Budgeted Accounting Reports

Introduction to Budgeting

• Budgeting is the process of preparing reports that estimate or predict the financial consequences of likely future transactions.
• Budgets assist in:
  • Planning: Predicting what is likely to occur in the future.
  • Decision-making: Providing a benchmark against which actual performance can be measured.
• Budgeted cash and budgeted profit are not necessarily the same.
• Budgeted figures are calculated by:
  • Preparing Schedules (of Receipts from Accounts Receivable/Payments to Accounts Payable).
  • Reconstructing ledger accounts.
• Variance reports compare actual and budgeted figures, highlighting variances.
  • A variance is the difference between the budgeted and actual figures.
  • Variances are classified as favourable or unfavourable based on their effect on bank balance or profit.

KEY TAKEAWAY: Budgeting is about predicting future financial outcomes to aid planning and decision-making.

Characteristics and Use of Budgeted Reports

1. Budgeted Cash Flow Statement

• Definition: A report that shows all expected future cash inflows and cash outflows, the actual bank balance at the start of the period, and the expected bank balance at the end of the period.
• Purpose: To predict future cash flows and estimate the bank balance at the end of the budgeted period, helping the owner assess the firm’s ability to meet its obligations.

• Classification of Cash Flows:

  • Operating activities: Cash flows related to day-to-day trading activities.
    • Inflows: Cash sales, Receipts from Accounts Receivable.
    • Outflows: Cash purchases (of Inventory), Payments to Accounts Payable, Wages, Rent, Advertising.
  • Investing activities: Cash flows related to the purchase and sale of long-term assets.
    • Inflows: Sale of equipment.
    • Outflows: Purchase of equipment.
  • Financing activities: Cash flows related to changes in the financial structure of the business.
    • Inflows: Capital contributions by the owner, Loan proceeds.
    • Outflows: Drawings by the owner, Loan repayments.

• Structure:

  Item	Inflow/Outflow	Amount ($)
  Opening Bank Balance		XXX
  Operating Activities
  Cash Sales	Inflow	XXX
  Receipts from A/R	Inflow	XXX
  Cash Purchases	Outflow	(XXX)
  Payments to A/P	Outflow	(XXX)
  Wages	Outflow	(XXX)
  Rent	Outflow	(XXX)
  Net Operating Cash Flow		XXX
  Investing Activities
  Purchase of Equipment	Outflow	(XXX)
  Sale of Equipment	Inflow	XXX
  Net Investing Cash Flow		XXX
  Financing Activities
  Capital Contribution	Inflow	XXX
  Drawings	Outflow	(XXX)
  Loan Repayment	Outflow	(XXX)
  Net Financing Cash Flow		XXX
  Closing Bank Balance		XXX

• Use:

  • Assessing Liquidity: Determines if the business has enough cash to cover its short-term debts.
  • Planning for Shortfalls: Allows businesses to arrange for additional funding (e.g., loans) if a cash shortfall is predicted.
  • Managing Cash Flow: Helps identify periods of high and low cash flow, enabling better management of working capital.

EXAM TIP: When preparing a Budgeted Cash Flow Statement, pay close attention to the timing of cash flows. For example, credit sales may not result in immediate cash inflows.

2. Budgeted Income Statement

• Definition: A report that shows all expected future revenues and expenses, and the expected Gross Profit, Adjusted Gross Profit, and Net Profit.
• Purpose: To predict the profitability of the business over a specific period.

• Structure:

  Item	Amount ($)
  Sales Revenue	XXX
  Cost of Goods Sold (COGS)	(XXX)
  Gross Profit	XXX
  Other Revenue	XXX
  Adjusted Gross Profit	XXX
  Expenses	(XXX)
  Net Profit	XXX

• Use:

  • Assessing Profitability: Determines if the business is likely to be profitable.
  • Controlling Expenses: Helps identify areas where expenses can be reduced.
  • Setting Sales Targets: Informs sales targets needed to achieve desired profit levels.
  • Benchmarking: Provides a standard against which actual profit performance can be measured.
  • Planning: Assisting planning by predicting future profitability.
  • Decision-Making: Assisting decision-making by providing a benchmark for performance.
  • Areas of Business Performance:
    • Sales performance
    • Expense management
    • Overall profitability

• Key Differences from Budgeted Cash Flow Statement:

  • The Budgeted Income Statement focuses on revenues and expenses (profitability), while the Budgeted Cash Flow Statement focuses on cash inflows and outflows (liquidity).
  • Revenues are not always cash inflows (e.g., credit sales), and expenses are not always cash outflows (e.g., depreciation).

COMMON MISTAKE: Confusing cash and profit. Remember that profit includes non-cash items like depreciation and credit transactions.

3. Budgeted Balance Sheet

• Definition: An accounting report that predicts the firm’s assets, liabilities, and owner’s equity at some point in the future.
• Purpose: To predict the financial position of the business at a specific future date.

• Structure:

  Assets	Amount ($)	Liabilities	Amount ($)	Owner’s Equity	Amount ($)
  Current Assets		Current Liabilities		Capital	XXX
  Cash at Bank	XXX	Accounts Payable	XXX	Retained Earnings	XXX
  Accounts Receivable	XXX	GST Liabilities	XXX	Total Equity	XXX
  Inventory	XXX	Total Current	XXX
  Total Current	XXX	Non-Current
  Non-Current Assets		Liabilities
  Equipment	XXX	Loan	XXX
  Total Non-Current	XXX	Total Non-Current	XXX
  Total Assets	XXX	Total Liabilities	XXX	Liabilities + OE	XXX

• Use:

  • Assessing Solvency: Determines if the business has enough assets to cover its long-term debts.
  • Evaluating Financial Structure: Provides insights into the proportion of assets financed by debt versus equity.
  • Planning for Future Investments: Informs decisions about future asset acquisitions.

STUDY HINT: Practice preparing each of these budgeted reports using different scenarios. Focus on understanding the relationships between the reports.

Budgeted vs. Actual Reports

REMEMBER: Budgeted reports are forward-looking and based on estimates, while actual reports are backward-looking and based on factual data.

Uses of Budgeted Reports

• Planning:
  • Predicting future cash flows, profitability, and financial position.
  • Setting financial targets and goals.
• Decision-Making:
  • Providing a benchmark against which actual performance can be measured.
  • Identifying areas of unsatisfactory performance.
  • Evaluating the potential impact of different strategies.
• Control:
  • Monitoring actual performance against budgeted targets.
  • Identifying and investigating variances.
  • Taking corrective action to address problems.
• Communication:
  • Communicating financial goals and expectations to employees.
  • Coordinating activities across different departments.

APPLICATION: Businesses use budgeted reports to secure loans from banks, attract investors, and manage their operations effectively.

Strategies to Address Problems Identified by Budgeted Reports

• Cash Flow Problems:
  • Increase sales (e.g., marketing campaigns, discounts).
  • Improve collection of accounts receivable (e.g., offering early payment discounts).
  • Reduce expenses (e.g., negotiating better deals with suppliers).
  • Delay payments to accounts payable.
  • Obtain a loan or overdraft.
• Profitability Problems:
  • Increase sales price.
  • Reduce cost of goods sold (e.g., finding cheaper suppliers).
  • Reduce operating expenses.
  • Improve efficiency of operations.
• Balance Sheet Problems (e.g., high debt):
  • Increase equity (e.g., capital contributions).
  • Reduce debt (e.g., repay loans).
  • Sell assets to reduce liabilities.

VCAA FOCUS: Be prepared to analyze scenarios and suggest strategies to address specific problems identified in budgeted reports.