Financial Planning and Control (continuation)

Budget – a quantitative expression of a plan of action. It imposes a formal structure (budgetary system)
that is needed for the organization. It can help identify problems in advance and be able to monitor and
adjust to the changing conditions. It is considered as an effective cost-management tool.

Master Budget – a detailed and comprehensive analysis of the first year of the long-range plan. It
quantifies targets for sales, purchases, production, distribution and financing in the form of forecasted
financial statements and supporting operating schedules. The schedules provide detailed information
beyond what appears in the forecasted financial statements.

Components of the Master Budget

A. Operating Budget – sometimes called the profit plan focuses on the income statement and its
supporting schedules.
1. Sales Budget
2. Operating Expense Budget
3. Purchases and Cost of Goods Sold Budget
4. Budgeted Income Statement
B. Financial Budget – focuses on the effects that the operating budget and other plans will have on
cash balances.
1. Cash Budget
2. Capital Budget
3. Budgeted Balance Sheet

Illustrative Sample Problem

The balance sheet of Color Corporation as of the end of March 2017 is shown below:

Color Corporation
Balance Sheet
March 31, 2017
Assets Liabilities and Equity
Cash P 10,000 Accounts Payable P 16,800
Accounts Receivable 16,000 Accrued Salaries and Commissions 4,250
Inventories 48,000 Total Liabilities P 21,050
Prepaid Insurance 1,800 Stockholders’ Equity P 78,950
Equipments P 37,000 Total Liabilities and Equity P 100,000
Accumulated Depreciation 12,800 24,200
Total Assets P 100,000

Color Corporation is a retailer of cellular phones and prepares a master budget for a three-
month period. The Sales forecast for the next quarter is as follows: April – P 50,000, May – P 80,000,
June – P 60,000. Actual Sales for March totals P 40,000. On the average, 60% of Sales is on cash basis
and 40% is on account that are collected immediately on the next month of the Sales. Uncollectible
accounts are considered negligible and thus ignored.
Due to uncertainties on deliveries from suppliers, at the end of each month, the company
established a based inventory of P 20,000 plus additional inventory of 80% of the expected Cost of
Goods Sold for the next month. The average Cost of Goods Sold is 70% of Sales. The company pays
50% of its Purchases for cash during the month the purchase was made and the remainder is paid on
the following month.
 The company pays salaries and commissions twice each month, with half-month accrued as of
the end of the month. Each payment consists of the one-half of the monthly fixed salary of P2,500 and
commission equal to 15% of Sales.
The company will purchase additional Equipments by April for P 3,000 in cash basis. Monthly
operating expenses is as follows: Rent of P 2,000 paid in cash at the end of month, expired portion of
the insurance is P 200 monthly, depreciation of equipments (including new purchase) is P 500, and
miscellaneous expenses at 5% of Sales.
Due to collection lags on credit sales, the company expects cash struggle to come-up with
available cash for the payment for purchases and other operating expenses. To answer this, short-term
loans will from a local bank with anticipation for payment when cash is available. A minimum amount of
P 10,000 cash balance is maintained at the end of each month.

Sales Budget
April May June Total for the Quarter
Sales P 50,000 P 80,000 P 60,000 P 190,000

Cash Collections (from Customers)

April May June
Cash Sales (60% of Sales) P 30,000 P 48,000 P 36,000
Collection from credit sales (40% of
previous month Sales) 16,000 20,000 32,000
Total Collections P 46,000 P 68,000 P 68,000

Purchases Budget
April May June
Cost of Goods Sold P 35,000 P 56,000 P 42,000
Add: Ending Inventory 64,800 53,600 48,000
Total Goods Needed P 99,800 P109,600 P 90,000
Less: Beginning Inventory 48,000 64,800 53,600
Purchases P 51,800 P 44,800 P 36,400

Cash Disbursements for Purchases

April May June
50% of last month’s Purchases P 16,800 P 25,900 P 22,400
Add: 50% of current month’s purchases 25,900 22,400 18,200
Total Disbursement for Purchases P 42,700 P 48,300 P 40,600

Operating Expenses Budget

April May June
Salaries P 2,500 P 2,500 P 2,500
Commissions (15% of Sales) 7,500 12,000 9,000
Total Salaries and Commissions P 10,000 P 14,500 P 11,500
Miscellaneous Expenses 2,500 4,000 3,000
Rent 2,000 2,000 2,000
Insurance 200 200 200
Depreciation 500 500 500
Total Operating Expenses P 15,200 P 21,200 P 17,200
Disbursement for Operating Expenses
April May June
Salaries and Commissions
50% of last month P 4,250 P 5,000 P 7,250
50% of this month 5,000 7,250 5,750
Total Salaries and Commissions P 9,250 P12,250 P13,000
Miscellaneous Expense 2,500 4,000 3,000
Rent 2,000 2,000 2,000
Total Disbursements P13,750 P18,250 P18,000

Color Corporation
Income Statement – Budgeted
For the months covering the quarter ended June 30, 2017
Total
April May June the Quarter
Sales P 50,000 P 80,000 P 60,000 P190,000
Less: Cost of Goods Sold 35,000 56,000 42,000 133,000
Gross Profit P 15,000 P 24,000 P 18,000 P 57,000
Less: Operating Expenses
Salaries and Commissions P 10,000 P 14,500 P 11,500 P 36,000
Miscellaneous Expenses 2,500 4,000 3,000 9,500
Rent 2,000 2,000 2,000 6,000
Insurance 200 200 200 600
Depreciation 500 500 500 1,500
Income/(Loss) from Operations P (200) P 2,800 P 800 P 3,400
Interest Expense 140 140 130 410
Net Income/(Loss) P (340) P 2,660 P 670 P 2,990

Cash Budget
April May June

Beginning Cash balance P 10,000 P 10,410 P 10,720

Minimum Cash balance desired 10,000 10,000 10,000
Available Cash - P 410 P 720
Cash Receipts and Disbursements
Collections from Customers P 46,000 P 68,000 P 68,000
Cash Payments for Purchases (42,700) (48,300) (40,600)
Payment for Operating Expense (13,750) (18,250) (18,000)
Purchase of Equipments (3,000) - -
Net Cash Receipts and Disbursement P (13,450) P 1,450 P 9,400
Excess of Cash before Financing P (13,450) P 1,860 P 10,120
Borrowings at the beginning of the month P 14,000
Repayments at the end of the month P (1,000) P (9,000)
Interest payments (1% per month) (140) (140) (130)
Total Cash Increase/(Decrease) P 13,860 P (1,140) P (9,130)
Ending Cash balance P 10,140 P 10,720 P 10,990