Budgeted Cash Flow Statement - balancingdragon_1_ by fjzhangxiaoquan


									Year 12 Accounting
Chapter 17
• So far this text has dealt only with historical
  transactions, concentrating on how to identify,
  record and report events that have already occurred.
  This is a logical starting point to analyse business
  performance, as without information on what has
  already happened, we are unable to identify areas
  that may need to be improved. However, it is also
  important to keep an eye on the future.
• Budgeting is the process of preparing reports that
  estimate or predict the financial consequences of
  likely future transactions.
• A small business owner could prepare a budget on
  just about any area of business performance,
  ranging from how many sales are made in a month,
  to how much will be spent on advertising, and how
  many returns will be made. In this course, we will
  concentrate on three general-purpose budgets:
 1. The Budgeted Cash Flow Statement, which
    shows all expected future cash inflows and cash
    outflows, the actual cash balance at the start of the
    period, and the expected cash balance at the end of
    the period.
2. The Budgeted Profit and Loss Statement,
   which shows all expected future revenues and
   expenses, and the expected Gross profit,
   Adjusted gross profit and Net profit.
3 Budgeted Balance Sheet, which shows all
   expected assets, liabilities and owner’s equity at
   some point in the future.
• Accounting reports are interconnected, with transactions
  reported in one affecting items reported in another, and
  this is no different for budgets. This means it is essential
  that the preparation of budgeted reports begin with an
  accurate estimate of budgeted sales.
• First, Sales is the main revenue item in the Budgeted
  Income Statement, and generates significant cash
  inflows (either as Cash sales or as Receipts from debtors
  if credit sales are involved). Second, the level of sales will
  be crucial in estimating the expenses that vary with the
  number of units sold (like Cost of Sales and Wages), and
  their corresponding cash outflows. Third, the level of
  sales will affect how much stock is purchased, which will
  in turn affect cash paid to creditors.
Balance Sheet
• The Balance Sheet does not report sales directly,
  but because it uses figures derived from the
  other two reports, its accuracy is also dependant
  on an accurate estimate of sales.
• (At the very least, the expected Bank figure will
  come straight from the Budgeted Cash Flow
  Statement, and the expected Net profit or loss
  will be determined in the Budgeted Income
The Budgeting Process
• It has been said that failing to plan is planning to fail, so
  the preparation of budgeted reports should be one of the
  first steps in starting a new business. However,
  budgeting should be a continuous process; budgets
  should be compared against actual reports to allow
  problems to be identified, decisions should be made
  based on that assessment, and then new budgets should
  be prepared for the next period. This budgeting process
  is shown in Figure 17.1 p. 390.
• A budget has limited value if it is not used to make
  decisions to improve business performance in the future.
  In addition, it makes little sense to develop a budget for
  one period without preparing another budget for the
  next period.
The Budgeting Process
• The information presented in the budgeted
  reports should be based on the historical data,
  but allowances must be made for changes and
  the effect of new business decisions.
• (Obviously, a brand new business will not have
  any historical data on which to rely – this makes
  budgeting harder for new businesses, but no less
Budgeted Cash Flow Statement
• In order to survive, a small business must have sufficient
  cash to meet its obligations.
• In order to do this, the business must generate sufficient
  cash inflows, chiefly through its cash sales and receipts
  from debtors. The Budgeted Cash Flow Statement
  attempts to predict all future cash inflows and cash
  outflows, and thus the estimated cash balance at the end
  of the budgeted period, to assist the owner in assessing
  the firm’s ability to meet its obligations over the budget
• Remember that the Cash Flow Statement classified the
  inflows and outflows as Operating, Investing and
  Financing activities, and these classifications must also
  be present in the Budgeted Cash Flow Statement.
Operating Activities
• Operating activities: all cash flows related to
  the firms day-to-day trading activities.
Operating Activities
• By preparing the Budgeted Cash Flow Statement, the
  owner will be forewarned if the operating cash flows are
  expected to be negative. Owners can then take steps to
  address the cash shortage before it occurs by:
• implementing strategies to increase expected inflows.
  These may include:
     increasing sales (via promotions, greater advertising,
      discounting prices)
     increasing receipts from debtors (via offering discounts,
      contacting slow payers, sending reminder notices).
• implementing strategies to decrease expected outflows.
  These may include:
     deferring payments to creditors
     cutting back on cash paid for expenses.
Operating Expenses
• The owner must be particularly mindful of
  reducing cash paid for expenses, as the benefits
  the expenses provide are vital in the earning of
  sales (and hence the generation of cash inflows);
  cutting expenses may actually make the cash
  situation worse rather than better.
Investing and Financing Activities
• Investing activities: all cash flows relating to
  the purchase or sale of non-current assets.
Investing and Financing Activities
• Financing cash flows: all cash flows that
  are the result of changes in the firm’s
  financial structure.
Denzel Washing Machines
• Reading skills are essential in budgeting
  questions; you will find most of the answers
  in the question itself if you look hard
• Note not all the transactions are reported in the
  Budgeted Cash Flow Statement, because not all
  involve cash. In this example, Credit sales and
  Credit purchases (including the GST on the
  transaction), Cost of Sales, Stock Loss, Depreciation
  of Office Equipment, and Drawings of Stock have all
  been excluded.
Consecutive Budgets
• The budget above relates only to one month
  taken in isolation, but it would be wise for a
  business to prepare budgets for consecutive
  months to show the effect of monthly variations.
  That is, separate budgets for March, April, May
  etc. could be prepared and presented side-by-
  side to show trends in inflows and outflows from
  month to month. Such a budget may appear as is
  shown in Figure 17.3.
Consecutive Budgets
• This type of budget allows the owner to identify
  monthly and even seasonal trends, and can be
  very useful for identifying when to undertake a
  particular cash activity (such as the purchase of
  a non-current asset or repayment of a loan).
• In general, more frequent budgets will be more
  accurate, and therefore more useful as
  benchmarks for comparison. In addition, they
  will allow for the earlier detection of problems.
• Review Questions 17.3.
 ▫ All of them!
• The Budgeted Cash Flow Statement aids planning by allowing
  the owner to prepare in advance for an expected cash surplus
  or cash deficit. Should the budget predict an overall cash
  deficit, the owner might:
  ▫ defer the purchase of non-current assets, or
    use credit facilities or a loan for their purchase
  ▫ defer loan repayments
  ▫ take less cash drawings
  ▫ make a cash capital contribution
  ▫ organise (or extend) an overdraft facility.
• Should the budget predict an overall cash surplus,
  the owner might use the extra cash to:
  ▫   purchase more/newer non-current assets
  ▫   increase loan repayments
  ▫   increase cash drawings (this sounds good)
  ▫   expand trading activities by increasing
      advertising, employing more staff etc.
• Alternatively, a business starting a period with a
  bank overdraft may choose to do nothing, and let
  the expected cash surplus bring their bank balance
  back into the black.
Decision Making
• In addition, the Budgeted Cash Flow Statement aids
  decision-making because it sets a benchmark for the
  assessment of the firm’s actual cash performance.
  By comparing budgeted and actual cash flows, the
  owner can identify problems areas, and then act to
  correct the situation.
• Specifically, the owner could assess:
  ▫ debtor collection procedures
  ▫ creditor payment policies
  ▫ the level of cash drawings.
• Schedule of receipts from debtors
 ▫ In the example in 17.2, we reported Receipts from
   Debtors in the Budgeted Cash Flow Statement rather
   than Credit Sales, as we were interested only in
   reporting cash flows. This distinction is very
   important; the credit sale and receipt of the cash may
   even take place in different reporting periods. In some
   cases, it may be necessary to calculate how much will
   be received from debtors during the budget period
   from credit sales made in previous periods (and in
   some cases, the current period).
• Based on the information in the Debtors Ledger, owners can
  estimate what percentage of debtors pay within a month of
  the sale, within two months and so on, thereby allowing them
  to calculate the expected receipts from debtors for the budget
  period. This calculation is facilitated by the preparation of a
  Schedule of Receipts from Debtors.
• If we were preparing a Budgeted Income Statement, we would
  not have to make any calculations, as we already have
  information relating to expected sales revenue for each
  month. However, in order to prepare a Budgeted Cash Flow
  Statement, we need to calculate expected Receipts from
• First we must calculate how much of the total sales figure is
  cash sales, and how much is made on credit. This is shown in
  Figure 17.4.
• Note that we have used the sales plus the GST, as
  both amounts will eventually be cash inflows.
• The cash sales figures for October to December can
  go straight into the Budgeted Cash Flow Statement
  (as Operating inflows) as they represent cash flows
  in the months when the sale is made (Cash sales for
  July to September are outside the budget period,
  and so are excluded.) Remember that of the cash
  received, part is cash sales (10/11), and part is GST
  received (1/11); each must be reported separately in
  the Budgeted Cash Flow Statement (see page 395).
• However, we need to calculate how much cash will
  be received in October to December as a result of
  credit sales in earlier months. This requires more
  information about the repayment patterns of the
  firm’s debtors.
• In the textbook’s example, the owner expects 25% of
  debtors to pay in the month after the sale. These
  debtors receive a 5% discount. Of the remainder,
  60% of debtors pay two months after the sale, and
  15% pay in the third month after sale.
• Based on this information, we can prepare a
  Schedule of receipts from debtors like the one
  shown in Figure 17.5.
• If we examine the amount owing for credit sales made in
  September, we can see how the calculations were made.
  Based on the analysis of when debtors pay, 25% of the
  September credit sales figure ($19 360) less the 5%
  discount will be collected in the month after the sale, i.e.
  in October.
Budgeted Cash Flow Statement
• If we add up all the figures in the columns for
  October, November and December, we can calculate
  estimated Receipts from debtors for each month.
  This information can now be reported in the
  Budgeted Cash Flow Statement, along with the cash
  sales (and GST) figures we had already calculated.
• See p. 395.
• Note that for Receipts from debtors, there is no
  separate GST amount, because the GST was
  recognised when the credit sale occurred. It is only
  for cash sales that we must identify the sales
  component and the GST component separately.
Schedule of payments to creditors
• This technique can also be applied to calculate
  payments to creditors, with Credit Purchases
  substituting for credit sales. Once again, we
  require information on how frequently creditors
  are paid so that we can calculate when, and how
  much, creditors will be paid during the budget
• You!
 ▫ Review Questions 17.5.
 ▫ Questions 3 & 4.
• A Budgeted Profit and Loss Statement attempts to
  predict revenues and expenses for the budget
• Cash vs. Profit
 ▫ Cash and profit are different measures of performance,
   and therefore the items reported in the Budgeted
   Income Statement will not necessarily be the same as
   those reported in the Budgeted Cash Flow Statement.
   Whereas the Budgeted Cash Flow Statement reports
   expected cash inflows and cash outflows over the
   budget period, the Budgeted Income Statement
   reports expected revenues earned and expected
   expenses incurred over the budget period.
▫ As some cash items are not revenues or expenses, they will be
  omitted from the Income Statement.

• Strictly speaking, cash sale from an NCA represents revenue. However,
  it is only the overall profit (or loss) on the disposal that is reported in
  the Budgeted Income Statement.
• The Budgeted Income Statement will include
  some revenues and expenses that are not
  reported as cash flows:
• Some of the items will be affect both budgets,
  but the amounts may differ:
• See Denzel’s Washing Machines example on p. 402.
• Uses of Budgeted Income statements:
 ▫ the level of sales (and the effectiveness of
 ▫ the mark-up achieved
 ▫ the level of stock loss (to assess stock
   management procedures)
 ▫ expense control
 ▫ staff performance.
• You!
    Review Questions 17.6
    Q1.
• The Budgeted Balance Sheet attempts to predict the firm’s
  assets, liabilities and owner’s equity at some point in the
• See example p. 404.
• Uses of the Budgeted Balance Sheet:
  ▫ By detailing the expected carrying value of non-current assets at
    some time in the future, it helps the owner prepare for their
    replacement. When used in conjunction with the Budgeted Cash
    Flow Statement, it can also be used to plan for the repayment of
    loans, and to set the level for drawings for the coming period. In
    addition, it can assist decision-making by setting a benchmark for
    indicators that assess liquidity and stability (stability is not
    assessed). Specifically, it will allow the owner to calculate the
    budgeted Working Capital ratio, which can be used to assess
Account Reconstruction
• The example illustrated how ledger accounts can be used to
  calculate closing balances for the Budgeted Balance Sheet.
  However, this is not the only use of ledger accounts in the
  budgeting process. If we already know the closing balance, we can
  actually work backwards to calculate other figures which may be
  necessary to complete the Budgeted Cash Flow Statement, or the
  Budgeted Profit and Loss Statement.
• Where only some information is known, we can use our knowledge
  of ledger accounts and double entry accounting to calculate missing
  or unknown figures by reconstructing the relevant ledger account.
  Reconstructing a ledger account involves three steps:
  ▫ Step 1 Identify the entries we would expect to see in a
    particular ledger account.
  ▫ Step 2 Match these entries with figures that are known.
  ▫ Step 3 Complete the ledger account to calculate the figures that
    are not known.
Account Reconstruction
• See Kings Sportswear example p. 406.
• Note the Study Tips.
• The data is sufficient to prepare the Budgeted
  Income Statement as Credit Sales is known ($80
  000), and the Budgeted Balance Sheet can be
  prepared as Debtors at the end is known ($15 000).
  However, the Budgeted Cash Flow Statement cannot
  be prepared, as Receipts from Debtors is unknown.
  We do not have sufficient information to prepare a
  Schedule of Receipts from Debtors, but we can
  reconstruct the Debtors Control account.
Account Reconstruction
• Note particularly the Stock Control account.

• Note that although Cost of Sales may involve two
  entries in the ledger, it would only be reported as a
  single figure. Note also the links between the
  Creditors Control and Stock Control accounts
  relating to credit purchases and purchase returns.
Account Reconstruction
• This list is by no means exhaustive – any ledger account could be
  reconstructed to calculate a missing figure, for any of the three
  general-purpose budgets. The only restriction is that we need to
  know three of the ‘big four’ pieces of information. For debtors and
  creditors, this means at least three of:
  ▫   1 opening balance
  ▫   2 closing balance
  ▫   3 credit sales/credit purchases
  ▫   4 receipts from debtors/payments to creditors.
• For stock, it means three of:
  ▫   1 opening balance
  ▫   2 closing balance
  ▫   3 cost of sales
  ▫   4 purchases (cash or credit).
• If we know only one or two of the big four, we have insufficient
  information to reconstruct the account.
• A Variance Report compares actual and
  budgeted figures, highlighting any significant
  differences (which are known as variances), so
  that problems can be identified and corrected. It
  is prepared once the actual figures are available,
  but before the next budget.
• In this course, we will prepare two Variance
  ▫ Cash Variance Report
  ▫ Profit Variance Report
Cash Variance Report
• A Cash Variance Report compares actual and
  budgeted cash flows. In appearance, it is very similar to a
  Budgeted Cash Flow Statement, but is has additional
  columns for actual figures, and the calculation of the
  variance. Figure 17.8 shows the Cash Variance Report for
  Denzel Washing Machines for March 2016.
• A variance is simply the difference between the
  budgeted figure and actual figure. Whether it is
  favourable or unfavourable depends – in the Cash
  Variance Report – on its effect on cash. A variance is
  favourable (F) if it means cash will be higher than
  expected in the budget; a variance is unfavourable (U) if
  it means cash will be lower than expected in the budget.
Cash Variance Report
• Note that in our example, the variance in the Loan – AXC
  Bank is reported as favourable because cash will increase
  more than expected. The fact the liabilities will also increase
  does not affect its classification in the Cash Variance Report.
• Note also payments to creditors is classified as favourable,
  even though it could mean the balance owed to creditors is
  higher than expected.
• Assuming the variances are not caused by poor estimates,
  then the Cash Variance Report is a valuable aid to decision-
  making. The unfavourable variances should be investigated,
  and their cause identified. This will allow the owner to take
  corrective action. In our example, Denzel Washing Machines
  may be concerned at the unfavourable variance in Receipts
  from debtors; does it indicate a decline in credit sales, poor
  collection policies, or something else?
Profit Variance Report
• In the same way that a Cash Variance Report
  compares actual and budgeted cash flows, a Profit
  Variance Report can be prepared to compare
  actual and budgeted revenues and expenses.
• Variances in this report are classified as favourable
  or unfavourable depending on their effect on profit.
  In the Budgeted Income Statement, a variance is
  favourable (F) if it means profit will be higher than
  expected in the budget; a variance is unfavourable
  (U) if it means profit will be lower than expected in
  the budget.
• Read Summary.
• Do minimum five end of chapter exercises.
• Read Chapter 18 Where Are We Headed?

To top