Forecasts and Budgets 187vested in marketable securities earning an investment return of 6% per annum
(0.5% per month). Finally, taxes are levied at the rate of 35% on pre-tax income.
The Financial Budget
The financial budget presents the plans for financing the operating activ ities
of the firm. The financial budget is made up of the budgeted balance sheet
and the budgeted statement of cash f lows, each providing essential financial
information.
Budgeted Balance Sheet (20 – 41)
The budgeted balance sheet for the coming accounting period is derived
from the actualbalance sheet at the beginning of the current budget period
and the expectedchanges in the account balances of the operating, capital-
expenditure, and cash budgets.
The budgeted balance sheet is more than a collection of residual balances
resulting from other budget estimates. Undesirable projected balances and ac-
count relationships may cause management to change the operating plan. For
instance, if a lending institution requires a firm to maintain a certain relation-
ship between current assets and current liabilities, the budget must ref lect
these requirements. If it does not, the operating plan must be changed until
the agreed requirements are met.
Budgeted Accounts Receivable (22)
Budgeted accounts receivable are a function of expected sales on open account
and the period of time that the receivables are expected to be outstanding. For
C&G’s Gift Shop, all sales are assumed to be on open account to other busi-
nesses. The company expects that 65% of the sales during the period will be
collected in the following month, and 35% will be collected in the next month.
For this exercise, we have assumed that all of the accounts are collectible. If
not, the company would have to build in a provision for uncollectible accounts
that would reduce expected collections and be ref lected in the income state-
ment as bad debt expense.
Budget of Ending Inventories (23)
Inventories comprise a major portion of the current assets of many manufac-
turing firms. Separate decisions about inventory levels must be made for raw
materials, work-in-process, and finished goods. Raw material scarcities, man-
agement’s attitude about inventory levels, inventory carrying costs, inventory
ordering costs, and other variables may all affect inventory-level decisions.
C&G’s Gift Shop has a policy to maintain inventory on hand equal to the
next month’s expected cost of goods sold.