Forecasts and Budgets 189Budgeted Accrued Expenses (34)
Expenses are recognized in the income statement when incurred, regardless of
the period in which they are paid. For this example, we assume that all of the
operating expenses incurred and recognized during the month are paid in the
following month. These expenses include selling expenses, administrative ex-
penses other than depreciation, interest expense, and taxes.
Bank Loan (Line of Credit) (32)
Businesses require cash to cover the portion of inventories and accounts re-
ceivable that are not financed by trade accounts payable and accrued expenses.
This is very pronounced in seasonable businesses. For example, C&G’s Gift
Shop must purchase inventories one month in advance of sales. And when
these inventories are sold, 65% of the proceeds are collected in the subsequent
month and 35% in the month thereafter. As a result, C&G has a considerable
amount of cash invested in the business that is not recouped for at least two
months.
Typically, short-term cash needs such as the needs of seasonal businesses
are met with a bank line of credit that allows the company to borrow funds up
to a predetermined maximum and to repay those loans at a later date. In this
case, funds are borrowed to finance the purchase of inventories and these
amounts are repaid when the receivables are collected.
Stockholders’ Equity (37–39)
No sales of common stock are budgeted. Since no dividends are projected, re-
tained earnings (38) increase by the amount of profit for the month.
Cash Budget
Of all the components of the master budget, none is more important than the
cash budget. Of the two major goals of most profit-seeking firms—to earn a
satisfactory profit and to remain liquid—liquidity is more important. Many
companies lose money for many years, but with adequate financing they are
able to remain in business until they can become profitable. Firms that cannot
remain liquid, in contrast, are unable to pay their bills as they come due. In
such cases, creditors can and often do force firms out of business. Even gov-
ernment and nonprofit organizations such as churches and charities must pay
their bills and other obligations on time.
Meeting cash obligations as they come due is not as simple as it may ap-
pear. Profitability and liquidity do not necessarily go hand-in-hand. Some firms
experience their most critical liquidity problems when they go from a break-
even position to profitability. At that time growing receivables, increased inven-
tories, and growing capacity requirements may create cash shortages.