The Putnam Company – Balance Sheet
Supporting computations:
| a. | From Schedule 8 (cash budget). |
| b. | $100,000 (Accounts receivable, 12/31/20A) + $900,000 (Credit sales from Schedule 1) − $892,000(Collections from Schedule 1) = $108,000, or 60% of 4th quarter credit sales, from Schedule 1 ($180,000 × 60% = $108,000). |
| c. | Direct materials, ending inventory = 520 pounds × $ 5 = $2,600 (From Schedule 3) |
| d. | From Schedule 6 (ending finished goods inventory budget). |
| e. | From the 20A balance sheet and Schedule 8 (no change). |
| f. | $250,000 (Building and Equipment, 12/31/20A) + $42,000 (purchases from Schedule 8) = $292,000. |
| g. | $74,000 (Accumulated Depreciation, 12/31/20A) + $16,000 (depreciation expense from Schedule 5) = $90,000. |
| h. | Note that all accounts payable relate to material purchases. $6,275 (Accounts payable, 12/31/20A) + $61,150 (credit purchases from Schedule 3) − $60,950 (payments for purchases from Schedule 3) = $6,475, or 50% of 4th quarter purchase = 50% ($12,950) = $6,475. |
| i. | From Schedule 9. |
| j. | From the 20A balance sheet and Schedule 8 (no change). |
| k. | $77,575 (Retained earnings, 12/31/20A) + $64,375 (net income for the period, Schedule 9) − $20,000 (cash dividends from Schedule 8) = $121,950. |
How is it used and applied?
A budget is a tool for both planning and control. At the beginning of the period, the budget is a plan or standard; at the end of the period, it serves as a control device to help the business manager measure performance against the plan so that future performance may be improved.
The major objectives of a budgeted system are to:
1.Set acceptable targets for revenues and expenses.
2.Increase the likelihood that targets will be reached.
3.Provide time and opportunity to formulate and evaluate options should obstacles arise.
4.Evaluate a variety of “what-if” scenarios (especially with the aide of computer software) in an effort to find the best possible course of action.
It is important to realize that with the aide of computer technology, budgeting can be used as an effective device for evaluation of “what-if” scenarios. This way managers should be able to move toward finding the best course of action among various alternatives through simulation. If the manager does not like what he sees in analyzing the budgeted financial statements in terms of various financial ratios such as liquidity, activity (turnover), leverage, profit margin, and market value ratios, he can always alter the contemplated decision and planning set. A ratio is a relationship of one amount to another. It relates financial statement components to each other.
10. What Is The Cost Structure?
Introduction
The ratio of variable costs to fixed costs measures the relationship between costs that change with volume and costs that do not change within the short term.
How is it computed?
Examples of variable costs are direct materials and direct labor used in producing a product. Examples of fixed costs are rent, insurance and property taxes.
Example
A business reports total variable costs of $800,000 and total fixed costs of $8,000,000. The ratio is 0.10. This in unfavorable, because it is difficult to reduce the fixed costs in the short run when business falls off.
How is it used and applied?
When there is idle capacity, additional volume may be produced but total fixed costs remains constant. However, fixed cost per unit decreases because total fixed cost is spread over more units. Total variable cost increases as more units are produced, but the variable cost per unit remains the same. In a nonmanufacturing environment, service hours are substituted for units produced.
The cost structure of the business indicates what costs may be cut if needed, as in a recessionary environment (e.g., the early 1990’s). The owner can more readily control and adjust variable costs than fixed costs.
See Sec. 54, Cost-Volume-Profit Analysis; Sec. 55, Contribution Margin Analysis; and Sec. 107, Operating Leverage.
11. Using Budgeting to Control Cash
Introduction
The cash budget presents the amount and timing of the expected cash inflows and out flows for a specified time period. It is a tool for cash planning and control and should be detailed enough that you know how much is required to run your business. If you can estimate cash flows reliably, you will be able to keep cash balances near a target level using fewer transactions.
The cash budget should be prepared for the shortest time period for which reliable financial information can be obtained. In the case of many businesses, this may be one week. However, it is also possible to predict major cash receipts and cash payments for a specific day.
How is it prepared?
The cash budget usually consists of four major sections:
1.The receipts sections, which is the beginning cash balance, cash collections from customers, and other receipts
2.The disbursements sections, which comprises all cash payments that are expected for the budgeting period
3.The cash surplus or deficit section, which shows the difference between the cash receipts section and the cash disbursements section
4.The financing section, which provides a detailed account of the borrowings and repayments anticipated during the budgeting period
If further financing is needed, the cash budget projections allow adequate lead-time for the necessary arrangements to be made.
Cash budgets are often prepared monthly, but there are no general, it should be long enough to show the effects of your business policies, yet short enough so that estimates can be made with reasonable accuracy. Table 11.1 shows the major elements of a cash budget.
The basis for predicting cash receipts is sales, whether from cash sales or collections from customer balances. An incorrect sales estimate will result