Budgeted financial statements are often called pro-forma statements which means 'what if'. They represent what the statements would look like 'if' the activity on the operating budgets is predicted accurately. While many companies prepare budgets for all four financial statements, only the budgeted income statement, and the current sections of the balance sheet are covered in this course. The complete budgeted balance sheet, the budgeted statement of  stockholder's equity, and the budgeted statement of cash flows are beyond the scope of this course.

 


Budgeted Income Statement


The budgeted income statement looks exactly like a non-budgeted multiple-step income statement. The difference is the source of the amounts used to prepare the statement. The data comes from the operating budgets that have already been prepared. Sales revenue is based on amounts in the sales budget. Cost of goods sold is a derivation of unit costs from the materials purchases budget, the direct labor budget, and the manufacturing overhead budget. Operating expenses are based on amounts from the selling and administrative expenses budget. In addition, the company's income tax rate is used to calculate the budgeted amount of income tax expense.

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Recall that an income statement will include non-cash amounts such as depreciation and amortization, however, these items are not cash flows, so they never appear on the cash budget.

 


Budgeted Balance Sheet


The budgeted balance sheet is prepared in the same format as a historical-based balance sheet. The  difference on the budgeted balance sheet is source of the data needed to prepare the statement. The data comes from all other budgets that have been already prepared.

The balance sheet items listed below contains a typical current asset and current liabilities section of the balance sheet, along with the source of the information used to determine the respective amounts.

 


Walk Through Problem - Budgeted Income Statement and Partial Budgeted Balance Sheet


      Climbin’ High Company, a small merchandising firm that sells ladders, is currently budgeting for the month of January, 2018. Pertinent information follows:

 

         Wages and salaries $14,400

         Depreciation $1,200

         Occupancy costs $3,500

         Miscellaneous $1,500

Solution

Budgeted income statement

Step 1: Begin with budgeted sales revenue, which is given as $144,000 for January.

 

Step 2: Calculate cost of goods sold. The source is typically the purchases budget, however, in this problem, sufficient information is given in the data which states that each ladder costs $21. Budgeted cost of goods sold is:

                    3,200 ladders x $21 = $67,200

Step 3: Calculate gross profit. The difference between sales revenue and cost of goods sold is gross profit. The income statement budget so far appears below:

 

 Sales revenue    $ 144,000 
 Cost of goods sold     67,200 
 Gross profit      76,800 

Step 4: Complete the operating expense section of the budgeted income statement. When completing the entire master budget, you can find most of the operating costs  in the cash disbursements budget with other information in the data provided. Because the income statement is an accrual-based statement, non-cash amounts such as accruals, gains and losses, and depreciation and amortization are often provided in 'other data'. Climbin' High has four operating expenses: wages and salaries, depreciation, occupancy costs  and miscellaneous.

 

 Operating expenses: 

 

 

    Wages and salaries 

$14,400

 

    Depreciation 

       1,200 

 

    Occupancy costs 

       3,500 

 

    Miscellaneous expenses 

   1,500 

 

 Total operating expenses 

 

    20,600 

Income before taxes

 

   $56,200 

Step 5: Complete the income statement by subtracting income taxes to calculate net income.

 

 Climbin' High Company 

 Budgeted Income Statement 

 Month Ending January 31, 2018 

 Sales revenue  

 

 $144,000 

 Cost of goods sold 

 

   67,200 

 Gross profit 

 

    76,800 

 Operating expenses: 

 

 

    Wages and salaries 

    $14,400 

 

    Depreciation 

       1,200 

 

    Occupancy costs 

       3,500 

 

    Miscellaneous expenses 

    1,500 

 

 Total operating expenses 

 

   20,600 

 Income before taxes 

 

    56,200 

 Income tax expense 

 

   16,800 

 Net income 

 

$  39,400 

Partial budgeted balance sheet

Step 1: Begin by calculating the cash balance at January 31. Cash on the balance sheet is determined from cash budget. Because the cash budget is a summary of all cash increases and decreases, you can simply post all the transactions to the Cash t-account as follows:

 Cash     
Beginning balance - Jan. 1 

    11,600

     
 Cash receipts: $144,000*60%

 86,400

     
 Cash receipts: $202,500*40% 

     81,000

     Cash Disbursements:
     6,941    January purchases: $69,405*10% 
     82,260    December purchases: $91,400*90% 
    11,520    Wages: $14,400*80% 
     2,880    Wages: $14,400*20% 
      5,000    Occupancy and miscellaneous
      2,200    Capital expenditures 
      38,000    Taxes 
         6,500    Dividends 
      Budgeted cash - Jan. 31

 23,699

     

The budgeted cash balance at January 31 is $23,699, which is the first account listed in the current assets section of the balance sheet.

 

Step 2: Accounts receivable is next and is based on the amount that customers charged on account (Accounts Receivable) but have not paid. Customers paid 60% of April sales during January, leaving the 60% balance due at January 31.

      Accounts receivable = $144,000 x 40% = $57,600

Step 3: Inventory is based on the company's estimate of the number of units it plans to have on hand at the end of the period. This amount is equal to 15% of the following month's (February) expected unit sales. The number of units to have on hand is 15% x 4,000 units, or 600 units. Each unit costs $21, for a total cost of $12,600.

 Current Assets   
 Cash   $23,699
 Accounts receivable        57,600
 Inventory        12,600
    Total current assets  $93,899

Step 4: Current liabilities consists of accounts payable, wages payable, and income taxes payable for Climbin’ High Company. Accounts payable results from inventory purchases that have not yet been paid. During January, the company paid for 10% of the purchases. A balance of 90% of those purchases remains:

Accounts payable = $69,405 x 90% = $62,465

Step 5: Wages unpaid for January are equal to 20% of the January's wages and salaries operating expense:

Wages payable = $14,400 x 20% = $2,880

Step 6: Income taxes are paid in the month following accrual so the amount accrued as an expense during January is unpaid at the end of January and must be reported as a liability in the amount of $16,800.

 Current Liabilities 

 

 Accounts payable 

 $62,465

 Wages payable  

       2,880

 Income taxes payable 

     16,800

    Total current liabilities 

$82,145


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