The McGraw-Hill Companies, Inc Master Budget

Financial Planning and Analysis: The Master Budget

Chapter 9

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Helen (H) – CHAPTER 9: CORRECTION REQUIRED Note that not all slides include slide numbers.

Helen (H) – Slide 12 Note that I deleted the previous Slide 12 because the slides was blank.

Chapter 9: Financial Planning and Analysis: The Master Budget

Learning Objective 9-1 – Explain the relationship between financial planning and analysis and the master budget.

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Learning Objective 9-1. Explain the relationship between financial planning and analysis and the master budget.

Financial Planning and
Analysis (FP&A) Systems

A financial planning and analysis (FP&A) system helps managers assess the company’s future and know if they are reaching their performance goals. A complete FP&A system includes subsystems for (1) planning, (2) measuring and recording results, and (3) evaluating performance.

The planning component of the FP&A system is called the master budget. It is intended to help ensure that plans are consistent and yield a result that makes sense for the organization.

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A financial planning and analysis (FP&A) system helps managers assess the company’s future and know if they are reaching their performance goals. A complete FP&A system includes subsystems for (1) planning, (2) measuring and recording results, and (3) evaluating performance.

 

The planning component of the FP&A system is called the master budget. It is intended to help ensure that plans are consistent and yield a result that makes sense for the organization. (LO 9-1)

 

Learning Objective 9-2 – List and explain five purposes of budgeting.

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Learning Objective 9-2. List and explain five purposes of budgeting.

Purposes of Budgeting Systems

Budget

 

A detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.

  • Planning
  • Facilitating Communication and Coordination
  • Allocating Resources
  • Controlling Profit and Operations
  • Evaluating Performance and Providing Incentives

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A budget is a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time. The procedures used to develop a budget constitute a budgeting system. Budgeting systems have five primary purposes: (1) planning, (2) facilitating communication and coordination, (3) allocating resources, (4) controlling profit and operations and (5) evaluating performance and providing incentives. (LO 9-2)

Types of Budgets

Detail

Budget

Detail

Budget

 

 

Detail

Budget

Master

Budget

Covering all

phases of

a company’s

operations.

Sales

Production

Materials

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Different types of budgets serve different purposes. A master budget, or profit plan, is a comprehensive set of detailed budgets covering all phases of an organization’s operations for a specified period of time. (LO 9-2)

Types of Budgets

Budgeted Financial

Statements

Balance Sheet

Income Statement

Statement of Cash Flows

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Budgeted financial statements, often called pro forma financial statements, show how the organization’s financial statements will appear at a specified time if operations proceed according to plan. Budgeted financial statements include a budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows. (LO 9-2)

Types of Budgets

2014

2015

2016

2017

Continuous or

Rolling Budget

This budget is usually a twelve-month

budget that rolls forward one month

as the current month is completed.

L o n g R a n g e B u d g e t s

Capital budgets with acquisitions
that normally cover several years.

Financial budgets with financial resource acquisitions.

9-*

 

 

 

 

 

Helen (H) – Slide 8 CORRECTION REQUIRED The years on the timeline should be updated.

Helen (H) – Slide 8 Reduced the font size for the words ‘Continuous or Rolling Budget.’

A capital budget is a plan for the acquisition of capital assets, such as buildings and equipment. A financial budget is a plan that shows how the organization will acquire its financial resources, such as through the issuance of stock or incurrence of debt. Budgets are developed for specific time periods. Short-range budgets cover a year, a quarter, or a month, whereas long-range budgets cover periods longer than a year. Rolling budgets are continually updated by periodically adding a new incremental time period, such as a quarter, and dropping the period just completed. Rolling budgets are also called revolving budgets or continuous budgets. (LO 9-2)

Learning Objective 9-3 – Describe the similarities and differences in the operational budgets prepared by manufacturers, service-industry firms, merchandisers, and non-profit organizations.

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Learning Objective 9-3. Describe the similarities and differences in the operational budgets prepared by manufacturers, service-industry firms, merchandisers, and nonprofit organizations.

 

Budgeted Income Statement

Cash Budget

Sales of Services or Goods

Ending

Inventory

Budget
Work in Process

and Finished

Goods

Production

Budget

Direct

Materials

Budget

Selling and

Administrative

Budget

Direct

Labor
Budget

Overhead

Budget

Ending

Inventory

Budget
Direct Materials

Budgeted Balance Sheet

Budgeted Statement of Cash Flows

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The master budget comprises many separate budgets, or schedules, that are interdependent. Based on the sales budget, a company develops a set of operational budgets that specify how its operations will be carried out to meet the demand for its goods or services. A manufacturing company develops a production budget, which shows the number of product units to be manufactured and ending inventory budgets. From the production budget, a manufacturer develops budgets for the direct materials, direct labor, and overhead that will be required in the production process. A budget for selling and administrative expenses also is prepared. The operational portion of the master budget is similar in a merchandising firm, but instead of a production budget for goods, a merchandiser develops a budget for merchandise purchases. A merchandising firm will not have a budget for direct materials. Based on the sales budget for its services, a service industry firm develops a set of budgets that show how the demand for those services will be met. Every business prepares a cash budget. This budget shows expected cash receipts, as a result of selling goods or services, and planned cash disbursements, to pay the bills incurred by the firm. The final portion of the master budget includes a budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows. (LO 9-3)

 

 

 

 

 

Financing Budgets

Cash Receipts Budget

Provides information about cash inflows. Considers things such as the timing of sales and collections, collection patterns, and sales that will never be collected.

Helen (H) – Slide 11 NN Last sentence: Changed the word ‘patters’ to read ‘patterns.’

After developing its sales and operational budgets, a company knows where its money will be coming from and where it will go. But several timing issues affect when they can collect the cash. To plan for this, companies develop a set of financing budgets including a cash receipts budget, a cash disbursements or payments budget, and an overall cash budget.

 

A cash receipts budget considers the timing of sales and collections, collection patterns, and even the sales that may never be collected. (LO 9-3)

 

Financing Budgets

Cash Disbursements Budget

Portrays spending plans based other budgets prepared

Helen (H) – Slide 12 NN First paragraph, last sentence: Changed the words ’30 days for more” to read ‘for 30 days or more.’ Second paragraph, fifth sentence: Changed the word ‘an’ after the word ‘ahead’ to read ‘and.’

The cash disbursements budget depends on the spending plans outlined in several operational budgets. For example, the company may not pay cash immediately for most of their expenditures. Rather, it will pay its suppliers according to standard commercial arrangements, often delaying payments for 30 days or more past the delivery date.

 

Finally, the cash budget can be prepared. The cash budget plays a critical role in planning the firm’s cash needs. It summarizes the various cash inflows and outflows and incorporates nonoperational cash flows as well. It also addresses financing issues. By predicting the company’s net cash position at frequent points, the firm can plan ahead and can arrange sources of short term borrowings and make short term investments as the cash positions allow. The ability to foresee and avoid cash emergencies makes the cash budget a very important and powerful tool. (LO 9-3)

 

Learning Objective 9-4 – Explain the concept of activity-based budgeting and the logic it brings to the budgeting process.

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Learning Objective 9-4. Explain the concept of activity-based budgeting and the logic it brings to the budgeting process.

Activity-Based Costing versus Activity-Based Activity Based Budgeting (ABB)

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