Preparing a projected balance sheet, or financial budget, involves analyzing every balance sheet account. The beginning balance for each account is the amount on the balance sheet prepared at the end of the preceding period. Then, managers consider the effects of any planned activities on each account. Many accounts are affected by items appearing in the operating budget and by either cash inflows or outflows. Cash inflows and outflows usually appear in a cash budget discussed later in the chapter.<\/p>\r\n
The complexities encountered in preparing the financial budget often require the preparation of detailed schedules. These schedules analyze such things as planned accounts receivable collections and balances, planned material purchases, planned inventories, changes in all accounts affected by operating costs, and the amount of federal income taxes payable. Dividend policy, inventory policy, financing policy and constraints, credit policy, and planned capital expenditures also affect the amounts in the financial budget.\u00a0 This video will give you an overview of the budgeted balance sheet process (the first 3 minutes reviews the entire master budget process).<\/p>\r\nhttps:\/\/youtu.be\/6DuTf1NSRf0\r\n\r\nNow that Leed's management has prepared the operating budget (or projected income statement), it can prepare its financial budget. Remember that the financial budget is a projected balance sheet.\r\n\r\nTo prepare a projected balance sheet, Leed's management must analyze each balance sheet account. Managers take the beginning balance from the balance sheet at the end of the preceding period (remember, ending balances of one period are the beginning balances of the next period).\u00a0 Look at\u00a0 Leed Company's balance sheet as of December 31 last year. Management must consider the effects of planned activities on these balances. Many accounts are affected by items in the planned operating budget, by cash inflows and outflows, and by policy decisions. Management uses the planned operating budgets and cash budget to prepare the project balance sheet for this year.\r\n
Leed Company<\/strong><\/td>\r\n<\/tr>\r\n| Balance sheet<\/strong><\/td>\r\n<\/tr>\r\n | December 31 (last year)<\/strong><\/td>\r\n<\/tr>\r\n | Assets<\/strong><\/td>\r\n | <\/td>\r\n | <\/td>\r\n<\/tr>\r\n | Current assets:<\/em><\/td>\r\n | <\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0 Cash<\/td>\r\n | <\/td>\r\n | $130,000<\/td>\r\n<\/tr>\r\n | \u00a0 Accounts receivable<\/td>\r\n | <\/td>\r\n | 200,000<\/td>\r\n<\/tr>\r\n | \u00a0 Inventories:<\/td>\r\n | <\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0\u00a0\u00a0 Materials<\/td>\r\n | $40,000<\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0\u00a0\u00a0 Finished goods<\/td>\r\n | 130,000<\/td>\r\n | 170,000<\/span><\/td>\r\n<\/tr>\r\n | \u00a0\u00a0\u00a0 Total current assets<\/td>\r\n | <\/td>\r\n | $500,000<\/td>\r\n<\/tr>\r\n | Property, plant, and equipment:<\/em><\/td>\r\n | <\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0 Land<\/td>\r\n | <\/td>\r\n | $60,000<\/td>\r\n<\/tr>\r\n | \u00a0 Buildings<\/td>\r\n | $1,000,000<\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0\u00a0\u00a0 Less: accumulated depreciation<\/td>\r\n | 400,000<\/span><\/td>\r\n | 600,000<\/td>\r\n<\/tr>\r\n | \u00a0 Factory Equipment<\/td>\r\n | $600,000<\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0\u00a0\u00a0 Less: accumulated depreciation<\/td>\r\n | 180,000<\/span><\/td>\r\n | 420,000<\/span><\/td>\r\n<\/tr>\r\n | \u00a0\u00a0\u00a0\u00a0 Total property, plant, and equipment<\/td>\r\n | <\/td>\r\n | $1,080,000<\/span><\/td>\r\n<\/tr>\r\n | Total assets<\/strong><\/td>\r\n | \u00a0<\/strong><\/td>\r\n | $1,580,000<\/strong><\/td>\r\n<\/tr>\r\n | <\/td>\r\n | <\/td>\r\n | <\/td>\r\n<\/tr>\r\n | Liabilities and stockholders\u2018 equity<\/strong><\/td>\r\n | <\/td>\r\n | <\/td>\r\n<\/tr>\r\n | Current liabilities:<\/em><\/td>\r\n | <\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0 Accounts payable<\/td>\r\n | $80,000<\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0 Income taxes payable<\/td>\r\n | 100,000<\/span><\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0\u00a0\u00a0 Total current liabilities<\/td>\r\n | <\/td>\r\n | $180,000<\/td>\r\n<\/tr>\r\n | Stockholders\u2019 equity:<\/em><\/td>\r\n | <\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0 Common stock (100,000 shares of $10 par value)<\/td>\r\n | $1,000,000<\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0 Retained earnings<\/td>\r\n | 400,000<\/span><\/td>\r\n | <\/td>\r\n<\/tr>\r\n | \u00a0\u00a0 Total stockholders\u2019 equity<\/td>\r\n | <\/td>\r\n | $1,400,000<\/span><\/td>\r\n<\/tr>\r\n | Total liabilities and stockholders\u2019 equity<\/strong><\/td>\r\n | \u00a0<\/strong><\/td>\r\n | $1,580,000<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWe will look at each account and determine the new budgeted balances based on the previous schedules.\r\n\r\nCash<\/strong>\r\n\r\nWe can get the ending cash balance from the Ending Cash balance in the cash budget.\u00a0 The ending cash balance is $188,000.\r\n\r\nAccounts Receivable<\/strong>\r\n\r\nThe balance in Accounts Receivable represents credit sales that have not been collected during the year.\u00a0 This would be 40% of Quarter 4 sales of $1,000,000 or $400,000 to be collected during the 1st quarter of the next year.\r\n\r\nInventory<\/strong>\r\n\r\nFor a manufacturer like Leed Company, there are two inventory accounts:\u00a0 Raw Materials inventory and Finished Goods inventory.\u00a0 Raw Materials inventory will come from the materials purchases budget using desired ending inventory for quarter 4 or the year x cost per material.\u00a0 For Leed Company, there were 30,000 lbs of materials for ending inventory x $2 per lb of material = $60,000.\u00a0 For Finished Goods inventory, we will use the desired ending inventory units from the production budget x production cost per unit.\u00a0 For Leed Company, the production cost is $20.50 per unit including direct materials, direct labor, variable and fixed overhead.\u00a0 The ending balance in finished goods inventory is calculate as 6,000 units x $20.50 per unit or $123,000.\r\n\r\nFor a merchandising company, you would use the quarter 4 or year Ending merchandise inventory units x the cost per unit.\r\n\r\nProperty, Plant and Equipment<\/strong>\r\n\r\nThis section will look at the balances from the previous year and add any depreciation and additional purchases for the year.\u00a0 Property, Plant and Equipment (also called Fixed Assets) refer to long term assets used in the business including land, equipment, machinery, buildings, etc.\u00a0 Depreciation is applied to all of these items except for land, which is not depreciated.\r\n\r\nFor Leed Company, there were no changes to the Land account so the balance will remain at $60,000.\u00a0 Leed purchased a new building for $650,000 in the 4th quarter so the new building balance is $1,650,000 ($1,000,000 last year + 650,000 new building).\u00a0 According to the selling and administration expense budget, we had depreciation on the office building of $80,000 so we will add this to the existing balance from the previous year to get a new balance of $480,000 ($400,000 prior year + $80,000 current year depreciation).\u00a0 We are not planning on buying\u00a0any new equipment this year.\u00a0 The equipment balance will remain the same at $600,000.\u00a0 According to the manufacturing overhead budget, we planned $40,000 of factory equipment depreciation this year.\u00a0 The new balance for equipment accumulated depreciation is $220,000 ($180,000 prior year + $40,000 current year depreciation).\r\n\r\nCurrent Liabilities<\/strong>\r\n\r\nCurrent Liabilities are liabilities we expect to pay in the next year.\u00a0 Accounts Payable is determined using the purchases budget (material purchases for a manufacturer or inventory purchase budget for a merchandiser) and the schedule of cash payments.\r\n\r\nLeed Company budgets purchase payments as 80% in the quarter of purchase and 20% in the quarter after the purchase.\u00a0 We can calculate Leed's ending accounts payable by looking at the Quarter 4 material purchases of $217,500 x 20% to be paid in the first quarter of next year for $43,500.\r\n\r\nIncome taxes are typically paid in the quarter after they were calculated or during the first quarter of the next year.\u00a0 For Leed Company, income taxes are paid in the quarter after they were calculated.\u00a0 We can determine the budgeted income tax amount from the budgeted income statement.\u00a0 In quarter 4, Leed Company plans income taxes of $142,500 to be paid in the first quarter of the following year making this the ending balance for Income Taxes Payable.\r\n\r\nStockholder's Equity<\/strong>\r\n\r\nStockholder's Equity is comprised of common stock and retained earnings.\u00a0 Common stock represents ownership in the company.\u00a0 Retained Earnings is the earnings of the company over time minus any dividends paid.\r\n\r\nLeed Company did not have any new issues of common stock so the ending common stock balance will remain the same as $1,000,000.\u00a0 For retained earnings, we will need to calculate the ending balance using the following formula:\r\n\r\nBeginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings\r\n\r\nBeginning retained earnings comes from the balance of last year's balance sheet of $400,000.\u00a0 Net Income comes from the budgeted income statement for the year of $855,000.\u00a0 Dividends can be determined from the schedule of cash payments which shows $120,000 paid this year.\u00a0 Ending Retained Earnings is $1,135,000 ($400,000 + 855,000 - 120,000).\r\n\r\nThe full budgeted balance sheet will look like this:\r\n |
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