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Budgeted Balance Sheet
A budgeted balance sheet, also known as a pro forma balance sheet, is a financial
planning tool that projects a company's financial position at a future point in time. It's
developed using the budgeted balance sheet from the preceding year and other
budgets for the current year, such as sales, production, purchases, selling,
administrative expense, cash, and budgeted income statement.
Purpose of a Budgeted Balance Sheet
The budgeted balance sheet serves several key purposes:
Financial Forecasting: Provides a forward-looking view of a company's assets,
liabilities, and equity, enabling management to anticipate future financial
conditions.
Strategic Planning: Supports long-term financial planning by aligning
operational, investment, and financing activities with strategic goals.
Performance Measurement: Allows for comparison between actual balance
sheet amounts and budgeted amounts to assess the accuracy of financial
forecasts and the effectiveness of budget management. This comparison
facilitates decision-making and revisions to the budgeted balance sheet if
necessary.
Stakeholder Communication: Facilitates communication with investors,
lenders, and other stakeholders about the company's future financial
expectations.
Preparation of a Budgeted Balance Sheet
In practice, companies typically use their most recent actual balance sheet as a
baseline for projecting future balances, rather than relying solely on the previous
year's budgeted balance sheet. This process involves integrating various budgets,
including:
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Sales budgets
Production budgets (for manufacturing companies)
Cash budget
Budgeted income statement
Capital expenditures budget
Components of a Budgeted Balance Sheet
The budgeted balance sheet mirrors the structure of a standard balance sheet,
comprising assets, liabilities, and stockholders' equity sections.
Assets: * Cash: Sourced from the cash budget. * Accounts Receivable: Derived from
the schedule of collections. * Finished Goods Inventory: Obtained from the
production budget. * Raw Materials Inventory: Taken from the direct materials
budget.
Example Calculations:
1. Accounts Receivable:
If sales in the fourth quarter are $270,000, and 40% is collected in the
following quarter:
AccountsReceivable =270,000 * 40%$
AccountsReceivable =108,000$
2. Finished Goods Inventory:
Ending finished goods units are 1,000 units.
Total unit cost is $44.
F inishedGoodsI nventory = 1, 000units∗44$
F inishedGoodsI nventory =44,000$
3. Raw Materials Inventory:
Desired ending direct materials are 1,020 units.
Value is $4,080.
Raw materials inventory = $4,080## Budgeted Balance Sheet Example
Here's how to calculate the budgeted balance sheet amounts:
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1. Calculate the cost of goods sold (COGS):
1,020 pounds * 4 =4,080
2. Sum up the costs:
The sum is $19,319
3. Determine the buildings and equipment:
Recall the beginning balance from December 31, 2016.
Initial amount: $18,000
Add any purchases, such as a truck purchased in the second quarter for
$10,000.
Total: 18, 000+10,000 = $19,000
If there's a separate account for vehicles, you can add it accordingly.
4. Calculate accumulated depreciation:
Beginning balance: $28,800 (from December 31, 2016).
Add depreciation expenses from:
Manufacturing overhead budget: $1,200
Selling and administrative expenses: $4,000
Total depreciation: 1, 200+4,000 = $15,200
Accumulated Depreciation: 15, 200+28,800 = $48,000
5. Calculate total assets:
Buildings and equipment: $192,000
Subtract accumulated depreciation (a contra-asset account): 192, 000−
48,000 = $144,000
6. Calculate liabilities and stockholders' equity:
Accounts payable: $8,600
This comes from purchases of direct materials. 50% are paid in the
quarter of purchase, and 50% in the following quarter. The unpaid
50% is your accounts payable.
Example: 17, 200 ∗ 508,600
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7. Common stock
Stick to the beginning balance if no assumptions are provided.
Example: $225,000
8. Calculate retained earnings:
Beginning retained earnings: $46,480
Add net income: $47,900
Subtract any dividends paid.
Retained earnings ending: 46, 480+47,900 = $94,380
9. Calculate total stockholders' equity:
Example: 225, 000(CommonStock)+94,380 (Retained Earnings) =
$319,380
10. Calculate total liabilities and stockholders' equity:
Add accounts payable to total stockholders' equity.
Example: 8, 600+319,380 = $337,980
Total assets must equal total liabilities plus equity to ensure the
balance sheet is balanced. Assets = Liabilities + Equity
Merchandising Business Budgeting
Instead of a production budget, merchandising businesses use a purchases budget
because their nature is to buy and sell finished products. They don't have
manufacturing budgets like direct materials, direct labor, or manufacturing overhead
budgets.
Required Merchandise Purchases Formula
To determine the budgeted merchandise purchases:
Budgeted Cost of Goods Sold + Desired Ending Merchandise Inventory -
Beginning Merchandise Inventory = Required Merchandise Purchases
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This formula is a rearranged version of the cost of goods sold formula.
Costof GoodsSold = BeginningI nventory + P urchases − EndingI nventory
Example: Lima Company
Lima Company estimates:
July sales: $300,000
August sales: $320,000
Cost of goods sold: 70% of sales
Desired ending inventory: 30% of the following month's cost of goods sold
Calculations for July:
1. Budgeted cost of goods sold:
300, 000(J ulysales) ∗ 70 210,000
2. Desired ending merchandise inventory:
320, 000(Augustsales) ∗ 70 224,000
224, 000 ∗ 30 67,200
3. Beginning merchandise inventory:
300, 000 ∗ 30 63,000
4. Required merchandise purchases:
210, 000+ 67,200 - 63, 000 =214,200
Service Companies
Budgeting principles are vital for service companies, but their application differs from
manufacturing and merchandising due to the intangible nature of their products.
Service companies focus on managing capacity and resource utilization, particularly
their staff, as they are labor-intensive. Inventory management is less of a concern.
Budgeting for Service Companies
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In service companies, labor costs are often the most significant expense, making
personnel budgeting crucial. Revenue recognition can be complex, especially for
long-term service contracts, so it's important to revisit the standards for recognizing
revenue.
Budgeting Principles and Application
Revenue budget: The foundation, based on factors like:
Projected service demand
Pricing strategies
Contractual agreements
Capacity constraints
Accurate revenue forecasting
Labor budget: Plans for:
Salaries and wages
Benefits
Training costs It's crucial to align labor costs with projected service
demand.
Operating expense budget: Covers expenses like:
Rent
Utilities
Marketing and advertising
Professional fees
Supplies
Capacity budgets: Include equipment, facilities, staffing levels, and scheduling.
Cash flow budget: Includes inflows and outflows.
Project budgeting: Estimates project costs, tracks project expenses, and
monitors project profitability.
The specific nature of the business matters. For example, the budgeting process is
different for restaurants and technology companies. However, service companies
should focus on:
People
Quality controls
Technology
Flexibility
Budgeting for Not-for-Profit Organizations
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Budgeting is just as important for not-for-profit organizations as it is for profit-
oriented companies. Their budget process differs from profit-oriented companies, and
budgets are based on cash flows (expenditures and receipts) rather than revenue and
expenses. Zero-based budgeting is often the most applicable method.
Zero-based budgeting: starts from a "zero base" and requires every
expense to be justified for each new period.
The starting point will be the expenditures, not the receipts, because these
organizations are not profit-oriented. Management's task is to find receipts needed to
support planned expenditures. For example, government organizations often use
zero-based budgeting and must know the budgets for expenditures in order to build
some budgets.
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