Budget Preparation and

Projected Financial
Statements
After accomplishing this lesson, you
are expected to illustrate the
formula and format for the
preparation of budgets and projected
financial statement.
 You are also expected to prepare budgets
such as projected collection, sales budget,
production budget, income projected
statement of comprehensive income,
projected of financial position, and
projected cash flow statement.
BUDGETING
A budget is an estimate of costs,
revenues, and resources over a
specified period, reflecting a
reading of future financial
conditions and goals.
 Sales budget, production
budget, operating budget and cash
budget are the budgets that need to
be prepared.
1. SALES BUDGET
 It provides the estimated
amount of money based on the
volume of products that a
company proposes to sell in the
future.
 In forecasting the financial statements,
the most important statement account is
sales because almost all of the accounts
in the financial statements are affected
by it. Cost of sales and gross profit are
examples of accounts that are affected by
sales.
 Sales Revenue=Units to be sold x
Unit Selling Price

 The finance manager must consider

the internal and external factors in
preparing sales budget.
These external factors like interest rates,
GDP, income tax rate, and inflation should
be considered to forecast sales. They can
affect the sales of the company. Even a crisis
should be considered as the effect of Covid-
19. Many companies closed down and many
people lost their jobs.
As a result, the company's sales can be
affected because the purchasing power of
the people decreases since they lost their
job. Internal factors should also be
considered in preparing the sales budget.
You cannot produce thousands of units if
you only have 3 production staff.
EXAMPLE: The required production
of ABC Corporation in the first quarter
is 200,000 units. The units increased by
10% per quarter. The selling price per
unit is Php 5.00.
2. PRODUCTION BUDGET
 It provides information with
respect to the number of units that
should be produced over a given
accounting period based on
expected sales and targeted level of
ending inventories.
Required Production in
Units =Expected Sales +
Target Ending Inventories-
Beginning Inventories
In order to get the production units,
ADD the target level of ending
inventories and then LESS the
beginning inventories.
Note that the ending inventory of the first
quarter (22,000) is the beginning inventory in
the second quarter. The same can be seen in the
quarters that follow. However, the ending
inventory for the year is the same as the fourth
quarter and the beginning inventory for the
year is the same as that of the first quarter.
3. OPERATING BUDGET
 It is made to estimate how much their
revenue and expenses would be within a
year. It is composed of the variable and fixed
costs needed to run the operations of the
business like wages and salaries of
personnel, tax payments, interest payments,
and rent payments.
4. CASH BUDGET
 It displays the expected cash receipts
and disbursements for an accounting
period. It is prepared on a monthly or
quarterly basis for a year.
 The cash budget is divided into
three parts: cash receipts, cash
disbursements, excess cash
balance, or required total
financing.
PARTS OF THE CASH BUDGET
ARE AS FOLLOWS:
1. Cash receipts- These compose of
collections from receivables, proceeds from
loans, issuance of new shares of stocks, and
advances from the stockholders.
2. Cash Disbursements-
These include payments to
suppliers and other service
providers, loans, and cash
dividends.
3. Excess cash balance or required total
financing- This part of the cash budget shows
possible funding requirements. If the company
has excess cash, it is a good indicator that it
can pay an existing loan or put it in an
investment. If there is no excess cash, the
company must make a plan where to get funds.
EXAMPLE: The president of ABC
Corporation wants to find out if the
company has enough cash to pay the
company’s loan worth Php 300,000.00
by the end of 2020.
The fourth quarter sales in 2019 were
Php 900,000.00. Eighty-five percent
(85%) of the sales are collected in the
Quarter 1 of the sales. The remaining
fifteen percent (15%) is collected in
the following quarter.
f. Expected cash balance at the end of
2019 is about Php 40,000.00.

For 2020, target cash is raised to Php

100,000.00 because of expected
increase in sales.
To compute for the cash budget, follow these
steps:
1. Compute for the cash receipts.
Identify how much will be collected
from the sales.
a. Multiply the projected sales per
quarter by the percentages of
sales collection.
b. Multiply the projected sales per quarter
by the remaining percentages of sales
collection. Use the last quarter sales of last
year for the first quarter. Then use Quarter 1
to Quarter 3 sales for year 2020.
c. Add the Quarter of Sale and the
Quarter after Sale.
3. Subtract the cash
disbursement from the cash
receipts to get the net cash
flow.
4. Add the beginning cash balance and then
subtract the minimum cash balance. If the
minimum cash balance is less than the
ending cash balance, the firm has excess
cash. If the minimum cash balance is
greater than the ending cash balance, the
firm requires financing.
ACTIVITY:
Directions: Before we continue our
lessons, let us have a review by having
these exercises. Write the answers on
the separate sheet of paper.
1. Prepare the production budget of
Emir’s Corporation for 2021. Given
below are the pieces of information
needed to prepare a production
budget.
2. The president of Emir’s Corporation
wanted to find out if the company has
enough cash to pay the company’s loan
worth Php 600,000.00 by the end of
2020.
Prepare the 2021 cash budget of
Emir’s Corporation. Find out if
they have enough cash to pay the
Php 600,000.00 loan in the last
quarter.