX
Cash, Ending XXX

Below is a historical financial statement to be used in making forecast.

GRANOLA COMPANY
Income Statement
For the year Ending December 31, 20XX
2019 2018 2017
Net Sales 5,250,000.00 4,770,000.00 4,310,000.00
Cost of Sales 4,305,000.00 3,959,100.00 3,663,500.00
Gross Profit 945,000.00 810,900.00 646,500.00
Operating Expenses 314,750.00 297,890.00 246,231.00
Operating Income 630,250.00 513,010.00 400,269.00
Interest Expenses 250,000.00 250,000.00 250,000.00
Income Before taxes 380,250.00 263,010.00 150,269.00
Taxes 114,075.00 78,903.00 45,078.00
Net Income 266,175.00 184,107.00 105,191.00

Based on the table above, the sales are expected to increase 10% by 2020 from
the 2019 sales level. This growth assumption is based on the assessment of the
external and internal factors related to the company and its historical growth. Its
sales grew by 10.3% annually from 2017 to 2019.

Projected Sales in 2020 = 5,250,000.00 x (1 x 10%) = 5,775,000.00

9
 GRANOLA COMPANY
Income Statement
For the year Ending December 31, 20XX
2019 2018 2017
Assets
Current Assets
Cash 1,060,000.00 990,000.00 770,000.00
Receivables 2,300,500.00 1,921,000.00 1,722,000.00
Inventories 4,850,000.00 4,500,000.00 3,797,000.00
Other Current Assets 1,050,000.00 980,000.00 2,017.00
Total Current Assets 9,260,500.00 8,391,000.00 6,291,017.00
Non-Current Assets
Property, plant, and equipment, net 2,440,000.00 2,260,000.00 1,810,000.00
Other Non-Current Asset 835,689.00 925,681.00 896,842.00
Total Non-Current Assets 3,275,689.00 3,185,681.00 2,706,842.00
Total Assets 12,536,189.00 11,576,681.00 8,997,859.00
Liabilities and Equity
Current Liabilities
Notes payable (external funds needed)
Trade Payables 5,050,000.00 4,756,000.00 4,130,000.00
Income taxes payable 28,520.00 19,725.00 11,270.00

Current portion of long-term debt 2,250,000.00 250,000.00 1,000,000.00

Other Current liabilities 85,600.00 28,700.00 40,990.00

Total Current Liabilities 7,414,120.00 5,054,425.00 5,182,260.00
Non-current Liabilities
Long-term debt, net of current portion 2,000,000.00 1,250,000.00 -
Total Liabilities 9,414,120.00 6,304,425.00 5,182,260.00
Stockholder’s Equity
Capital Stock 1,000,000.00 1,000,000.00 1,000,000.00
Retained Earnings 2,122,069.00 2,022,256.00 3,797,582.00
Total Stockholder’s Equity 3,122,069.00 3,022,256.00 4,797,582.00
Total liabilities and stockholder’s equity 12,536,189.00 9,326,681.00 9,979,842.00

Forecast Cost of Sales and Operating Expenses

In determining the cost of sales and operating expenses, variable and fixed costs
should be identified. One way of projecting the cost of sales is by using the cost of
sales ratio. Companies would generally have a consistent historical cost of sales ratio.

Operating costs are a mixed variable and fixed costs. Variable costs usually vary with
sales. To project these costs, the percentage of the sales method may be used. On the
other hand, the fixed cost remains the same no matter how the volume of sales has
changed.

Assumption: The company wants to maintain the same gross profit per year of 2019.
Variable operating expense is 5% of sales. Depreciation expense is 5% of the gross

10
beginning balance of property, plant and equipment. As of December 31, 2019, the
gross balance of PPE is PHP 5,200,000. For January 2020, PHP 1,000,000 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 expenses, and Depreciation.

Cost of sales percentage = (cost of sales / sales ) x 100%

Cost of sales percentage in 2019 = 4,305,000 / 5,250,000 x 100%

Cost of sales percentage in 2019 = 82%

Projected cost of sales = cost of sales percentage of the previous year

x
projected sales of next year

Projected cost of sales in 2020 = 82% x 5.775,000

= 4,735,500

Operating Cost
Variable (5% x Sales of 2020 5,775,000) = 288,750
Fixed (depreciation expense)
Gross balance of PPE :5,200,000
Add: New balance of PPE 2020 :1,000,000
Total :6,200,000
Variable x 5% = 310,000
Total Operating expenses = 598,000

Compute for Net PPE

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

What Is It

In analyzing the financial statements, you need to consider the financial trends, market
conditions, possible changes and management expectations to arrive at a future picture.
The information collected is critical in assessing the company’s results and decision
making as it affects the future performance of the company.

The projected financial statements are also called pro-forma financial statements. The
term pro forma simply means “as a matter of form”. It is used to focus on a certain figure
such as sales or profit that examines the effects of a particular decision. In considering

11
adding new product line or acquiring new equipment or expanding new business the pro
forma financial statements would help determine the overall impact of the business.
Pro-forma financial statements can consist of a balance sheet, profit and loss, cash flow
statement or more. These would translate to present future information.

Preparing regular financial statements can be hard. This is where the help is of a CPA
(Certified Public Accountant) or CFO ( Chief Finance Officer) is needed in order to execute
the following activities:
1. Examine comparative reports. Comparing results across periods on
accounting and book keeping results.
2. Safely make assumptions. Making assumptions is presenting the ‘what if”
scenarios and make decisions based on those projections which remain the
same or deviate the same rate historically.
3. Make projections on relevant accounts. Once the independent accounts
have been projected, it’s reasonable to project other accounts.

What’s More

Activity 1.1 Income Statement

Instruction: Compute for the projected sales of 2020. Write your solution in a separate
sheet of paper.

GRANOLA COMPANY
Income Statement
For the year Ending December 31, 20XX
2019 2018 2017
Net Sales 5,250,000.00 4,770,000.00 4,310,000.00
Cost of Sales 4,305,000.00 3,959,100.00 3,663,500.00
Gross Profit 945,000.00 810,900.00 646,500.00
Operating Expenses 314,750.00 297,890.00 246,231.00
Operating Income 630,250.00 513,010.00 400,269.00
Interest Expenses 250,000.00 250,000.00 250,000.00
Income Before taxes 380,250.00 263,010.00 150,269.00
Taxes 114,075.00 78,903.00 45,078.00
Net Income 266,175.00 184,107.00 105,191.00

Assumptions: Sales are expected to increase 15% by 2020 from the 2019 sales
level. This growth assumption is based on the assessment of the external and
internal factors related to the company and its historical growth. Its sales grew
by 10.3% annually from 2017 to 2019. Compute for projected sales.

12
 What I Need to Remember

Given the importance of sales forecast, the financial manager must be able to support
figures with reasonable assumptions with the help of the internal and external factors.

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

Required production in units

= Expected sales + Target Ending Inventories – Beginning Inventories.

Projected sales help the companies to efficiently allocate resources for future growth
and manage its cash flow.

Projected Sales
= current sales X ( 1 + projected increase (decrease of sales in percent)

Understanding the percentage of cost of sales would help make decisions like whether
to invest more on the operations or improve the way to manage the inventory.

Cost of sales percentage

= (cost of sales / sales) x 100%

Remember that the financial projection would ONLY assess what additional assets
are needed to support increase revenue and the potential impact on your balance
sheet. The projected financial plan indicates how much additional debt or equity is
needed to remain solvent and healthy that impact the cash flow.

What I Can Do

Activity 1.2 Production Budget

Instruction: Compute for the production budget of Cowhead Company. Write your
answer on the separate sheet of paper.
Situation.
Cowhead Company forecast sales in units for January to May as follows:
Jan Feb Mar Apr May
Units 3000 3600 3800 2500 3000

13
Cowhead Company would like to maintain 200 units in its ending inventory at the end
of the month. Beginning Inventory at the start of January reached to 50 units. How many
units should the company produce in order to fulfill the expected sales of the company?

Assessment (Posttest)

Direction. Read the statements carefully. Choose the correct answer and write it on a
separate sheet of paper.
For Items number 1-5, please refer to the problem and table below:
Corona Company has a beginning cash balance of PHP 90,000 and would like to
maintain an ending balance of PHP 100,000. Prepare a Cash Budget for January to May.
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 90,000 80,000 67,000 53,500 125,500 51,500
Ending Cash Balance 77,000 66,500 139,000 (20,500) 207,500 105,000
Less: Minimum Cash (100,000) (100,000) (100,000) (100,000) (100,000)
Balance (100,000)
Cumulative excess cash
balance

1. What is the cumulative excess cash balance for the month of January?
A. (33,500) B. (23,000) C. 39,000 D. 45,500
2. What is the cumulative excess cash balance for the month of February?
A. (33,500) B. (23,000) C. 39,000 D. 45,500
3. What is the cumulative excess cash balance for the month of March?
A. (33,500) B. (23,000) C. 39,000 D. 45,500
4. What is the cumulative excess cash balance for the month of April?
A. (120,500) B. (107,500) C. 39,000 D. 45,500
5. What is the cumulative excess cash balance for the month of May?
A. (120,500) B. (107,500) C. 39,000 D. 45,500
For Items number 6-8, please refer to the problem below:
For the year ending December 2019, Granola Company has the following activities.
Sales = 4,310,000
Cost of Sales 3,663,500
Operating Expenses 246, 231
Interest Expense 250,000
Taxes 45,078

6. What it the gross profit of Granola Company?

A. 646,500 B. 810, 900 C. 945,000 D. 1,045,00
7. What is its operating income?
A. 297,890 B. 400, 269 C. 513,010 D. 630, 250

14
8. What is its income before taxes?
A.150,269 B. 263,010 C. 380,250 D. 400, 269

For Items number 9-15, please refer to the problem and table below:
The Fashion company has generated the income statement as for the year ending
December 31, 2019.

Fashion Company
Income Statement
For the year Ending December 31, 2019
Cash 1,060,000.00
Receivables 2,300,500.00
Inventories 4,850,000.00
Other Current Assets 1,050,000.00
Property, Plant, and Equipment, Net 2,440,000.00
Other Non-Current Asset 835,689.00
Notes Payable (external funds needed) 0
Trade Payables 5,050,000.00
Income Taxes Payable 28,520.00
Current Portion of Long-Term debt 2,250,000.00
Other Current liabilities 85,600.00
Long-term Debt, Net of Current Portion 2,000,000.00
Stockholder’s Equity
Capital Stock 1,000,000.00
Retained Earnings 2,122,069.00
Total Stockholder’s Equity 3,122,069.00

9. What are the current assets of Fashion company?

A. 6,291,017 B. 8,391,000 C. 9,260,500 D. 10,122,069
10. What is its total assets?
A. 8,997,859 B. 10,876,681 C. 11,576,681 D. 12,536,189
11. What is its other current liabilities?
A. 28,700 B. 40,990 C. 85,600 D. 95,034
12. What is its total non-current liabilities?
A. 2,000,000 B. 3,000,000 C. 4,000,000 D. 5,000,000

13. What is its total stock holders’ equity and liabilities?

A. 8,997,859 B. 10,876,681 C. 11,576,681 D. 12,536,189
14. What is its current assets percentage against the total assets?
A. 73.87% B. 70.80% C. 73.90% D.90.98%

15. What is its cash percentage against the current assets?

A. 11.45% B. 12.45% C. 15.45% D. 16.45%

15