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Chapter 11

COMM-2016EL Chapter Notes - Chapter 11: Budget, Pro Forma, Financial Statement

Commerce and Administration
Course Code
Kayla Levesque

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Chapter 11 The Master Budget
Budgets: What They Are and How They Benefit the Organization
Planning is the key to good management. This is true for all organizations small companies, new high-tech
companies, large corps, government agencies, NFP companies, and individuals
Individuals budget their resources to make the best use of their time, money, & energy
Budget a formal, quantitative, expression of plans which provides a benchmark against which to measure
actual performance. A budget is a tool that helps managers both plan and control operations
Long-Range Plans & Budgets
Give the organization direction and goals for the future
Strategic Plan a plan that sets the overall goals and objectives of the organization (most forward-looking
Some analysts won’t classify the strategic plan as an actual budget because it does not deal with a
specific time frame, and it does not produce forecast financial statements
Long-Range Planning producing forecast economic targets and/or financial statements for 5 to 10 year
Capital Budgets budgets that detail the planned expenditures for facilities, equipment, new products, and
other long-term investments
Short-Term Plans
Guide day-to-day operations
Master Budget a budget that summarizes the planned activities of all subunits of an organization from the
very first state of production to the delivery of goods to the consumer
Quantifies targets for sales, cost-driver activity, purchases, production, net income, cash position, and
any other objective that management specifies
It is a periodic business plan that includes a coordinated set of detailed operating schedules and financial
statements, including cash receipts and disbursements (may also be called pro forma statements)
Pro-Forma Financial Statements the planned financial statements based upon the planned activities in the
master budget
Management might prepare monthly or quarterly budgets, as well as daily/weekly task-oriented budgets
to help them carry out their functions and meet goals
Continuous Budget (Rolling Budget) a common form of master budget that adds a month at the end of the
budget period as a month ends
They compel managers to think specifically about the forthcoming 12 months and ths maintain a stable
planning horizon
Pay attention only to short-term budgets will lose sight of long-term goals, and paying attention to only the
long-term budget could wind up mismanaging day-to-day operations
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A budget allows systematic rather than chaotic reaction to change
The 3 major benefits of budgeting are:
1. Formalization of Planning
Budgeting forces managers to think ahead to anticipate and prepare for changing conditions. The budgeting
process makes planning an explicit management responsibility
To prepare a budget, a manager should set goals and objectives and establish policies to aid their achievement.
The objectives are the destination points, and budgets are the roadmaps guiding us to those destinations
2. Framework for Judging Performance
Budgeted goals and performance are generally a better basis for judging actual results than is past performance
The major drawback of using historical results for judging current performance is that inefficiencies may
be concealed in the past performance
Intervening changes in economic conditions, technology, manoeuvres by competitors, personnel, and so
forth also limit the usefulness of comparisons with the past
3. Communication and Coordination
Budgets tell employees what is expected of them. A good budget process communicates form the top down and
from the bottom up…
Top management clarifies the goals and objectives of the organization in its budgetary directives to middle- and
lower-level managers, and increasingly to all employees
The usual master budget for a non-manufacturing company has the following components:
A. Operating Budget
Operating Budget (Profit Plan) a major part of a master budget that focuses on the income statement and its
supporting schedules… It may show a budgeted loss, or can even be used to budget expenses in an organization
or agency with no sales revenue
The schedules of an operating budget are:
1. Sales budget (and other cost-driver budgets as necessary)
2. Purchases budget
3. COGS budget
4. Operating Expenses budget
5. Budgeted Income Statement
B. Financial Budget
Financial Budget the part of the master budget that focuses on the effects that the operating budget and other
plans (such as capital budgets and repayments of debt) will have on cash flow and the balance sheet
The schedules of a financial budget are:
1. Capital budget
2. Cash budgets (cash collection & disbursements)
3. Budgeted (pro forma) balance sheet
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find more resources at oneclass.com
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