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Key Concepts in Budgeting and Accounting

Introduction to Budgeting and Cash Flow

  • Instructor: Robin Patrick, member of the accounting team.

  • Focus: Key concepts from units four and five of the accounting course.

  • Importance of reviewing materials: Textbooks and course learning checks are essential for success.

Budgeting Cash Flow

  • Definition: Budgeting cash flow involves predicting cash inflows and outflows to manage a company's financial operations effectively.

  • Key Areas of Focus:

    • Cash receipt schedules

    • Cash payment schedules

  • Accounts: Two critical accounts involved:

    • Accounts Receivable: Asset account recording money owed from customers for credit sales.

    • Accounts Payable: Liability account recording money owed to suppliers for credit purchases.

Cash Receipt Schedule

  • Understanding Cash Receipts:

    • Relates to cash collected from customers after credit sales.

    • Important to recognize payment timing.

  • Example Problem: Calculating cash collections for October by reviewing sales data from August and September.

    • Step 1: Identify months to analyze (August, September, October).

    • Sales Breakdown:

    • Total sales for October = $550,000

    • Cash sales proportion = 30% ⇒ Cash sales = $550,000 × 30% = $165,000

    • Credit sales proportion = 70% ⇒ Credit sales = $550,000 × 70% = $385,000

  • Calculate cash collections based on customer payment behavior:

    • 10% of credit sales collected in the sale month (October).

    • 60% paid the month following the sale (September sales).

    • 25% paid two months after the sale (August sales).

  • Calculation for October:

    • Cash collections from October credit sales = $385,000 × 10% = $38,500

    • Cash collections from September credit sales = Previous month credit sales (assumed $472,500) × 60% = $283,500

    • Cash collections from August credit sales = Previous month credit sales (assumed $577,500) × 25% = $144,375

  • Total Cash Flow for October:

    • $165,000 (cash sales) + $38,500 (October collections) + $283,500 (September collections) + $144,375 (August collections) = $631,375 (estimated total cash inflow for October).

Cash Payment Schedule

  • Focus: Calculate expected cash outflows from credit purchases.

  • Step 1: Identify previous month purchases relevant to the current cash payment projection.

  • Example Problem: Calculate cash payments for November using data from September, October, and November.

    • Purchases Calculation: Cost of goods sold (COGS) = 75% of sales.

  • Cash and credit purchases breakdown for November:

    • Cash purchases: 25% of total purchases.

    • Credit purchases: 75% of total purchases.

    • Payment behavior:

    • 20% of credit purchases paid in the current month (November).

    • 75% paid in the following month (October).

    • 5% paid two months later (September).

  • Example Calculation:

    • If purchases amount = $468,750 (total), then:

    • Credit purchases November = $468,750 × 75% = $351,562.50

    • Payment Calculations:

    • September payments = Previous month purchases × 5% = estimate

    • October payments = Previous month purchases × 75% = estimate

    • November payments = Previous month purchases × 20% = $70,312.50

  • Total Cash Outflow:

    • Sum cash purchases and credit payments for total cash outflow for November = $438,516 (estimated).

Overview of Unit Five: Budgets and Performance Analysis

  • Importance of budgets in controlling costs and revenues.

  • Master Budget:

    • Starts with a Sales Budget to project expected sales.

    • Followed by a Production Budget to manage inventory and decide on production levels based on goals.

    • Include Materials, Labor, and Overhead Budgets which derive from the production budget.

    • A cash budget is derived from these elements indicating cash requirements.

    • Includes a Selling and Administrative Expense Budget based on sales budget expectations.

    • Final outputs: Budgeted Income Statement and Budgeted Balance Sheet.

Responsibility Accounting

  • Core concept: Accountability for managing costs and revenues.

  • Cost Centers, Profit Centers & Investment Centers:

    • Cost Center: Responsible for controlling costs;

    • Profit Center: Responsible for managing both revenues and expenses, thus evaluated based on profitability;

    • Investment Center: Responsible for costs, revenues, and the management of assets.

  • Variance Analysis:

    • Definition: Difference between budgeted figures and actual results.

    • Understanding variances:

    • If the actual expenditures exceed the budget, it is termed unfavorable.

    • If below budget, deemed favorable.

  • Segment Analysis: Understanding department or product line performance to inform business decisions.

    • Purpose: Isolate financial performance to make informed management decisions about operational efficiency.

  • Conclusion:

    • Importance of practical exercises and consistent practice with financial problems to enhance understanding.

    • Resources available for further clarification on creating visual financial materials due to importance in course evaluations.

Closing Remarks

  • Encourage practice through interactive questions and available resources.

  • Reminder to utilize video resources for topics like chart creation in Excel.

  • Instructor's offer for further questions and dialogues regarding course materials.