Businessfinance 12 q3 mod3 budget-preparation PDF

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Business FinanceQuarter 3 – Module 3:Budget Preparation andProjected Financial StatementsBusiness Finance – Grade 12 Alternative Delivery Mode Quarter 3 – Module 3: Budget Preparation and Projected Financial Statements First Edition, 2020Republic Act 8293, section 176 states that: No copyright shall...

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Business Finance Quarter 3 – Module 3: Budget Preparation and Projected Financial Statements

Business Finance – Grade 12 Alternative Delivery Mode Quarter 3 – Module 3: Budget Preparation and Projected Financial Statements First Edition, 2020 Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks, etc.) included in this module are owned by their respective copyright holders. Every effort has been exerted to locate and seek permission to use these materials from their respective copyright owners. The publisher and authors do not represent nor claim ownership over them. Published by the Department of Education Secretary: Leonor Magtolis Briones Undersecretary: Diosdado M. San Antonio

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Business Finance Quarter 3 – Module 3: Budget Preparation and Projected Financial Statements

Introductory Message This Self-Learning Module (SLM) is prepared so that you, our dear learners, can continue your studies and learn while at home. Activities, questions, directions, exercises, and discussions are carefully stated for you to understand each lesson. Each SLM is composed of different parts. Each part shall guide you step-bystep as you discover and understand the lesson prepared for you. Pre-tests are provided to measure your prior knowledge on lessons in each SLM. This will tell you if you need to proceed on completing this module or if you need to ask your facilitator or your teacher’s assistance for better understanding of the lesson. At the end of each module, you need to answer the post-test to self-check your learning. Answer keys are provided for each activity and test. We trust that you will be honest in using these. In addition to the material in the main text, Notes to the Teacher are also provided to our facilitators and parents for strategies and reminders on how they can best help you on your home-based learning. Please use this module with care. Do not put unnecessary marks on any part of this SLM. Use a separate sheet of paper in answering the exercises and tests. And read the instructions carefully before performing each task. If you have any questions in using this SLM or any difficulty in answering the tasks in this module, do not hesitate to consult your teacher or facilitator. Thank you.

What I Need to Know

This module is designed and written to help you understand and prepare the different types of budgets and projected financial statement. After accomplishing this module, you are expected to illustrate the formula and format for the preparation of budgets and projected financial statement (ABM_BF12-IIIc-d11). 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.

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What I Know

Directions: Write True if the statement is correct and False if the statement is incorrect. Write your answers on a separate sheet of paper. ______1. The projected statement of financial positions has to be balanced so External Funds Needed (EFN) can be computed. ______2. If the company needs funds for the operation of the business, they can only use debt instruments. ______3. If amount in EFN is positive, it means that the company has excess cash. ______4. If amount EFN is negative, it means that the company needs additional funds. ______5. If the company has excess cash, it means that it can pay its financial obligations. ______6. Net cash flow gives information about the amount of excess cash or cash deficit for the period. ______7. Cash receipts include payments to suppliers and other service providers, loans, and cash dividends. ______8. A budget is an estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals. ______9. In forecasting financial statements, sales are the most important account because almost all of the accounts in the financial statements are affected by it. ______10. The cash disbursement is the collections from receivables, proceeds from loans, issuance of new shares of stocks, and advances from the stockholders. ______11. Sales is the most important account in forecasting financing statement. ______12. There should be information on income taxes and how much financing cost a company will have to forecast net income. ______13. The cash budget displays the expected cash receipts and disbursements for an accounting period. ______14. Sales budget is composed of the variable and fixed costs needed to run the operations of the business. ______15. Operating budget provides estimated amount of money based on the volume of products that a company proposes to sell in a future period.

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Lesson

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Budget Preparation and Projected Financial Statements

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. 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. External Factors • • • • • • • • • •

Internal Factors

Gross Domestic Product • pricing (GDP) growth rate • promotional activities income tax rates • distribution inflation • production capacity interest rate • management styles foreign exchange rate • financial capability/resources of the developments in the company industry • reputation competition economic crisis regulatory environment political crisis Table 1. Factors that Influence Sales

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.

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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.

Units to be sold Unit Selling Price (Php) Sales Revenue (Php)

ABC Corporation Sales Budget For the Year Ending December 31, 2020 QUARTER 1 2 3 200,000 220,000 240,000 5 5 5 1,000,000.00 1,100,000.00 1,200,000.00

4 260,000 5 1,300,000.00

Year 920,000 5 4,600,000.00

Table 1. ABC Corporation Sales Budget Production Budget

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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 InventoriesBeginning Inventories

Example: Determine the units to be produced by ABC Corporation in 2020. Quarter 1 Quarter 2 Quarter 3 Projected Units 200,000 220,000 240,000 Target Level Ending Inventories 22,000 24,000 26,000

Quarter 4 260,000 28,000

The beginning inventory is 20,000 units. ABC Corporation Production Budget (In Units) For the Year Ending December 31, 2020

Projected Sales Add:Target Level of Ending Inventories Total Less: Beginning Inventories Required Production

1 200,000 22,000 222,000 20,000 202,000

QUARTER 2 3 220,000 240,000 24,000 26,000 244,000 266,000 22,000 24,000 222,000 242,000

4 260,000 28,000 288,000 26,000 262,000

Year 920,000 28,000 948,000 20,000 928,000

Table 2. ABC Corporation Production Budget In order to get the production units, add the target level of ending inventories and then less the beginning inventories.

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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. 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. 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. a. The projected quarterly sales for the year 2020 are as follows: Quarter 1 Quarter 2 Quarter 3 1,010,000 1,110,000 1,210,000

Quarter 4 1,310,000

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. b. Assume that the operating expenses for each quarter are as follows: Quarter 1 Php 101,000.00

Quarter 2 Php 111,000.00

Quarter 3 Php 121,000.00

c. Cost of sales is 75% of sales. d. Interest expenses paid every quarter is Php 15,000.00. e. Income tax rate is 30%.

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Quarter 4 Php 131,000.00

These are the income taxes to be paid every quarter. Quarter 1 Php 30,000.00

Quarter 2 Php 45,000.00

Quarter 3 Php 50,000.00

Quarter 4 Php 55,000.00

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. ABC Corporation Cash Budget For the Year Ending December 2020

Cash Receipts Less: Cash Disbursements Net Cash Flow Add: Beginning Cash Ending Cash Balance Less: Minimum Cash Balance Excess Cash Balance

Q1 Php 993,500.00 903,500.00 90,000.00 40,000.00 130,000 100,000.00 Php 30,000.00

Q2 Php 1,095,000.00 1,003,500.00 91,500.00 130,000.00 221,500.00 100,000.00 Php 121,500.00

Q3 Php 1,195,000.00 1,093,500.00 101,500.00 221,500.00 323,000.00 100,000.00 Php 223,000.00

Q4 Php 1,295,000.00 1,483,500.00 - 188,500. 00 323,000.00 134,500.00 100,000.00 Php 34,500.00

Table 3. ABC Corporation Cash Budget 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. Q1 Quarter of Sale Php 1,010,000.00 x 85% Php 858,500.00 Quarter after Sale Cash Receipts

Php 900,000.00 x 15% Php 135,000.00 Php 993,500.00

Q2 Php 1,110,000.00 x 85% Php 943,500.00

Q3 Php 1,210,000.00 x 85% Php 1,028,500

Q4 Php 1,310,000.00 x 85% Php 1,113,500.00

Php 1,110,000.00 x 15% Php 151,500.00 Php 1,095,000.00

Php 1,210,000.00 x 15% Php 166,500 Php 1, 195,000.00

Php 1,310,000.00 x 15% Php 181,500.00 Php 1, 295,000.00

Table 4. Computation of Cash Receipts 2. Compute for the cash disbursements. Identify all the payments to be made and add all expenses. Cost of Sales

Cash Operating Expense Income Taxes Interest Expense Loan Cash Disbursements

Q1 Php 1,010,000.00 x 75% 757,500 101,000.00 30,000.00 15,000.00 Php 903, 500.00

Q2 Php 1,110,000.00 x 75% 832,500.00 111,000.00 45,000.00 15,000.00 Php 1,003,500.00

Q3 Php 1,210,000.00 x 75% 907,500,00 121,000 50,000.00 15,000.00 Php 1,093,500.00

Table 5. Computation of Cash Disbursement

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Q4 Php 1,310,000.00 x 75% 982,500.00 131,000 55,000.00 15,000.00 300,000.00 Php 1,483,500

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.

What’s In

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. Quarter 1 Quarter 2 Quarter 3 Quarter 4 Projected Units 400,000 450,000 500,000 600,000 Target Level Ending Inventories 30,000 33,000 35,000 40,000 The beginning inventory is 32,000 units. 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. a. The projected quarterly sales for the year 2020 are as follows: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Php 1,200,000.00 Php 1,400,000.00 Php 1,600,000.00 Php 1,800,000.00 The fourth quarter sales in 2019 was Php 1,000,000.00. Ninety percent (90%) of the sales were collected in the quarter they were made. The remaining ten percent (10%) was collected in the following quarter. b. Assume that the operating expenses for each quarter are as follows: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Php 125,000.00 Php 150,000.00 Php 175,000.00 Php 200,000.00 c. Cost of sales is 75% of sales. d. Interest expenses paid every quarter is Php 18,000.00. e. Income tax rate is 30%. The income taxes to be paid every quarter will be: Quarter 1 Quarter 2 Quarter 3 Quarter 4 Php 35,000.00 Php 45,000.00 Php 55,000.00 Php 65,000.00 f. Expected cash balance at the end of 2020 is about Php 80,000.00. For 2021, target cash is raised to Php 150,000.00 because of expected increase in sales. 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.

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What’s New

Projected Financial Statement The projected financial statement is important in planning to forecast the outcome of the organization in future periods, assess the standing of the business, and budget preparation. It will help in evaluating the additional assets/funds needed in the business. It will also serve as a basis for the business if it can pay its financial obligations. The following are the steps to be followed in projecting financial statements: Forecast the Statement of Comprehensive Income (Income Statement). • Forecast sales. • Forecast cost of sales and operating expenses. To get the cost of sales, use the average cost of sales over the historical data analyzed. Find out which are variable expenses and fixed expenses. • Forecast net income and retained earnings. (There should be information on income taxes and how much financing cost a company will have to forecast net income.) Forecast the Statement of Financial Position and Statement of Cash Flows. • Determine SFP accounts that will be affected or associated with sales. (Cash, AR, inventories, AP, and accrued expenses payable) • Determine the external funds needed. The projected statement of financial position has to be balanced so EFN is computed. EFN=Change in Total Assets-(Change in Total Liabilities + Total Change in Stockholder’s Equity) + EFN, means that the company needs more funds - EFN, means that the company has excess cash. Find out how to finance EFN.

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After computing the EFN, the management must determine how to finance the company. They can raise the funds through debt (borrowing from the bank as notes payable) or equity (through stocks and bonds) or it can be the combination of the instruments.

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What Is It To further understand the lesson, let us have an example. Example: The president of ABCD Company asked the finance manager to prepare the projected financial statements of the company. The accounts needed are shown below. ABCD Company Projected Statement of Comprehensive Income For the Year Ending December 31, 2019 Net Sales Cost of Sales Gross Profit Operating Expenses Operating Income Interest Expense Income before Taxes Taxes Net Income

Php 54,705,675.00 41,954,730.00 12,750,945.00 8,958,213.00 3,792,732.00 250,000.00 3,542,732.00 1,062,820.00 Php 2,479,912.00

Financial Accounts in 2019 Cash Receivables Inventories Other Current Assets PPE Other Noncurrent Assets Trades Payable Current portion of Long-term Debt Long-term debt, Net of Current Retained Ea...