BUSFIN FINALS GA 1 CHAPTER 3 PDF

Financial planning - Still imperative to the firm because it serves as long-range plan for - What firm intends to do in near future its long-term goals - Process of setting the primary objective, identifying alternative...

Financial planning - Still imperative to the firm because it serves as long-range plan for - What firm intends to do in near future its long-term goals - Process of setting the primary objective, identifying alternative - Helps organization see how far it is going with what it had planned in courses of actions, and choosing best alternative to achieve the the past objective - Subject to changes and usually revised every year - Think about possible barriers business might face - Help firm cope with any risks it might face Financial Plan AKA Budget - Involves entire unit of organization - Budgeting is a process of transforming the planned courses of action - Top management = sets overall objective then info is carried down into quantitative terms (money) - Different units of the organization have to come up with own plans - Financial plan becomes a formal statement by the company with that would lead to achieving overall objective of organization regard to these for a certain period: - Finance Department’s main function in this process is to integrate Expected sales different plans and develop a forecast Expenses Projection to be used for budget preparation Production Serves as guide in determining if the department sticks to Other related financial transactions the target it had set before the budget was implemented - Directs firms operations and measuring its periodic or annual performance Dimensions of Financial Planning - Record of actual operations of the firm is kept with purpose of Short-range plan: gathering information about the different units of the organization - Covers next 12 months Other relevant information are summarized and reported to - Focuses on possible actions for the coming year in terms of volatility top management of the market, stability of its operations, and rate of change in Any variance between the financial plan and the actual technology that might affect its product lines and production performance of the firm is analyzed processes Corrective action will be adopted if needed - Supplies great deal of details, and from time to time, provide direct guidelines to the different heads of the organization Objectives of Financial Planning (Plan, Coordinate, Control) Long-range plan: 1. Planning - Time frame of 2-5 or more years - Forces company to set its objectives and courses of action - Does not require great deal of details - A clear set of objectives allows the firm to place itself as one - More difficult and more prone to errors due to the time frame. These of the major players in the industry all affect long-range planning: Changes in environment 2. Coordination Needs of people - Creates harmonious relationship among different units of the Composition of top management organization Political stability - A clear set of objective allows them to coordinate, communicate, and work with each other  3. Control - The financial plan is an important tool in measuring the performance of the company Financial Budget - The diligent preparation of summarized reports containing - Shows budgeted financial resources of the firm comparison with planned objectives allows them to spot - Prepared right after operating budget differences and analyze them for improvement - Composed of: 1. Cash Budget: prepared in order to determine financial needs Master Plan (Operating and Financial) of the company. Shows detailed lists of all cash receipts and - Combined budgets of different units of organization expenses for a particular period - Control measure used by firm to determine if the set objectives are 2. Pro-forma statement of financial position: Presents attained projected components of SFP in the future. Starting point of - 2 categories: Operating Budget & Financial Budget this is the SFP of the previous period - The master budget is classified into 2 categories: the operating budget and the financial budget. From CHATGPT: Operating Budget (Sales, Production, Expenses) - Shows plan of operations Pro-forma financial statements are projections showing a company's - Includes details of sales, production, and expenses estimated future income, expenses, and financial position based on - Takes form of budgeted statement of comprehensive income showing hypothetical scenarios. operating results of firm in the coming year - Composed of: SPESP The pro-forma statement of financial position is a forecast of a company's future financial standing, starting with the prior period's 1. Sales Budget: planned volume of production company is statement of financial position and projecting components such as assets, expected to sell based on forecasted sales liabilities, and equity. 2. Production Budget: number of units to be produced after the sales budgets has been established and ending inventory Basic Steps In Preparing the Budget has been set forth - Done in sequential manner 3. Ending Inventory Budget: desired number of units to be - Leave one out = useless budget reflected in SFP at the end of a specific period - Steps: SPICSCPP (Spics See PeePee) 4. Selling and Administrative Budget: selling and 1. Sales projection administrative expenses in selling products of the company 2. Production cost (Ex: advertising, shipping costs, etc.) 3. Inventory level 5. Pro-forma Financial Statements: one of the major 4. COGS schedules in financial position showing projected income of 5. Selling and administrative budget the company 6. Cash budget 7. Pro forma SCI 8. Pro forma SFP  Cash Collection = Total Sales x Expected Sales Chatgpt: These calculations are part of creating a sales budget. The sales The Statement of Comprehensive Income (SCI) projects the company’s budget uses the estimated (or forecasted) sales volume and unit selling income based on its operations, including sales, production, and expenses. price to calculate expected revenue and cash collections, helping plan the company's financial and operational activities. Meanwhile, the Statement of Financial Position (SFP) reflects the company’s financial standing, showing assets, liabilities, and equity, which are influenced by the income and activities reported in the SCI. The Production Budget - Gives assurance that units required to produce the sales requirement Sales Forecast (Mother of all budgets) for each period are met - Process of estimating volume of sales - Serves as basis in getting budget for direct materials, direct labor, - Mother of all budgets because every operating and financial budget factory overhead, and other expenses which are directly associated will rely on the sales forecast with production - Make this as reasonably and accurately as possible so that it can be useful Formula for Projected Number of Units to Be Produced: - Inaccurate Sales Forecast = Puts company in difficult situation - Accurate Sales Forecast = Meaningful and realistic cash, production, Planned Sales ₱ xxx and disbursement budgets Add: Desired Ending Inventory xxx - Actions undertaken by the company in carrying out its operations Total Needs ₱ xxx always rely on the usefulness of its sales forecast Less: Beginning Inventory xxx Units to be produced ₱ xxx Sales Budget - Planned volume company is expected to sell based on forecasted The Manufacturing Cost (Direct Labor, Direct Materials, Factory sales Overhead) - Provides detailed plan of sales during a budget period - Necessary cost to incur in order to produce the desired units - Where operating budget and financial budget start - Composed of direct materials, direct labor, and factory overhead - Prepared on monthly, quarterly, semi-annually, or yearly basis - Prime cost = Direct material + Direct labor - This is not prepared by just one person, but rather it is a consolidated - Conversion cost = Direct labor + Factory overhead effort of the different units of the organization - Direct materials: obvious materials used in producing the item, - Not necessarily fixed other materials would be classified as indirect materials (Ex: wood - Guide for a target to be achieved and for coordination purposes chair and its materials used) - Subject to adjustment depending on economic situation - Direct labor: Cost of labor directly associated to produce one unit (Ex: machine operators, manufacturing technicians, etc.). Charged on hourly or per unit basis. Labor not directly associated with Computed as: production is referred to as indirect labor. (Ex: salary of supervisors, Total Sales (₱xx) = Expected Sales in units x Unit Selling Price managers, and crew that provide services) - Factory overhead: items not directly associated with production of are direct material purchases, direct labor, factory overhead, goods, but are necessary to be incurred as part of production. and other cash payments included in the budget preparation Consists of variable factory overhead and fixed factory overhead. Cash surplus or deficit: Difference of the first cash receipts Variable factory overhead: composed primarily of indirect and cash payments. This section indicates if firm needs to materials and indirect labor borrow funds to support operations or to use the excess Fixed factory overhead: include expenses such as money to pay their obligations or invest another profitable depreciation expense, utilities expense, and other expenses activities that cannot be classified as indirect material or indirect Financing section: Shows borrowings and payments made material by the company The Selling and Administrative Budget The Budgeted Statement of Comprehensive Income - Overall budgeted operating expenses that are not included in - Pro forma SCI can now summarize the various components of manufacturing planned revenue and expenses for the budgeting period from the - Categorized as variable and fixed expenses various budgets prepared - Variable expense: Directly proportional to sales - Serves as control device in measuring firm’s performance by means - Fixed expenses: Remains unchanged UNLESS firm decides to go of comparing actual outcome to its budgeted figures beyond its normal capacity - Serves as basis in monitoring whether or not different units of the - ALL NON-CASH expenses (Ex; Depreciation, Bad Debt Expense, organization met the budget assigned to them etc.) are not included in selling and administrative expense budget no Department whose difference in material from the budgeted cash flows) figures shall investigate the reason for such The Cash Budget The Budgeted Statement of Financial Position - One of the most important and critical ingredients in financial - Developed by using previous year’s actual SFP planning - The same balances from the previous year’s SFP will be used to add - Must have the ability to estimate the cash flow of the company in or subtract the budgeted accounts appearing from different budgets to order to make plans: arrive at the budgeted SFP Whether to outsource money when cash is required, or - In simpler terms: You use last year's numbers as a base, then adjust To invest when cash is excess of the firm’s current needs them based on your plans for this year to see where your company - Composed of 4 major sections: might end up financially. Cash receipts: Consists of all cash inflows, except for financing (securing capital or funds for business), during the covered period of the budget. Cash receipts start with beginning balance in which cash collections from sales are added Cash payment (disbursement): Consist of all cash outflows included in the budget period. Cash payments to be included  Other Budgets Cash Budget: This step calculates the inflow and outflow of cash, ensuring - Businesses can also prepare other possible budgets the company has enough liquidity to cover operations and expenses. - Pro forma cash flow statement and budgeted financial ratios Pro Forma SCI: The projected income statement (SCI) is prepared based on all the above information, showing the expected financial performance of the Pro Forma Cash Flow Statement company. - Can be prepared once pro forma SFP and actual SFP are available Pro Forma SFP: Finally, the projected balance sheet (SFP) is derived from - Prepared so that firms can have a preview of the likely movement of the SCI and other budgets, showing the company’s financial position after cash in the coming accounting period accounting for all expected assets, liabilities, and equity. - Companies sometimes need assistance in making sound judgment about the firm’s ability to handle more fixed commitment Each step flows into the next, creating a comprehensive financial picture. - Classified into 3 activities: This helps top management see general Skipping any step disrupts the logical flow, making the budget incomplete or perspective of cash flows unreliable. Operating Investing Financing Budgeted Financial Ratios - For more detailed analysis - Can compare company’s past performance and possible outcome in the incoming accounting period - From the information, the firm may decide to scrap or change the budget for the purpose of improvement The specific order in preparing a budget is crucial because each step builds upon the previous one: Sales Projection: It starts with estimating the sales, as this determines the revenue the company expects to generate. Production Cost: The sales projection influences how much the company needs to produce, which leads to estimating the production costs. Inventory Level: Inventory levels are planned based on the projected sales and production, ensuring that there’s enough stock. COGS (Cost of Goods Sold): With sales and production costs in mind, COGS is calculated to determine how much it will cost to produce the goods sold. Selling and Administrative Budget: These expenses are calculated based on expected sales, as higher sales typically mean higher marketing and operational costs.