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Questions and Answers
What is the main purpose of creating a sales budget?
Which of the following is NOT typically included in a short-term financial plan?
Which of the following budgets is used to forecast the company's future cash inflows and outflows?
What is the primary purpose of preparing pro forma financial statements?
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Which of the following is the most important factor in forecasting a company's sales?
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What is the purpose of Projected Financial Statements?
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How are sales projections typically calculated?
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What is a key step in projecting the cost of sales and operating expenses?
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Which financial statement may be included in projected financial statements?
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How can one project the cost of sales using a ratio?
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What helps determine the growth assumption for forecasting sales?
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Which of the following is NOT an external factor that should be considered in forecasting sales?
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Which of the following is an internal factor that should be considered in forecasting sales?
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What is the formula for calculating the required production in units?
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According to the example, what is Bethany Company's beginning inventory at the start of January?
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What is the target ending inventory that Bethany Company would like to maintain at the end of each month?
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How many units should Bethany Company produce in order to fulfill the expected sales?
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Study Notes
Financial Planning and Budgeting
- Financial planning involves considering proposed outlays for fixed assets, research and development activities, marketing and product development actions, capital structure, and major sources of financing.
- It also includes termination of existing projects, product lines, or lines of business, repayment or retirement of outstanding debts, and any planned acquisitions.
Short-term Financial Plans
- Short-term financial plans include setting sales forecasts and other forms of operating and financial data.
- This translates into operating budgets, cash budgets, and pro forma financial statements.
Budget Preparation
- Budget preparation involves:
- Sales budget
- Production budget
- Operating budget
- Cash budget
Sales Budget
- The sales budget is the most important account in making a forecast, as most expenses are correlated with sales.
- The financial manager must support the sales forecast with reasonable assumptions.
Projected Financial Statements
- Projected financial statements are a tool for setting an overall goal of what the company's performance and position will be for and as of the end of the year.
- They set targets to control and monitor the activities of the company.
- Projected financial statements include:
- Projected Income Statement
- Projected Statement of Financial Position
- Projected Statement of Cash Flows
Steps on Financial Statement Projection (Projected Income Statement)
- Forecast sales based on the assessment of external and internal factors related to the company and historical growth.
- Forecast cost of sales and operating expenses by identifying variable and fixed costs.
Forecasting Cost of Sales and Operating Expenses
- Cost of sales are direct costs associated with the generation of sales.
- Operating costs are a mix of variable and fixed costs.
- External and internal factors should be considered in forecasting sales, including:
- GDP growth rate
- Interest rate
- Foreign exchange rate
- Income tax rates
- Inflation
- Competition
- Economic crisis
- Regulatory environment
- Political crisis
- Internal factors such as pricing, promotion activities, distribution, area/outlet coverage, production capacity, human resources, management style, reputation, and network of the controlling stockholders and financial resources.
Production Budget
- A production budget provides information regarding the number of units that should be produced over a given accounting period based on expected sales and targeted level of ending inventories.
- It is computed as: Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories.
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Description
Learn about the external and internal factors that need to be considered in sales forecasting, including GDP growth rate, interest rate, pricing, promotion activities, production capacity, and more.
