Budget_and_Financial_Reporting_for_the_Enterprise 6.pptx

financial budget

1. Sesi 6 BUDGETING AND BUSINESS REPORT Financial Budget www.esaunggul.ac.id

2. VISI Menjadi perguruan tinggi kelas dunia berbasis intelektualitas, kreatifitas dan kewirausahaan, yang unggul dalam mutu pengelolaan dan hasil pelaksanaan Tridarma Perguruan Tinggi. MISI Menyelenggarakan pendidikan tinggi yang bermutu dan relevan Menciptakan suasana akademik yang kondusif Memberikan pelayanan prima kepada seluruh pemangku kepentingan www.esaunggul.ac.id

3. TOPIK SEBELUM UTS Budgeting: An Introduction Forcasting Sales Forcasting Operating Budget Financial Modeling: Tools for Budgeting and Profit Planning Financial Budget Capital Expenditures Budget www.esaunggul.ac.id

4. TOPIK SETELAH UTS Capital Budgeting Business structures and Business Report Accounting and Business Decision Making Accounting in society Accounting Quality, Development and Deployment of Information at the Functional Level Budget Report, Financial Report and Performance Budget Report, Financial Report and Performance www.esaunggul.ac.id

5. BUKU REFERENSI 1. Budgeting basics and beyond: Jae K. Shim, Joel G. Siegel, Allison I. Shim. Published by John Wiley & Sons, Inc., Hoboken, New Jersey, 2012 2. Financial Planning & Analysis And Performance Management, Published by John Wiley & Sons, Inc., Hoboken, New Jersey, 2018 3. Business Forecasting, John E. Hanke Dean Wichern, Ninth Edition, 2014 4. Financial Reporting, Financial Statement Analysis and Valuation, 8e, James Wahlen , Stephen Baginski , Mark Bradshaw, 2015 www.esaunggul.ac.id

6. BUKU REFERENSI Managerial Accounting Tools for Business Decision-Making, Fifth Canadian Edition, Jerry J. Weygandt Ph.D., CPA; Paul D. Kimmel Ph.D., CPA; Donald E. Kieso Ph.D., CPA; Ibrahim M. Aly Ph.D. 2017 Accounting: business reporting for Decision Making, Jacqueline Birt , Keryn Chalmers, Suzanne Maloney, Albie Brooks, Judy Oliver. Edition: Sixth edition. John Wiley & Sons, Australia, Ltd 2017 Financial forecasting, analysis, and modelling : a framework for long-term forecasting / Michael Samonas , John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom, 2015

7. PENILAIAN Present = 15 % Mid = 30 % Final = 30 % QUIZ = 10 % Task = 15 % www.esaunggul.ac.id

8. Slides prepared by Peter Miller ©National Core Accounting Publications 8 Cash Budgets Forecast the business’s ability to pay its debts as and when they fall due. Enable predicted borrowing to be arranged ahead of time. Allows planning for investment of surplus funds.

9. Financial Forecasting Ability to plan ahead and make necessary adjustments before actual events occur Outcome of a firm through external events might be a function of both: Risk-taking desires Ability to hedge against risk with planning No growth or a decline - not the primary cause of shortage of funds A comprehensive financing plan must be developed for a significant growth

10. Slides prepared by Peter Miller ©National Core Accounting Publications 10 Budgets required Accounts Receivable ( Debtors ) Collections Budget. Cash Receipts Budget. Cash Payments Budget. The following sub budgets may need to be prepared first in order to complete the Cash Budget

11. Sources and Uses of Cash Cash is considered to be the life-blood of a business. Cash shortages can be stifling and expensive while excesses can lead to poor returns. Since most businesses do not function on a pure cash basis, it is critical for them to forecast their needs for cash in advance. The cash budget is the analytical tool that estimates the future timing of cash inflow and cash outflow and projects potential shortfalls and surpluses. 12- 11

12. Sources and Uses of Cash 12- 12 Despite setting up a cash reserve, the firm is projected to have cash shortfalls in 3 months and surpluses in 2 after all cash receipts and disbursements have been forecasted for the first half of 2010.

13. Sources and Uses of Cash Identifying all possible sources and uses of cash is essential for preparing a useful cash budget.   This list can serve as a guide when preparing a cash budget. 12- 13

14. Cash Budget LO 13- 5 Estimate cash flows. The cash budget is a statement of cash on hand at the start of the budget period, expected cash receipts, expected cash disbursements, and the resulting cash balance at the end of the budget period. Cash receipts: – Collection of accounts receivable – Cash sales – Sales of assets – Borrowing – Issuing stock – Other LO 13-5

15. Cash Budget Some cash disbursements: – Materials purchases – Manufacturing costs – Operating activities – Debt repayment – Acquisition of new assets – Income taxes – Dividends – Other activities LO 13-5

16. Financial Budgets: Cash Budget Shows anticipated cash flows. Often considered to be the most important output in preparing financial budgets. Contains three sections: Cash Receipts, Cash Disbursements, and Financing. Shows beginning and ending cash balances.

17. Operating Budgets: Budgeted Income Statement Basic Format Illustration 20-14

18. Financial Budgets: Cash Budget Cash Receipts Section: Includes expected receipts from the principal sources of revenue – usually cash sales and collections on credit sales. Shows expected interest and dividends receipts as well as proceeds from planned sales of investments, plant assets, and capital stock. Cash Disbursements Section: Includes expected cash payments for direct materials and labor, taxes, dividends, plant assets, etc. Financing Section: Shows expected borrowings and repayments of borrowed funds plus interest.

19. Assembling the Master Budget for a Manufacturing Firm LO 13-6

20. Budgeting in Service Organizations Marketing and administrative cost budget Sales forecast Budgeted cost of services Budgeted income statement Cash budget Budgeted balance sheets LO 13- 7 Explain budgeting in merchandising and service organizations. LO 13-7

21. Budgeting Retail and Wholesale Organizations Purchases Marketing and administrative cost budget Sales forecast Budgeted income statement Cash budget Budgeted balance sheets LO 13-7

22. Financial Budgets: Cash Budget Must prepare in sequence. Ending cash balance of one period is the beginning cash balance for the next. Data obtained from other budgets and from management. Often prepared for the year on a monthly basis.

23. MEANING OF CASH BUDGET Cash budget is a schedule to record cash inflows And outflows over a period with a view to locating the timing and magnitude of cash surplus and shortage.

24. A cash budget is a forecast of future cash receipts And cash disbursement over various intervals of time. James V. Home Cash budget is an estimate of cash receipts and disbursement for a future period of time. Guthman & Dougal Definition of cash budget

25. Importance of Cash Budget Cash is the nucleus or life blood in the working capital management. Cash budget is a useful tool in the cash management of organizations as it reveals potential cash shortages as well as potential periods of excess cash. It brings equilibrium between available cash and the cash demanding activities – operations, capital expenditures,etc.

26. Advantages of Cash Budget It ensures that sufficient cash is available when required. It reveals the expected shortages of cash, so that action may be taken in time,e.g.,a bank overdraft or loan may be arranged. It shows whether capital expenditure projects can be financed internally;or arrangement has to be made borrowings. It reveals the availability of cash so that advantage may be taken of cash discounts.

27. Aktivitas Operasional Penerimaan Kas Pengeluaran Kas Penjualan Produk Pendapatan Lain-lain Penerimaan Piutang Pembelian Bahan/Produk Biaya Tenaga Kerja Biaya Overhead Biaya Pemasaran Biaya Administrasi Pembayaran Lain

28. Aktivitas Investasi Penerimaan Kas Pengeluaran Kas Penjualan Kendaraan Penjualan Gedung Penjualan Tanah Penjualan Aktiva Lain2 Pembelian Kendaraan Pembelian Gedung Pembelian Tanah Pembelian Peralatan Pembelian Mesini Pembelian Surat Berharga

29. Aktivitas Keuangan Penerimaan Kas Pengeluaran Kas Penerbitan Saham Penerbitan Obligasi Penerbitan Promes Kredit Bank Pembayaran Deviden Pembayaran Bunga Pelunasan Obligasi Pelunasan Promes Pelunasan Hutang Banki

30. Contoh Soal Pada bulan Oktober 2008, manajemen PT.Nusa Indah menyusun anggaran kas perusahaan untuk tahun 2009. Sedangkan data yang dimiliki manajemen perusahaan berkaitan dengan penyusunan anggaran kas tersebut adalah sebagai berikut : Penjualan tunai tahun 2009 diperkirakan sebesar Rp 400.000.000. per bulan. Sedangkan penjualan kredit diperkirakan sebesar Rp 250.000.000. per bulan. Biasanya pelanggan akan membayar pada bulan berikutnya. Diperkirakan, saldo piutang usaha pada akhir tahun 2008 sebesar Rp 200.000.000. Dari jumlah piutang tersebut, diperkirakan akan dapat ditagih pada bulan Februari 2009 sebanyak 60% dan sisanya akan dapat ditagih pada bulan Maret 2009.

31. Saldo kas pada akhir bulan Desember 2008, diperkirakan sebesar Rp 840.000.000. Pembelian bahan baku langsung dianggarkan sebesar Rp 400.000.000. per bulan. Dimana sebesar 60% akan dibayar pada saat terjadinya transaksi dan sisanya akan dibayar pada bulan berikutnya. Pada akhir tahun 2008, diperkirakan perusahaan masih memiliki hutang usaha sebesar Rp 400.000.000. dimana sebesar Rp 225.000.000.direncanakan akan dibayar pada bulan Januari 2009 dan sebesar Rp 175.000.000. direncakan akan dibayar pada bulan Februari 2009. Biaya tenaga kerja langsung dianggarkan sebesar Rp 45.000.000. per bulan. Biaya overhead pabrik dianggarkan sebesar Rp 50.000.000. per bulan, termasuk di dalamnya biaya depresiasi aktiva tetap sebesar Rp 15.000.000. per bulan. Biaya pemasaran dianggarkan sebesar Rp 25.000.000. per bulan

32. Biaya administrasi dan umum dianggarkan sebesar Rp 30.000.000. per bulan, termasuk di dalamnya biaya depresiasi aktiva tetap sebesar Rp 8.000.000. per bulan. Perusahaan merencanakan akan membeli mesin pada bulan April 2009 sebesar Rp 280.000.000. dan pada bulan September 2007 sebesar Rp 400.000.000. Pada awal tahun 2009 diperkirakan perusahaan masih akan memiliki hutang bank yang akan jatuh tempo pada tahun 2009 sebesar Rp 520.000.000. (termasuk bunga). Dimana sebesar Rp 260.000.000. akan dibayar pada bulan April 2009 dan sebesar sisanya akan dibayar pada bulan Mei 2009. Perusahaan merencanakan akan membayar pajak pada bulan Maret 2009 sebesar Rp 62.000.000. Diharapkan, Bank Danamon akan memberikan kredit modal kerja sebesar Rp 700.000.000. pada akhir bulan Maret 2009, dengan tingkat bunga pinjaman sebesar 24% per tahun dan bunga akan dibayarkan setiap bulan mulai bulan Mei 2009.

33. Perusahaan merencanakan menjual 4 unit kendaraan pick-up yang dimilikinya, dengan taksiran harga jual sebesar Rp 35.000.000. per unit. Diperkirakan seluruh mobil tersebut akan dapat terjual pada bulan Februari 2009. Dan untuk mengganti kendaraan yang telah dijual tersebut, perusahaan merencanakan akan membeli secara tunai sebanyak 5 unit kendaraan baru, seharga Rp 80.000.000. per unit pada bulan Februari 2009. Berdasarkan data diatas, jika dibuat anggaran kas PT.Nusa Indah untuk 6 bulan pertama tahun 2009, akan menghasilkan anggaran sebagai berikut :

34. Keterangan B u l a n Januari Februari Maret April Mei Juni # Saldo awal 840.000 648.000 336.000 977.000 360.000 211.000 # Aktivitas Operasional : - Penjualan tunai 400.000 400.000 400.000 400.000 400.000 400.000 - Penerimaan piutang 370.000 330.000 250.000 250.000 250.000 - Pembelian tunai (240.000) (240.000) (240.000) (240.000) (240.000) (240.000) - Pembayaran hutang usaha (225.000) (335.000) (160.000) (160.000) (160.000) (160.000) - Biaya tenaga kerja (45.000) (45.000) (45.000) (45.000) (45.000) (45.000) - Biaya overhead (35.000) (35.000) (35.000) (35.000) (35.000) (35.000) - Biaya pemasaran (25.000) (25.000) (25.000) (25.000) (25.000) (25.000) - Biaya Admin & umum (22.000) (22.000) (22.000) (22.000) (22.000) (22.000)

35. # Aktivitas Investasi : - Pembelian mesin (280.000) - Penjualan kendaraan 140.000 - Pembelian kendaraan (320.000) # Aktivitas Operasional : - Pembayaran hutang bank (260.000) (260.000) - Kredit bank 700.000 Saldo akhir 648.000 336.000 977.000 360.000 211.000 322.000 - Biaya bunga (12.000) (12.000) - Pajak Penghasilan (62.000)

36. Financial Budgets: Cash Budget Example – Hayes Company Assumptions Minimum Desired Cash Balance = $ 15,000 January 1, 2012, Cash balance: $38,000. Sales: Collect 60% in quarter sold; 40% in next quarter; collect December 31, 2011 Accounts Receivable in Quarter 1. Expected sale of short term investments: $2,000 in Quarter 1. Direct Materials: Pay 50% in quarter purchased; 50% in next quarter; pay December 31, 2011 Accounts Payable in Quarter 1. Direct Labor: pay 100% in quarter incurred. Manufacturing Overhead and Selling/Administrative Expenses: Pay (except depreciation) in quarter incurred. Expected purchase of truck: $10,000 cash in Quarter 2. Estimated annual income taxes: Equal payment each quarter. Loans: Pay in earliest quarter with sufficient cash (i.e., cash on hand exceeds the $15,000 minimum required balance).

37. Financial Budgets: Cash Budget Example – Hayes Company Usually prepare schedule of collections from customers. Illustration 20-15

38. Financial Budgets: Cash Budget Example – Hayes Company Prepare schedule of cash payments for direct materials. Now prepare the Cash Budget based on the assumptions and preceding schedules. Illustration 20-16

39. Financial Budgets: Cash Budget Illustration 20-17

40. Financial Budgets: Cash Budget Contributes to more effective cash management. Shows managers the need for additional financing before actual need arises. Indicates when excess cash will be available. $ CASH $

41. Financial Budgets: Budgeted Balance Sheet A projection of financial position at the end of the budgeted period. Developed from the budgeted balance sheet for the preceding year and the budgets for the current year.

42. Financial Budgets: Budgeted Balance Sheet Illustration 20-18

43. Budgeting: Merchandisers Sales Budget: Starting point and key factor in developing the master budget. Use a purchases budget instead of a production budget. Does not use the manufacturing budgets (direct materials, direct labor, manufacturing overhead). To determine budgeted merchandise purchases:

44. Cash Budgeting and the Sales Forecast Sales revenue: Base variable driving almost all other items in the cash budget. A company m ust forecast sales as objectively as possible.  There is usually a time lag between when a sale is made and when the cash receipts come in . A company must keep track of all future collections. To forecast: Need internal data (information that is proprietary or unique to the firm) as well as external data (publicly available information) sources for objective sales forecasts. 12- 47

45. Cash Budgeting and the Sales Forecast 12- 48

46. Budgeting: Merchandisers Example – Lima Company Budgeted sales for July, $300,000, and for August, $320,000. Cost of Goods Sold: 70% of sales. Desired ending inventory: 30% of next month’s Cost of Goods Sold. Illustration 20-20

47. Cash Inflow from Sales Firms typically sell products and services partially for cash and partially on credit.   An analysis of a firm’s collection policy can help project cash inflow from sales.   It is quite common for firms to collect some of their receivables in the months following the sale, i.e. November 2008’s credit sales will be partially collected in December and January.   12- 50

48. 12.2 Cash Inflow from Sales 12- 51 Managers often figure in a small percentage of the forecasted sales as bad debts when preparing a cash budget.

49. Other Cash Receipts Besides sales, which are the main contributors to a firm’s cash inflow, need to forecast the timing and magnitude of other occasional sources of cash such as asset sales, funds raised through issuance and sale of securities, and income earned on investments (dividends, interest, etc.) 12- 52

50. Cash Outflow from Production The magnitude and timing of the various cash disbursements of a firm depends mainly on forecasted sales.   Payments for raw materials, labor costs, overheads such as utilities and rent, shipping costs, etc.   Like sales, there is often a time lag between when the firm receives and records the various costs, and when it actually makes the payment for them. The cash budget can be used as a handy planning document to keep track of the projected disbursements.  Depreciation is merely a tax write-off, not a cash disbursement, so should not be included in a cash budget . 12- 53

51. The Cash Forecast: Short-Term Deficits and Short-term Surpluses The main objective of developing a cash budget is to determine if a firm has sufficient cash available from its revenues and other receipts to cover its periodic cash disbursements such as:  1. Accounts payables for materials and supplies; 2. Salaries, wages, taxes, other operating expenses; 3. Capital expenditures for plant, equipment, and machinery; and 4. Dividends, interest and floatation cost payments related to raising and servicing of capital. Over a short planning cycle, the total periodic cash inflow rarely matches the total periodic outflow, due to seasonal fluctuations and time lags.   F orecasted cash deficits and surpluses in specific periods can be managed for the betterment of the firm. 12- 54

52. The Cash Forecast: Short-Term Deficits and Short-term Surpluses 12- 55

53. Funding Cash Deficits Cash shortfalls can be handled in 4 ways: Cash from savings Unsecured loans (letters of credit). Secured loans (using accounts receivable, inventories or other company assets). Other sources (commercial paper, trade credit, or banker’s acceptance). 12- 56

54. Investing Cash Surpluses When a company has excess funds, it has 4 options: 1. Put the surplus in a savings account or invest it in marketable securities. 2. Repay lenders and owners (retire debt early or pay extra dividends). 3. Replace aging assets. 4. Invest in the company (add new projects that grow the company by accepting positive net present value projects). 12- 57

55. Planning with Pro Forma Financial Statements Cash budgeting, is only one aspect of short-term financial planning. Equally important for firms is to forecast their operating cash flow and net income for the forthcoming period by developing pro forma financial statements.  There are a variety of ways to produce pro forma statements, but the statements usually rely on two primary inputs:  The prior year’s financial statements and the relationship of the account balances to each other, and The projected sales for the coming year. 12- 58

56. Planning with Pro Forma Financial Statements The percentage of each item either to sales (income statement) or to total assets (balance sheet) is computed for the prior year and then multiplied by the projected sales (income statement) or total assets (balance sheet) for the coming year to develop pro forma financial statements.   For example, let’s say that the cash balance for the prior year is $2 million and the total assets is $100m. So cash is 2% of total assets. For the Pro Forma Balance Sheet, we would forecast cash as 2% of the forecasted total assets as well, i.e. if total assets are forecasted to increase by 20% to $120m the cash would be forecasted to be .02 x 120m = $24m . 12- 59

57. Pro Forma Income Statement 12- 60

58. Pro Forma Income Statement 12- 61 This approach, a good first step, is often too simplistic in reality because many financial statement items do not vary proportionately with sales. In particular, depreciation decreases over time and cost of goods sold often declines due to economies of scale. The manager would have to fine-tune the forecasted values to make them more in line with reality.

59. Pro Forma Balance Sheet Each prior year’s balance sheet item is expressed as a percent of total assets, and then multiplied by the forecasted total assets figure for the next period.   Items which are obviously either constant each period, or which vary at a different rate (for whatever reason) are accordingly adjusted for by the financial manager.   If total assets exceed total liabilities and owner’s equity, external financing is allocated according to some pre-determined ratio to serve as the plug variable. 12- 62

60. Pro Forma Balance Sheet 12- 63

61. Pro Forma Balance Sheet 12- 64 Based on the following assumptions, a pro forma balance sheet is developed

62. Pro Forma Balance Sheet 12- 65 Key calculations include:

63. Pro Forma Balance Sheet 12- 66

64. Pro Forma Balance Sheet 12- 67

65. Pro Forma Cash Flow Statement Finally, the pro forma cash flow statement (Figure 12.7) is prepared to tie together all the changes in operating, investment, and financing cash flows. It helps the company see where funds will be generated in the coming period and where funds will be used. If operations is insufficient in generating cash inflow and borrowing is needed (from either lenders or owners) it must be a temporary situation or the company will not be sustainable. Here the $200,000 from borrowing needs to be for expanding the business and not maintaining the business. 12- 68

66. Pro Forma Cash Flow Statement 12- 69

67. CONTOH

68. PREPARATION OF CASH BUDGET Table 1. Items of Cash Receipts and Payments and the Basis of Their Estimation. Items Basics of Estimation Cash Sales Estimated Sales and its division between cash and credit sales. Collection of accounts receivable Estimated sales, its division between cash and credit sales and collection pattern. Interest and dividend receipts Firm’s portfolio of securities and return expected from the portfolio. Increase in loans/deposits and issue of securities Financing plan. Sale of assets Proposed disposal of assets. Cash purchases Estimated purchases, its division between cash and credit purchases, and terms of credit purchases. Continued…

69. Items Basics of Estimation Payment of purchases Estimated purchases and its division between cash purchases and credit purchases. Wages and Salaries Manpower employed and wages and salaries structure. Manufacturing expenses Production plan. General, administrative, and selling expenses Administration and sales personnel and proposed sales promotion and distribution expenditure. Capital equipment purchases Capital expenditure budget and payment pattern associated with capital equipment purchases. Repayment of loans and retirement of securities Financial plan. Continued…

70. Problem on Cash Budgeting Given below are the estimated details of Nagpur Company Ltd., from which you have to prepare the cash budget for three months – April, May and June,200X. Particulars Feb. Rs. Mar. Rs. April Rs. May Rs. June Rs. July Rs. Sales 1,00,000 1,20,000 80,000 1,40,000 1,00,000 1,60,000 Purchases 60,000 50,000 30,000 70,000 40,000 60,000 Manufacturing Overheads 5,000 6,000 4,000 8,000 4,000 8,000 Wages 10,000 8,000 7,000 8,000 5,000 6,000 Administrative Salaries 12,000 10,000 11,000 10,000 12,000 11,000

71. Some more information is given below: The company gives one month credit to its customers, 50% of the sales are on credit. 5% commission is given on all sales. 2% cash discount is given on cash sales. 60% of the purchases are on credit and the company gets two months credit from the suppliers. Payment of the manufacturing overheads is normally delayed by 15 days. The company will purchase furniture worth Rs. 40,000 on 01-05-200X with a down-payment of Rs. 20,000 and the remaining in two equal monthly installments in the immediately following months. Advance tax of Rs.6,000 will have to be paid on 01-06-200X. The company will sell old plant worth Rs. 25,000 for Rs. 18,000 on –06-06-200X. Ten employees are going to retire on 31 st March and total gratuity due to them in May amounts to Rs. 1,10,000. Bank overdraft facility is available. Cash-in-hand on 01-04-200X is Rs.12,000. You can make the necessary logical assumptions.

72. Nagpur Company Ltd Quarterly Cash Budget for April, May & June, 200X. Particulars April Rs. May Rs. June Rs. Opening Balance (A)(i) 12,000 37,200 -74,200 Receipts(B) Cash Sales (ii) 39,200 68,600 49,000 Collection of credit sales (iii) 60,000 40,000 70,000 Sales of old plant (iv) - - 18,000 (A)+(B) 1,11,200 1,45,800 62,800 Less: Payments (C ) Cash purchases (v) 12,000 28,000 16,000 Payment of credit purchases (vi) 36,000 30,000 18,000 Manufacturing overheads (vii) 5,000 6,000 6,000 Wages (viii) 7,000 8,000 5,000 Administrative salaries (ix) 10,000 10,000 12,000 Sales commission (x) 4,000 7,000 5,000 Purchase of Furniture (xi) - 20,000 10,000 Payment of advance tax (xii) - - 6,000 Payment of gratuity (xiii) - 1,11,000 - (C) 74,000 2,20,000 78,000 Closing Balance [(A+B)-C] 37,200 -74,200 -15,200

73. Working Notes A cash budget is actually a combined statement of cash and bank accounts. Hence, the opening balance (on the 1 st day of the month) and the closing balance (on the last day of the month) are the total of cash and bank balances. The closing balance of April will become the opening balance of May and so on. A negative balance means a bank overdraft. 50% of sales are for cash, i.e. 50% of the sales for a month will be collected in the same month. But 2% cash discount is given on cash sales, i.e. 98% of cash sales are actually collected. Example Rs. April Sales 80,000 50% on Cash 40,000 Less: 2% cash discount 800 Net Cash Sales Collection 39,200 Continued

74. Remaining 50% of sales are on credit and the company gives one month credit to its customers, i.e. credit sales of April will be collected in May and so on. Hence, credit sales of Rs. 60,000 (50% of Rs. 1,20,000 for March are shown as collected in April and so on, Hence, credit sales of Rs. 60,000; 50% of Rs. 1,20,000) for March are shown as collected in April and so on. (III) It is assumed here that sales commission at 5% is given on respective month’s sales in the same month, irrespective of the collection of credit sales in the next month, i.e. 5% commission on April sales of Rs. 80,000 amount to Rs. 4,000 and it will be paid in April because sales of Rs. 80,000 are achieved in April. Continued

75. (IV) As stated earlier, the cash budget has to show payments and receipts on account of daily business transactions or revenue payments and receipts and for purchase/sale of fixed or long-term assets, i.e. capital payments and receipts. The plant costing Rs. 25,000 will be sold for Rs.18,000 in June. The cash budget has to exhibit actual or net receipts or payments. Hence, Rs. 18000 is shown as an item of receipt in June and not Rs. 25,000 or loss of Rs. 7,000. Rs.20,000 is paid for the furniture on the date of its purchase (01-05-200X) and the remaining Rs. 20,000 in two equal monthly installments, i,.e. Rs.10,000 in June and the remaining Rs. 10,000 in July. Continued

76. (V) 40% of the purchases are for cash, i.e. these purchases will be paid immediately in cash. 60% of the purchases are on credit for which the suppliers give two months’ credit, i.e. credit purchase of February will be paid in April and so on. Hence, 60% of the purchases worth Rs. 60,000 of February (Rs. 36,000) are shown as ‘payment of credit purchases’ in April (VI) Payment of the manufacturing overheads will be delayed by 15 days, i.e. the overheads of the first fortnight of April will be paid in its second fortnight and the second fortnight’s overheads will be paid in the first fortnight of May and so on. Hence, Rs. 3,000 due in March (second fortnight) + Rs. 2,000 due in April (First fortnight) will be paid in the first and second fortnights of April, respectively. Continued

77. The total payments in April against manufacturing overheads amount to Rs. 5,000. The same rule applies to other months. Here it is assumed that the same amount of overhead is incurred every day in a month. (VII) Wages and administrative salaries for a month will be in the same month; as no information to the contrary is available. It is given in the problem that advance tax will be paid on 1 st June and gratuity in May, so the payments are shown in the respective months. Continued

78. ILLUSTRATION FOR PREPARATION OF CASH BUDGET ABC Co. manufactures razor blades. Its estimated sales for the period January, 200X through June 200X are as follows: Rs. 1,00,000 per month from January through March and Rs. 1,20,000 per month from April through June. The sales for November & December of the previous year have been Rs. 1,00,000 each. Cash and credit sales are expected to be 20% & 80% respectively. The receivables from credit sales are expected to be collected as follows: 50% of receivables on an average one month from the date of sale & the balance 50% of receivables, on an average two months from the date of sale. No bad debt losses are expected to occur. Other anticipated receipts are: (1) Rs. 5000 from the sale of a machine in March & (ii) Rs. 2000 interest on securities in June. Given the information tabulate the forecasted each receipts. Continued…

79. Now consider the forecast of cash payments: ABC Co. plans to purchase the material worth Rs. 40,000 in January & February and material worth Rs. 48,000 in March & April. The payments for these purchases are made approximately a month after the purchase. The purchases for the month of December of the previous year have been Rs. 40,000 for which payments will be made in January 200X. Miscellaneous cash purchases of Rs. 2000 per month are planned for January through June. Manufacturing expenses are expected to be Rs. 20,000/- month. Continued… Continued…

80. General administration and selling expenses are expected to be Rs. 10,000- month. Dividend & Tax payment of Rs. 20,000 each is expected to be scheduled in June 200X. A machine worth Rs. 50,000 is proposed to be purchased on cash in March 200X Tabulate the proposed cash payments. Summaries the two tables to calculate the cash surplus/ deficit month wise for ABC co. Assume that the cash balance on 1 st January 200X is Rs. 22,000 and the minimum cash balance required by the firm is Rs, 20,000. Continued… Continued…

81. Table 2: Forecast of Cash Receipts Rs. Jan Feb. Mar. Apr. May. Jun. 1. Sales 1,00,000 1,00,000 1,00,000 1,20,000 1,20,000 1,20,000 2. Credit Sales 80,000 80,000 80,000 96,000 96,000 96,000 3. Collection of Accounts Receivables 80,000 80,000 80,000 80,000 88,000 96,000 4. Cash Sales 20,000 20,000 20,000 24,000 24,000 24,000 5. Receipt Sales of Equipment 5,000 6. Interest 2,000 Total Cash Receipts (3+4+5+6) 1,00,000 1,00,000 1,05,000 1,04,000 1,12,000 1,22,000

82. Table 3: Forecast of Cash Payments Rs. Jan Feb. Mar. Apr. May. Jun. 1. Material Purchase 40,000 40,000 48,000 48,000 48,000 48,000 2. Credit Material Purchase 40,000 40,000 48,000 48,000 48,000 48,000 3. Payment of Accounts Payable 40,000 40,000 40,000 48,000 48,000 48,000 4. Misc.Cash Purchases 2,000 2,000 2,000 2,000 2,000 2,000 5. Wages 15,000 15,000 15,000 15,000 15,000 15,000 6. Manufacturing expenses 20,000 20,000 20,000 20,000 20,000 20,000 7. General Administration and Selling Expenses 10,000 10,000 10,000 10,000 10,000 10,000 8. Dividend … … … … … 20,000 9. Tax … … … … 20,000 10. Capital Expenditure … … 50,000 … … … Total Cash Payments (3+4+5+6+7+8+9+10) 87,000 87,000 1,37,000 95,000 95,000 1,35,000

83. Table 4: Summary Cash Forecast Rs. Jan Feb. Mar. Apr. May. Jun. 1. Opening Balance 22,000 2. Receipts 1,00,000 1,00,000 1,05,000 1,04,000 1,12,000 1,22,000 3. Payments 87,000 87,000 1,37,000 95,000 95,000 1,35,000 4. Net Cash Flow (3-4) 13,000 13,000 (32,000) 9,000 17,000 (13,000) 5. Cumulative Net Cash Flow 13,000 26,000 (6,000) 3,000 20,000 7,000 6. Opening Cash Balance + Cumulative Net Cash Flow (1+5) 35,000 48,000 16,000 25,000 42,000 29,000 7. Minimum Cash Balance Required 20,000 20,000 20,000 20,000 20,000 20,000 8. Surplus or Deficit in Relation to the Minimum Cash Balance Required (6-7) 15,000 28,000 (4,000) 5,000 22,000 9,000

84. The management can avoid this shortage by adopting one or more of the following means: (i) Postponement of asset acquisition to April, Deferring a position of the payment for the capital asset to April & Resorting to short-term borrowing for the month of March. Other alternatives like: Delaying payment to suppliers of material and Expediting the collection of receivables are also available. Continued

85. The receipt and payments method of cash forecasting is used commonly due to two advantages: It provides a complete picture of expected cash flows; and It is a sound vehicle for exercising control over day to day transactions. However this method has following drawbacks: Its reliability is impaired by delays in collection or sudden demand for large payments and other similar factors. It fails to provide a clean picture of important changes in the company’s working capital movement, especially those relating to inventories and receivables. This method of cash forecasting, resembling the funds flow statement, seeks to estimate the firm’s need for cash at some future date and indicates whether this need can be met with internal resources or not: Continued

86. Table 5: A format for the adjusted Net Income Method Year1 Year2 Year3 Year4 Year5 Source Net Income after taxes Non-Cash Charges (Depreciation, Amortisation Etc.) Increase in Borrowings Sales of Equity Shares Miscellaneous Uses Capital Expenditure Increase in Current Assets Repayment of Borrowings Dividend Payment Miscellaneous Surplus / Deficit Opening Cash Balance Closing Cash Balance

87. Table 6: Daily Cash Report Opening Balance Receipts Cash Sales Collection of Accounts receivables Loans Others … … … … … … Payments Cash Purchases Payments to Creditors Repayment of Loans Other Payments Difference Between Receipts and Payments Closing Balance … … … … … …

88. Table 7: Daily Treasury Report Today This month to Date Cash Opening Balance Receipts Payments Closing Balance … … … … … … … … Marketable Securities Opening Balance Purchases Sales Closing Balance … … … … … … … … Accounts Receivables (Debtors) Opening Balance Bills Raised Cash Receipts Closing Balance … … … … … … … … Accounts Payable Opening Balance Bills Received Cash Payments Closing Balance … … … … … … … … Net Treasury Position At the Beginning At the End … … … … Tab on Important Items Bank Loans Dividends Long Terms Loans Income-Tax Others … … … … … … … … … …

89. Playing The Float To illustrate the game of ‘Playing the float’, let us consider an example. ABC company issues cheques of Rs. 20,000 daily and it takes 6 days for these cheques to be cleared. ABC receives cheques of Rs.20,000 daily and, thanks to its expeditious collection, it takes 4 days for these cheques to be realised. Assuming that there is zero balance to begin with, the balance in the books of the firm and the books of the bank will be as shown in Table 8. From this table we find that a steady state is reached on the seventh day. From thereon the closing balance in the firm’s books would be zero and the closing balance in the bank’s books would be Rs. 40,000. This means that in the steady state situation the firm has a ‘net float’ of Rs. 40,000 and a part of this may be used.

90. Table 8: Balance in the books of the Firm and the books of the Bank Day Books of the Firm Books of the Bank 1. Balance decreased by Rs. 20,000 (Cheques issued and increased by Rs. 20,000 (Cheque deposited). The net effect is nil, so the closing balance is zero Balance of the firm is neither increased nor decreased. Hence the closing balance is zero. 2. - do - - do - 3. - do - - do - 4. - do - - do - 5. - do - Balance of the firm is increased by Rs. 20,000 (cheques deposited on the first day are credited). The closing balance is Rs. 20,000 6. - do – Balance of the firm is increased by Rs. 20,000 (Cheques deposited on the second day are credited). The closing balance is Rs. 40,000 7. - do – Balance of the firm is increased by Rs. 20,000 (Cheques deposited on the third are credited) and decreased by Rs. 20,000 (Cheques issued on the first day are paid) The closing balance is Rs. 40,000. From this day onward each day Rs. 20,000 is credited to the firm’s account and Rs. 20,000 is debited to the firms account, and the closing balance remains at Rs. 40,000.

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