Antique National School

Senior High School

Grade 12, First Semester SY 2023-2024
Business Finance
Prepared by: Necca T. Palcat-Berin

Learning Activity Sheets 3 (LAS_)

for Business Finance Grade 12

BUSINESS FINANCE

Financial Planning Process, Formula and Format for Preparation of Budgets and Projected
Financial Statements

I. Learning Competency with Code

• Identify the steps in the Financial Planning Process (ABM_BF12-IIIc-d-10)
• illustrate the formula and format for the preparation of budgets and projected financial
statement. (ABM_BF12-IIIc-d-11)

II. Activity Proper

ACTIVITY 1: Steps in Financial Planning Process

Steps in Financial Planning Process

1) Set goals or objectives.

For corporations, long term and short-term objectives are usually identified. These can be
seen in the company’s vision and mission statements. The vision statement states where the
company wants to be while the mission statement states the plans on how to achieve the vision.

Examples of a company’s Vision-Mission statements are as follows:

Jollibee Foods Corporation (JFC)

Vision: To excel in providing great tasting food that meets local preferences better than
anyone; To become one of the three largestand most profitable restaurant companies in the world
by 2020.

Mission: To serve great tasting food, bringing the joy of eating to everyone.

McDonalds Philippines

Vision: First to respond to the fast changing needs of the Filipino family; First choice when
it comes to food and dining experience; First mention as the ideal employer and socially responsible
company; First to respond to the changing lifestyle of the Filipino family

Mission: To serve the Filipino community by providing great-tasting food and the most
relevant customer delight experience.

2) Identify Resources

Example, the resources needed are the following:

Page 1 of 12
•PHP 300,000
• Man power

Resources include production capacity, human resources who will man the operations and financial
resources (Borja & Cayanan, 2015).

3) Identify goal-related tasks

Example: The goal-related task is to prepare an event to increase awareness of (whatever issue you
want).

4) Establish responsibility centers for accountability and timeline.

Example, there were different responsibilities formed as follows:

• Event Chairperson
• Budgeting Team
• Production Team
• Marketing Team
• Creatives Team
• Administrative Team

Also, there must be a timeline for the activities, especially since they were allotted a specific time to
do the activity.

5) Establish the evaluation system for monitoring and controlling

For corporations, the management must establish a mechanism which will allow plans to be
monitored. This can be done through quantified plans such as budgets and projected financial
statements. The management will then compare the actual results to the planned budgets and
projected financial statements. Any deviations from the budgets should be investigated.

6) Determine contingency plans

• In planning, contingencies must be considered as well.

• Budgets and projected financial statements are anchored on assumptions. If these assumptions
do not become realities, management must have alternative plans to minimize the adverse effects
on the company (Borja & Cayanan, 2015).

ACTIVITY 2: Formula and Format for Preparation of Budgets and Projected Financial
Statements

Budgeting

Budgeting is the act of estimating revenue and expenses over a period of time. It involves
preparing a plan on how to allocate resources in accomplishing organizational goals. A quantified
plan is represented through budgets and projected or pro-forma financial statements.

Page 2 of 12
 A plan is useless if it is not quantified (quantified means to measure the amount or size and
express it as a number). 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 and serve as the bases for monitoring actual performance/s.

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
(Cayanan, 2015).

Format for Preparation of Budget

1. 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 preparing a sales forecast, the following external and internal factors should be considered:

Source: Teaching Guide for Senior High School, Business Finance. Published by CHED K-12, 2016

When forecasting the sales budget, both the internal and external factors must be considered.
Let us try to analyze the following considerations:

a. A low GDP rate (external) coupled by a high inflation rate will mean that consumers are
likely to purchase less. It means that we cannot set a high forecast of sales during the periods of
low GDP rate.

b. Development in the Industry (external) also affects sales forecast, for example, the
products and services which have more development in its industry will likely have a higher sale
forecast as compared with the slower development industry.

c. Competition (external) must also be considered, if your business is the only store offering
a certain product or service, your sales forecast can be higher as compared to a business that has
5 or more competitors. But customers preferences must be taken into consideration as well, because

Page 3 of 12
even if your business is the sole producer of a certain product or service, but is not within your
target customers preference, your sales will be affected.

d. The production capacity and manpower (internal) must also be considered in preparing
sales forecast. For example, the business has a high demand of sales, but the production capacity
fails to meet such demand, there can be an opportunity cost for the forgone sales (opportunity cost
is when customers want to buy but there are no available products/services). Management may
either choose to increase capacity, by expanding their operations wherein they may hire more
employees to meet the demand. Another scenario will be, if they produced more units than the sales
demand, the unnecessarily increase in production capacity may end up with more inventories that
are not easily converted to cash, that will be affecting the working capital of the business.

Below is the computation for the sales budget.

Sales Budget Format

Budgeted Sales (No. of unit to be Sold) xx

x Unit Selling Price xx
Budgeted Sales Revenue Pxx

Sample Computation:

XYZ company is expecting to sell 2,700 units of goods in November at a selling price of P65.
Compute for the Sales budget.

Budgeted Sales (No. of unit to be Sold) 2,700

x Unit Selling Price P 65
Budgeted Sales Revenue P175,500

2. Production Budget

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

Production Budget Format

It is computed as follows:
Projected Sales (No. of unit to be Sold) xx
Add: Target Ending Inventory xx
Total Production Required xx
Less: Beginning Inventory (xx)
Require Production Units xx
*Note: Ending inventory of current period is beginning inventory of next period.
Page 4 of 12
Sample Computation:

XZC Company forecasts its sales in units for January to May as follows:
Jan Feb Mar Apr May
Units 2,000 2,200 2,500 2,800 3,000

• XZC company 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 a company produce to fulfill the expected sales of the company?

Solution:
For the Month of January

Projected Sales (No. of unit to be Sold) 2,000 units

Add: Target Ending Inventory 100 units **
Total Production Required 2,100 units
Less: Beginning Inventory (50) units
Require Production Units 2,050 units

For the Month of February

Projected Sales (No. of unit to be Sold) 2,200 units

Add: Target Ending Inventory 100 units
Total Production Required 2,300 units
Less: Beginning Inventory (100**) units
Require Production Units 2,200 units

**the ending inventory for the month of January will be the beginning inventory for February.

MONTH
Jan Feb Mar Apr May
Projected Sales 2,000 2,200 2,500 2,800 3,000
Add: Target Ending inventories 100 100 100 100 100
Total Production Required 2100 2,300 2,600 2,900 3,100
Less: Beginning Inventories (50) (100) (100) (100) (100)
Required Production Units 2,050 2,200 2,500 2,800 3,000

3. Operating Budget

Operating budget refers to the variable and fixed costs and revenue generated that are needed
to run the operations of the company. Examples of this may include rent payments, wages and
salaries of personnel, travel and representation expenses, tax payments etc.

Page 5 of 12
Sample Computation:

DSA Corporation has the following forecasted expenses in October:

a. P6,500 monthly rental fee
b. P11,000 salaries per employee; DSA has 3 employees
c. Interest expense of P1,800
d. Travel Expense of P30,000
e. Taxes of P8,000

Compute for the operating budget of DSA Corporation

Solution:

Operating Budget

Rent Expense P6,500

Salaries Expense
(P11,000 x 3 employees) 33,000
Interest Expense 1,800
Travel Expense 30,000
Tax Expense 8,000
Operating Budget P79,300

Page 6 of 12
 4. Cash Budget

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 and for cash shortages (Gitman & Zutter, 2012).

Cash Budget Format

ABM Company
Cash Budget
Month Ended October 31, 202X

Cash & Cash Equivalents, Beginning of the Year P xx

Cash Flow from Operating Activities:

Cash Received from:
Sales of Merchandise Pxx
Collection of Accounts Receivable xx
Refund from Suppliers xx

Cash Paid for:

Office Supplies (Pxx)
Freight Out (xx)
Merchandise Purchased (xx)
Operating Expenses (xx)
Refund to customers (xx)
Payment of Accounts Payable (xx)
Freight In (xx)
Net Cash Flow from Operating Activities P xx

Cash Flow from Investing Activities:

Payment for Acquisition of Property, Plant & Equipment (Pxx)
Purchases of Marketable Securities (xx)
Proceeds from sales of Marketable Securities xx
Net Cash Flow from Investing Activities P xx

Cash Flow from Financing Activities:

Investment of Owner Pxx
Borrowings from Bank xx
Dividends and Dividend equivalent Rights Paid (xx)
Net Cash Flow from Financing Activities P xx
Increase/Decrease in Cash & Cash Equivalents xx

Cash & Cash Equivalents, Ending of Year P xx

Page 7 of 12
 Projected Income Statement Format

Net Sales xx
Less: Cost of Sales (xx)
Gross Profit xx
Less: Operating Expenses (xx)
Operating Income xx
Less: Interest Expense (xx)
Income before Taxes xx
Less: Taxes (xx)
Net Income Pxx

Budgeted Statement of Financial Position

Format
Budgeted Statement of Financial Position

Assets
Current Assets
Cash xx
Accounts Receivable xx
Inventory xx

Non-Current Assets
Building xx
Equipment xx
Total Assets Pxx

Liabilities and Owner’s Equity

Current Liabilities
Accounts Payable Pxx
Note Payable xx
Non-Current Liabilities
Mortgage Payable xx
Total Liabilities xx

Capital xx

Total Liabilities & Owner’s Equity Pxx

Page 8 of 12
Sample Computation:

The Statement of Financial Position of GHI Company, a footwear distributor as of September

30 were as follows:

GHI Company
Statement of Financial Position
September 30
Assets
Cash P25,000
Accounts Receivable 157,000
Inventory 25,000
Building, net of depreciation 280,000
Total Assets P487,000

Liabilities & Owner’s Equity

Accounts Payable P97,000
Notes Payable 26,000
Mortgage Payable 114,000
De Juan, Capital 250,000
Total Liabilities & Owner’s Equity P487,000

GHI Company has the following data for the October budget:

a. A 2,000 units with a unit selling price of P140 is expected to be sold. Of these sales, P110,000
will be sold in cash and the rest will be receivables. 60% of the receivables will be collected
on the month the sales occur and the remaining amount will be collected on the following
month. The outstanding receivables from previous month are to be collected in October.
b. P95,000 worth of Inventories is expected to be purchased on account for the month of
October. Cash payment of 35% will be paid for all Purchased Inventories on the same month
of purchase, and the remaining amount payable for the next month. All previous month’s
accounts payable will be paid for the month of October.
c. 70% of the outstanding notes payable will be paid in October, and the interest for the notes
payable with the amount of P600 will be paid in cash.
d. Depreciation expense of P3,450 will be forecasted for the month of
October. Total of P73,000 of Operating expenses will be expected for the month of October
excluding depreciation.
e. An ending inventory balance of P55,000 is budgeted in October.
f. A computer equipment is expected to be purchased in October with the amount of P22,000.

Prepare the following requirements:

1. Budgeted Income Statement for the month of October

2. Cash Budget for October, stating all the Notes showing the computation for the cash receipts
and cash disbursements
3. Budgeted Statement of Financial Position as of October 31
Page 9 of 12
Solution
1. Budgeted Income Statement for the month of October.

GHI Company
Budgeted Income Statement
For the Month of October

Sales (Note 1) P280,000

Less: Cost of Sales
Beginning Inventory 25,000
Add: Purchases 95,000
Goods Available for Sale 120,000
Less: Ending Inventory 55,000
Cost of Goods Sold 65,000
Gross Profit 215,000
Less: Operating Expenses (Note 2) 76,450
Net Operating Income 138,550
Less: Interest Expense 600
Net Income P137,950

Note 1
Sales Unit 2,000
x Unit Selling Price P140
Total Sales P280,000*
Note 2
Operating Expenses
Operating Expense P73,000
Depreciation Expense 3,450
Total Operating Expense P 76,450

2. Cash Budget for October

GHI Company
Cash Budget
For the Month of October

Cash & Cash Equivalents, Beg. Balance P 25,000

Cash Flow from Operating Activities

Cash Received from:
Cash Sales P110,000
Collection of A/R (Note 3) 259,000

Cash Paid for:

Purchase of Inventory (Note 4) (130,250)
Operating Expenses (73,000)
Net Cash Flows from Operating Activities P165,750

Page 10 of 12
 Cash Flow from Investing Activities
Purchase of Equipment (P22,000)
Net Cash Flows from Operating Activities (P22,000)

Cash Flow from Financing Activities

Payment of Borrowings (Note 5) (P18,800)
Net Cash Flows from Financing Activities (P18,800)

Increase/Decrease in Cash & Cash Equivalents P124,950

Cash & Cash Equivalents, Ending Balance P149,950

Note 3
Collection of Accounts Receivables
Sept collection of A/R 157,000
October Collection
[(P280,000*-110,000) x 60%] 102,000
Total Cash Receipts P259,000

Note 4
Purchase of Inventory
September Purchases P97,000
October Purchases (P95,000x35%) 33,250
Total Purchases P130,250

Note 5
Payments of Borrowings
(P26,000x70%) P18,200
Interest 600
Total Financing P18,800

Page 11 of 12
3. Budgeted Statement of Financial Position as of October 31

GHI Company
Budgeted Statement of Financial Position
October 31

Assets

Cash P149,950
Accounts Receivable (P170,000x40%) 68,000
Inventory 55,000
Building P280,000
Less: Accumulated Deprn’ – Bldg. (3,450) 276, 550
Computer Equipment 22,000

Total Assets P571,500

Liabilities and Owner’s Equity

Accounts Payable (P95,000x65%) P61,750

Notes Payable 7,800
Mortgage Payable 114,000
De Juan, Capital (P250,000+137,950) 387,950

Total Liabilities & Owner’s Equity P571,500

Page 12 of 12