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Chapter 10

BU247 Chapter Notes - Chapter 10: Cash Flow, Income Statement

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Greg Clark

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BU247 Chapter 10 Using Budgets for Planning and Coordination Week 9
The Budgeting Process
The Role of Budgets and Budgeting
-Budgets are a central part of the design and operation of management accounting systems
-A budget is a quantitative expression of the planned money inflows and outflows that reveals whether
the current operating or business plan will meet the organization’s financial objectives
-Budgeting is the process of preparing budgets
-Budgeting also serves to coordinate the many activities of an organization
-A budget helps to anticipate potential problems and can serve as a tool to help provide solutions to
these problems
The Elements of Budgeting
1. Flexible resources that create variable costs Ex. Lumber, glue, varnish
2. Intermediate-term capacity resources that create fixed costs Ex. Forecasting the need for rental
storage space that might be contracted on a quarterly, semi-annual, or annual basis
3. Resources that, in the intermediate run and long run, enhance the potential of the organization’s
strategy Discretionary expenditures such as advertising and promotions
4. Long-term capacity resources that create fixed costs Ex. A new fabrication facility for a computer
chip manufacturer, which might take several years to plan and build and might be used for 10 years
-Two major types of budgets make up the master budget:
1. Operating budgets summarize the levels of activities such as sales, purchasing, and production
2. Financial budgets, such as balance sheets, income statements, and cash flow statements, identify the
expected financial consequences of the activities summarized in the operating budgets
Budget Components
-The budgeting process describes the acquisition, production, selling, and logistical activities performed
during the budget period
-Planners present the expected financial results in three forms:
1. A statement of expected cash flows
2. The projected balance sheet
3. The projected income statement
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