Ch. 6 Budgets
6.7 Proforma Balance Sheet
Learning Objectives
At the end of this week students will be able to:
- First create a Proforma Balance Sheet.
Proforma Balance Sheet
The cash budget shows how cash changes from the beginning of the year to the end of the year, and the ending cash balance is the amount shown on the budgeted balance sheet. The proforma balance sheet is the estimated assets, liabilities, and equities that the company would have at the end of the year if their performance were to meet its expectations.
| Information Source | Balance Sheet Change |
|---|---|
| Cash | ending cash balance from the cash budget |
| Accounts Receivable | uncollected receivables from the cash collections schedule |
| Inventory | ending balance in all inventory accounts as show on the COGS schedule |
| Accounts Payable | unpaid purchases from the cash payment schedule |
Though there seem to be many budgets, they all fit together like a puzzle to create an overall picture of how a company expects the upcoming business year to look. All budgets begin with the sales budget. This budget estimates the number of units that need to be manufactured and precedes the production budget. The production budget provides the necessary information for the budgets needed to plan how many units will be produced. Knowing how many units need to be produced from the production budget, the direct materials budget, direct labor budget, and the manufacturing overhead budget are all prepared. The sales and administrative budget is a nonmanufacturing budget that relies on the sales estimates to pay commissions and other variable expenses. The sales and expenses estimated in all of these budgets are used to develop a budgeted income statement.
The estimated sales information is used to prepare the cash collections schedule, and the direct materials budget is used to prepare the cash payment schedule. The cash receipts and cash payments budget are combined with the direct labor budget, the manufacturing overhead budget, the sales and administrative budget, and the capital assets budget to develop the cash budget. Finally, all the information is used to flow to the budgeted balance sheet.
Other balance sheet changes throughout the year are reflected in the income statement and the statement of cash flows. For example, the beginning cash balance of Accounts Receivable plus the sales, less the cash collected results in the ending balance of Accounts Receivable. A similar formula is used to compute the ending balance in Accounts Payable. Other budgets and information, such as the capital asset budget, depreciation, and financing loans, are used as well.
To explain how to use a budgeted balance sheet, let’s return to Big Bad Bikes. For simplicity, assume that they did not have accounts receivable or payable at the beginning of the year. They also incurred and paid back their financing during the year, so there is no ending debt. However, the cash budget shows cash inflows and outflows not related to sales or the purchase of materials. The company’s capital assets increased by $8,500 from the copier purchase, and their common stock increased by $5,000 from the additional issue as shown.
| Big Bad Bikes | ||
| Proforma Balance Sheet | ||
| as of December 31, 20×9 | ||
| Assets | ||
|---|---|---|
| Current Assets | ||
| Cash | $33,358 | |
| Accounts Receivable | 78,250 | |
| Allowance for Doubtful Accounts | (22,000) | |
| Inventory | 42,629 | |
| Total Current Assets | ||
| Property, Plant, and Equipment | ||
| Machine and Equipment | 23,524 | |
| Accumulated Depreciation | (22,000) | |
| Total Property, Plant, and Equipment | 1,524 | |
| Total Assets | $133,761 | |
| Liabilities and Stockholders’ Equity | ||
| Current Liabilities | ||
| Accounts Payable | $6,000 | |
| Line of Credit | 20,000 | |
| Total Current Liabilities | 26,000 | |
| Stockholders’ Equity | ||
| Common Stock | 20,000 | |
| Retained Earnings | 87,761 | |
| Total Stockholders’ Equity | 107,761 | |
| Total Liabilities and Stockholder’s Equity | $133,761 | |
6.7a Exercise
Using the information for Monica’s Microphones, create a Proforma Balance Sheet for October and November.
| Transaction | Information |
|---|---|
| A | October sales are estimated to be $370,000. The company expects sales to increase at 30% each month. Sales are 40% cash and 60% on account. Monica’s expects to collect 100% of credit sales in the month following the sale. |
| B | Cost of goods sold is 55% of sales. The company desires to maintain a minimum ending inventory equal to 25% of the next month’s cost of goods sold. However, the company wants to have more cash available at the end of November and only having an ending inventory value of $12,750. All purchases are made on account and are paid at 75% in the month purchased and 25% in the following month. |
| C | Store fixtures are purchased on October 1 for $185,400. The fixtures have a salvage value of $5,400 and a four year useful life. |
| D | Budgeted selling and administrative expenses per month are: salaries expense, $18,300; sales commission, 4% of sales; other admin expense, 2% of sales; utilities, $1,700; depreciation on store fixtures, (calculate based on Transaction D); rent, $5,100; and miscellaneous, $1,500. |
| E | Utilities and sales commissions are paid the month after they incurred. All other expenses are paid in the month in which they are incurred. |
| F | The company desires to maintain a $15,000 cash cushion. |
| G | Monica’s has a line of credit that allows them to borrow funds, in increments of $1,000, and repay funds, in any amount available, on the first day of the month. The line of credit charges interest of 24% per month. The interest is paid on the first day of the next month. |
6.7a Homework
The following information is for the beginning months of operation for Friend’s Coffee Factory.
| Transaction | Information |
|---|---|
| A | April sales are estimated to be $350,000. The company expects sales to increase at 30% each month. Sales are 50% cash and 50% on account. Monica’s expects to collect 100% of credit sales in the month following the sale. |
| B | Cost of goods sold is 60% of sales. The company desires to maintain a minimum ending inventory equal to 20% of the next month’s cost of goods sold. However, the company wants to have more cash available at the end of June and only having an ending inventory value of $10,250. All purchases are made on account and are paid at 70% in the month purchased and 30% in the following month. |
| C | Store fixtures are purchased on April 1 for $126,200. The fixtures have a salvage value of $23,000 and a two year useful life. |
| D | Budgeted selling and administrative expenses per month are: salaries expense, $15,300; sales commission, 4% of sales; other admin expense, 2% of sales; utilities, $1,500; depreciation on store fixtures, (calculate based on Transaction C); rent, $4,100; and miscellaneous, $1,700. |
| E | Utilities and sales commissions are paid the month after they incurred. All other expenses are paid in the month in which they are incurred. |
| F | The company desires to maintain a $10,000 cash cushion. |
| G | Friend’s has a line of credit that allows them to borrow funds, in increments of $1,000, and repay funds, in any amount available, on the first day of the month. The line of credit charges interest of 12% annual. The interest is paid on the first day of the next month. |
Instructions
- Using the information from 6.5a and 6.6a, create a Proforma Balance Sheet for April, May, and June 20×4.
Licensing and Attribution:
Content on this page is adapted from the following openly licensed resource(s):
Principles of Accounting, Volume 2: Managerial Accounting by Mitchell Franklin, Patty Graybeal, and Dixon Cooper licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License
is the estimated assets, liabilities, and equities that the company would have at the end of the year if their performance were to meet its expectations
