BUDGET

PREPARATION
AND PROJECTION
FINANCIAL
STATEMENT
 CONCEPT OF BUDGETING
Budgeting is the process or act of preparing financial
budget. Budget refers to a plan which is expressed in a
quantitative monetary value. In other words, a budget is
the final output of the whole budgeting process. It
simply indicates the amount of money involved to
realize the approved strategic and operating plans of
the business.
BENEFITS 1. Planning is facilitated

OF 2. Financial

BUDGETING coordination is
established.
3. Resources are
property allocated.
4. Control mechanism is
enhanced
TYPES OF BUDGETS:

Sales Budget

Production

Budget

Cash Budget
SALES BUDGET
is a prediction of the firm's sales
over a specific period, based on Sales budget of ABC Company
external and internal information. For the year ended December 31, 2019

Series
Particulars Quarter 1
no.

1 Sales unit (forecasted) 6000

2 X price per unit 100

Sales revenue Php 600,000

 PRODUCTION BUDGET
is a financial planning related to the units of
production that the management think that
the business should produce in the upcoming
period to match the estimated sales
quantity, based on the management's
judgement related to the competition in the
market, economic conditions, production
capacity, consumer prevailing market
demands and past trends.
 Production budget of XYZ Company
For the year ended December 31, 2019
Series no. Particulars Quarter 1 Quarter 2

1 Sales unit (forecasted) 20000 50000

Add: Finished goods inventory 10000 6000

Total Productions 30000 56000

Less: beginning Inventory of finished

4000 10000
goods

Units to be produced Php 26000 Php 46000

CASH BUDGET
is a statement of the firm that has EXAMPLE
planned inflows and outflows of
cash. It forecasts the timing of Assume selling price is Php 100/unit
theses cash flows and matches sales for each month that has expected
them with cash inflows from sales to be collected as follows:
and other receipts Month of sales: 20%
A month after sales: 50%
2 months after sales: 30%
 JAN FEB MAR APR MAY TOTAL

UNITS 2000 2200 2500 2800 3000 12500

SALES IN PESOS 200000 220000 250000 280000 300000 1250000

Collection from
monthly sales (Sales in 40000 44000 50000 56000 60000 250000
Pesos x20%)

Collection from
previous monthly
sales (Sales in Pesos
10000 110000 125000 140000 150000
x50%)

Collection from two

months prior sales 60000 66000 75000 84000
(Sales in Pesos x30%)

Total collection from

sales
40000 144000 220000 247000 275000 926000
PROJECTED FINANCIAL STATEMENTS

It is serving as tool of the company to set

an overall goal of what the company’s
performance and position will be for, and as
the end of the year. It sets targets to
control and monitor the activities of the
company.
 Projected Financial Statements
The followings reports may be forecasted:

Projected Statement Projected Statement Projected Statement

of Comprehensive of financial of
Income Position Cash Flows
 STEPS ON
PREPARING PFS

1. Forecast Sales
2. Forecast costs and expenses
3. Forecast Net Income and retained earnings
4. Determine balance sheet items
5. Determine payment schedules
 01 FORECAST SALES
we need reasonable assumptions. this assumptions
should be considering external and internal factors.

EXTERNAL INTERNAL
GDP Growth and inflation rate
Interest rate Production capacity
Foreign exchange (ForEx) rate Man power requirements
Income tax rates Management style of managers
Developments in the country Reputation and network of the controlling
Competition stockholders
Economic crisis Financial resources of the company
Regulatory environment
Political crisis
 02 FORECAST COSTS
AND EXPENSES
Cost of Sales - direct costs associated in generating sales
Cost of Sales
Cost of Sales Ratio =
Sales
Historical Cost of Sales Ratio - cost of sales ratio from previous years

Operation/Administrative/Distribution costs are either Variable or Fixed

Variable costs are costs that vary with sales or with levels of production
Fixed costs are costs that don't change despite changes in levels of
production
 03 FORECAST NET
INCOME AND
RETAINED EARNINGS

Relevant interest rate Projected Net Income

(6% to 14% per Usury Retained Earnings , beg.
laws) Dividends to be declared

Relevant tax rates (2% to Projected Retained Earnings

35%)
04 DETERMINE BALANCE
SHEET ITEMS THAT WILL
VARY WITH SALES
Cash,
Account receivables and
Account payables,
Inventories,
Accruals and Deferrals

These balance sheet accounts

usually vary with Sales
04 DETERMINE PAYMENT
SCHEDULE FOR LOANS

Computations for
interest expense, income
tax payable, and retained
earnings.
APPROACHES
IN PREPARING
PROJECTIONS
 Approaches in
preparing projections
Percent-of-Sales Judgemental
Method Approach
Expressing various Estimates value of
income statement balance sheet
items as percentage of accounts and uses
the sales external financing as a
balancing figure
 COMPREHENSIVE
ILLUSTRATION
PROJECTED STATEMENT
OF COMPREHENSIVE
INCOME
Assumption/Forecasting Step
ILLUSTRATION
Assumption/Forecasting Step
ILLUSTRATION

Projected Sales
= 150, 000 x (1.1)
= 165,000
Cost of Sales %
= P60,000 / P150,000
= 40%
Cost of Sales %
= P60,000 / P150,000
= 40%

Projected Cost of Sales

= P165,000 x 40%
= P66,000
Cost of Sales %
= P60,000 / P150,000
= 40%

Projected Cost of Sales

= P165,000 x 40%
= P66,000

Projected Cost of Sales

= P165,000 x 12%
= P19,800
Fixed depreciation expense
= (P320,000 + P80,000) x 50%
= P400,000 x 5%
= P20,000
Fixed depreciation expense
= (P320,000 + P80,000) x 50%
= P400,000 x 5%
= P20,000

Total operating expense

= P19,800 + P20,000
= P39,800
Interest on 1st loan
= P125,000 x 8% x (6/12 months)
= P5,000
Interest on 1st loan
= P125,000 x 8% x (6/12 months)
= P5,000

Interest on 2nd loan from Jan-June

= P300,000 x 8% x (6/12)
= P12,000

Interest on 2nd loan from Jul-Dec

= (P300,000 - P50,000) x 8% x (6/12)
= P10,000
Interest on 1st loan
= P125,000 x 8% x (6/12 months)
= P5,000

Interest on 2nd loan from Jan-June

= P300,000 x 8% x (6/12)
= P12,000

Interest on 2nd loan from Jul-Dec

= (P300,000 - P50,000) x 8% x (6/12)
= P10,000

Total interest expense

= P5,000 + P12,000 + P10,000
= P27,000
 Assume that
D&E Company income tax
Projected Income Statement imposed on
corporations is at
For the year ended December 31, 2021 30%
Net sales P 165,000
Less: Cost of sales 66,000
Gross Profit 99,000
Less: Operating expenses 39,800
Operating Income 59,200
Less: Interest expense 27,000
Income before taxes 32,200
Less: Taxes 9,600

Net Income P 22, 540

 COMPREHENSIVE
ILLUSTRATION
PROJECTED
STATEMENT OF
FINANCIAL POSITION
ASSUMPTIONS...
1. A Minimum cash balance of P35,000 is required.
2. Marketable securities will remain unchanged from 2020's
balance.
3. Accounts receivable are estimated to be 35% of projected
sales (refer to previous illustration).
4. Ending inventory is expected to be valued at P48,000.
5. A new machine will be bought P50,000. Because of this
acquisition, depreciation will increase by P5,000. Thus, a net
increase of P45,000 to the net PPE is required.
 D&E Company
Projected Statement of Financial Position
As of December 31, 2021

ASSETS
Current Assets
Cash P
Marketable Securities
Accounts receivable
Inventories
P
Non-current Assets
Property, Plant and Equipment, net P
TOTAL ASSETS P
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable P
Notes Payable
Taxes Payable
Other current liabilities
P
Non-current Liabilities
Loans Payable
Total Liabilities P
Owner's Equity
Common shares
Retained earnings
Total liabilities and equity before additional financing
Additional Financing required
TOTAL LIABILITIES AND OWNER'S EQUITY P
 D&E Company
Projected Statement of Financial Position
As of December 31, 2021

ASSETS
Current Assets
Cash P 35,000
Marketable Securities 120,000
Accounts receivable 57,750
Inventories 48,000
P 260,000
Non-current Assets
Property, Plant and Equipment, net P
TOTAL ASSETS P
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable P
Notes Payable
Taxes Payable
Other current liabilities
P
Non-current Liabilities
Loans Payable
Total Liabilities P
Owner's Equity
Common shares
Retained earnings
Total liabilities and equity before additional financing
Additional Financing required
TOTAL LIABILITIES AND OWNER'S EQUITY P
ASSUMPTIONS...
1. A Minimum cash balance of P35,000 is required
2. Marketable securities will remain unchanged from 2020's
balance
3. Accounts receivable are estimated to be 35% of projected
sales (refer to previous illustration)
4. Ending inventory is expected to be valued at P48,000
5. A new machine will be bought P50,000. Because of this
acquisition, depreciation will increase by P5,000. Thus, a net
increase of P45,000 to the net PPE is required.
 D&E Company
Projected Statement of Financial Position
As of December 31, 2021

ASSETS
Current Assets
Cash P 35,000
Marketable Securities 120,000
Accounts receivable 57,750
Inventories 48,00
P 260,000
Non-current Assets
Property, Plant and Equipment, net P 365,000
TOTAL ASSETS P 625,750
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable P
Notes Payable
Taxes Payable
Other current liabilities
P
Non-current Liabilities
Loans Payable
Total Liabilities P
Owner's Equity
Common shares
Retained earnings
Total liabilities and equity before additional financing
Additional Financing required
TOTAL LIABILITIES AND OWNER'S EQUITY P 625,750
 ASSUMPTIONS...
6. Purchases will approximately represent 80% of sales. D&E
expects 45% of purchases to be paid on the following year.
7. Notes payable will remain unchanged from its current level.
8.Taxes payable will be one-half of the projected tax expense.
9. The P 195,000 other current liabilities must be paid off in 2021.
10. A long-term debt of P 50,000 will be reclassified as current.
 Assume that
D&E Company income tax
Projected Income Statement imposed on
corporations is at
For the year ended December 31, 2021 30%
Net sales P 165,000
Less: Cost of sales 66,000
Gross Profit 99,000
Less: Operating expenses 39,800
Operating Income 59,200
Less: Interest expense 27,000
Income before taxes 32,200
Less: Taxes 9,600

Net Income P 22, 540

 D&E Company
Projected Statement of Financial Position
As of December 31, 2021

ASSETS
Current Assets
Cash P 35,000
Marketable Securities 120,000
Accounts receivable 57,750
Inventories 48,00
P 260,000
Non-current Assets
Property, Plant and Equipment, net P 365,000
TOTAL ASSETS P 625,750
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable P 59,400
Notes Payable 25,000
Taxes Payable 4,830
Other current liabilities 50,000
P 139,230
Non-current Liabilities
Loans Payable 200,000
Total Liabilities P 339,230
Owner's Equity
Common shares
Retained earnings
Total liabilities and equity before additional financing
Additional Financing required
TOTAL LIABILITIES AND OWNER'S EQUITY P 625,750
 ASSUMPTIONS...

11. There will be no changes in share equity accounts.

12. Retained earnings will increase by P 22, 540 - the project net
income for 2021.
 D&E Company
Projected Statement of Financial Position
As of December 31, 2021

ASSETS
Current Assets
Cash P 35,000
Marketable Securities 120,000
Accounts receivable 57,750
Inventories 48,00
P 260,000
Non-current Assets
Property, Plant and Equipment, net P 365,000
TOTAL ASSETS P 625,750
LIABILITIES AND EQUITY
Current Liabilities
P 59,400
Accounts Payable
25,000
Notes Payable
4,830
Taxes Payable
50,000
Other current liabilities
P 139,230
Non-current Liabilities
Loans Payable 200,000
Total Liabilities P 339,230
Owner's Equity
Common shares 100, 000
Retained earnings 54,540
Total liabilities and equity before additional financing 493,770
Additional Financing required
TOTAL LIABILITIES AND OWNER'S EQUITY P 625,750
 D&E Company
Projected Statement of Financial Position
As of December 31, 2021

ASSETS
Current Assets
Cash P 35,000
Marketable Securities 120,000
Accounts receivable 57,750
Inventories 48,00
P 260,000
Non-current Assets
Property, Plant and Equipment, net P 365,000
TOTAL ASSETS P 625,750
LIABILITIES AND EQUITY
Current Liabilities
P 59,400
Accounts Payable
25,000
Notes Payable
4,830
Taxes Payable
50,000
Other current liabilities
P 139,230
Non-current Liabilities
Loans Payable 200,000
Total Liabilities P 339,230
Owner's Equity
Common shares 100, 000
Retained earnings 54,540
Total liabilities and equity before additional financing 493,770
Additional Financing required 131,980
TOTAL LIABILITIES AND OWNER'S EQUITY P 625,750
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