 Hello and welcome to the session in which we would look at the master budget. The master budget is an important topic whether you are taking managerial accounting, cost accounting, CMA exam or the CPA exam, the BEC section. You need to know the various components such as the sales, the sales budget, the production budget, direct material, labor, overhead, cost of goods, sold, selling and administrative, which are all called the operating budget. You need to know about the capital expenditure budget, the cash budget, the budgeted net income and the budgeted balance sheet. So whether you are an accounting student or a CPA candidate, I strongly suggest you will take a look at my website farhatlectures.com. Especially if you're a CPA candidate or a CMA candidate, I don't replace your review course. You keep those. 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Connect with me on Instagram, Facebook, Twitter and Reddit. So let's take a look, go through an overview. And for this session, I'm going to warn you, there's going to be a lot of numbers that's going to be thrown around. So if you don't have access to the material, to the numbers, what I suggest you do, for example, take a picture on your phone. Take a picture of the budget numbers that I am working with. This way you could refer to them or write the numbers down because I'm going to be referring to numbers from other screens. So that's it will be easier for you rather than passing and going back, which is you could you could do that as well. But if it's easier for you, if you have this information somehow in front of you. So let's go real quick. We covered this in operating budget is this is the operating budget, which we're going to prepare one sales cost of sales, selling an administrative that's going to feed into the cash budget. The capital expenditure represent how much we are going to buy in purchase and property, plant and equipment. The financial budget include the cash budget, which is everything feeds into the cash budget. Then the cash budget feeds into the income statement and the balance sheet. And we have obviously we have to prepare the ending cash, which will feed, as I said, in the balance sheet. So the best way to illustrate this concept is to work an example. And as I said, the example will be comprehensive. We'll have a lot of numbers starting with the completed balance sheet. So we are saying is this we have a balance sheet as of March 31st, 2026. And now we're going to complete a balance sheet for the next three months, which is a budgeted balance sheet. But to come up with the budgeted balance sheet, we're going to have to complete many schedules, which what we're going to be learning to do. But you have to understand that we are starting with this much cash, 16,400, this much account receivable, this much inventory, this much prepaid. So all these numbers, sorry, I have to write them. I have to spell them out because I do have some blind viewers. So I do apologize. Cash is 16,400. Account receivable, 16,000. Merchandise inventory, 48,000 prepaid, 1,800. I do apologize if I don't, you know, mention all the numbers. But that's the reason I mentioned them. Although you see them on your screen, but some of your classmates, again, I have two or three blind individuals over the years. They, you know, they ask me to please say the numbers. So that's why I say them. Equipment and expenditure, which is property, plant and equipment, 32,000. Less accumulated depreciation of 12,800. We have accounts payable of 16,800. Salaries and commission payable of 4,250. This is common stock of 20,000. And the beginning retained earning is 60,350. So those are the figures that's given to us at the beginning of the period. Now, when we start a budget, you have to understand there's an order, what we do. And what drives a company is sales, is the revenue. So guess what? Sales, it's going to drive everything else. So we're going to start with sales. Now, how do we estimate sales? So how do company estimate sales? There are many ways that they can estimate sales. They can ask their salespeople to make a projection. They can study the market. They can hire a consultant. It doesn't matter. We're not concerned with that here. The numbers will be given to us, but the sales budget will drive everything. So the forecast for the sales revenue is the cornerstone of the master budget. And we're dealing with this company, Greg's Games. Their sales in March were $40,000. And by the way, March is already was factored. OK, but we need this number to project other numbers. So the sales in March was 40,000. The sales manager project the following monthly sales. Here we go. April, 50,000. May, 80,000. June, 60,000. July, 50,000. And August, 40,000. Those are projected sales. OK, so the sales budget is prepared based on 60% of our sales is cash and 40% on account. So simply put, when we make a sale for a particular month, customers usually pay 60% in cash and remaining is 40% on account, which will which we collect the following month. Haven't said so. It means this 40,000 here in March that we did in March. 60% of it was collected in March. What does that mean? It means 40% of it was outstanding as of March, which is it's part of their account receivable. And I believe if my math is right, it's 16,000. And you can see here that 16,000 is on the balance sheet of the account receivable. So this is how the 16,000 came from. It's based on 40k sales in March, which will receive 60 and remaining is 40. And here's what we have to do now. Basically, we're going to look at these figures and we're going to say April and we're preparing a four month ended July 31st, 2026. So we're preparing the budget for four months. So August is not included, but we'll need August. We need the projected month of August. You're going to see why we have why we need this number. So in April, 50,000 in total, 60% cash, 20% sales on account. We'll do the same thing for May, which is 80,000 in total. 60% of 80,000 is cash and 40% is sales on account. June the same thing, 60,000 in total. In July, the same thing, 50,000 in total, 60% in cash, 20,000 on account. Now, then we total all the cash and we total all the cash is 144,000. This is the cash sales. Simply put, we're going to be preparing a cash receipt schedule and we're going to need this figure and sales on account. It's going to be in total 96,000. This is this is the total, but we're going to have to compute the account receivable at the end of the period. Now, what is the account receivable? Remember the last month part of it will be this this July. 60% of July will be cash and 40% of July will be on account. What does that mean? It means we're going to end up with an account receivable. I just I just want to show you this now because you're going to see where this number coming from 40% of 50,000 is 20,000. So you already find out what our account receivable we projected what our account receivable it's going to be 20,000. And this is the sales budget. Again, you're going to see this several times, several times because we need these these figures later on because we need total sales for the period, 240,000. This is going to feed into the income statement. This is going to feed into cash and the account receivable that's going to be needed on the balance sheet. So that's why you're going to see this this schedule again and again. Now, once we after we compute the sales budget, we have to compute what is our cost of sales and that's going to include inventory and purchases to figure out your cost of goods sold. Here we are not manufacturing anything. If we were manufacturing simply put if we were manufacturing items simply put we have to prepare a direct material budget, a direct labor budget and manufacturing overhead budget. Now, I do have an example for preparing those type of budgets on my website for lectures.com. But in this example, I'm going to be considering we are selling finished products so we're not manufacturing anything. OK, so remember the cost of goods sold computation. We have to know this relationship beginning inventory plus purchases minus ending inventory gives us cost of goods sold. You have to know this formula by heart. OK, beginning inventory, what you started with plus what you purchased. And by the way, we call those two we call those two available for sale. We call those two goods available for sale goods available for sale. And from those goods, we will deduct what we have left. And this is how we compute our ending inventory. Now, if we want to find out what is our purchases all we have to do is rearrange this formula and we know that purchases to find out purchases will take cost of goods sold plus the desired ending inventory minus beginning inventory. Oh, what we did is hopefully, you know, we just rearranged the formula. We kept purchases on this side and we moved ending inventory, which became a plus ending inventory minus beginning inventory. Just what we did is just rearrange the formula, move those two to the other side of the equation. Now, let's take a look at additional information. Budgeted cost of goods sold average 70 percent of sales. The company will know this will know that for every dollar in sales, approximately 70 percent is cost of goods sold. That's that the company will have this data. And if it's a new company, they will have to basically come up with this figure. Minimum ending inventory. So they have to have ending inventory for every month should equal to 20,000 plus 80 percent of next month cost of goods sold. It seems they want to have inventory on hand and that's the number that they want. 20,000 plus minimum of 20,000 plus they want to have 20 80 percent ready for next month cost of goods sold. What does that mean? Let's take a look at how do we interpret these numbers? It means for the month of April. Now we are looking for the month of April sales. Let me just get the sales budget. If we look at the sales budget, sales for April is 50,000. Remember, 70 percent of this is cost of goods sold. So 70 percent of 50,000 is 35,000, which is cost of goods sold. In addition to that, so this is cost of goods sold. Now we have to compute the ending inventory. The ending inventory. Remember, it's 20,000 plus 80 percent of the cost of goods sold for next month. So how do we compute next month? Well, next month is 80 80,000. We're going to have to compute 80,000 times 80 percent and simply put 80,000. So April, it's going to be 20,000 plus 80,000. Sorry, 80,000 of the cost of goods sold. So first we have to take 80,000 80,000 times 70 percent. And that's going to give us cost of goods sold 56,000. Then multiply this 56,000 by 80 percent, which will give us which will give us this, this figure only should be 44,800. Then we add the 20,000 minimum that we want to will come up with 64,800. This is how we came up with ending inventory. So cost of goods sold plus ending inventory minus beginning inventory, which is beginning inventory is given to you on the balance sheet 48,000 will give us the budget that purchases. So this is how much we have to purchase for the month of April. Now for the purchases, we have to find out how much do we have to pay in cash and how much are we going to pay on accounts. So we have to find out how much is cash and how much is on account. But this is the total purchases. May the same thing what we do for the month of May. Let me erase this. The month of May first will take May sales times 70 percent. So May sales time, which is 80,000 times 70 percent will give us cost of goods sold. Then we have to compute our purchases for that month. Well to compute our purchases we have to find out what is our desired ending inventory. And the desired ending inventory is computed as 20,000 plus 80 percent of next month cost of goods sold. What's next month cost of goods sold? We have to look at sales. Sales is 60,000. We're going to take sales multiplied by 70 percent. I believe that's 42,000. And it's 80 percent of the cost of goods sold. So 42,000 times 80 percent plus 20,000. That must be 23,000, is that correct? 33,600 because if we take 33,600 plus 20,000 will give us 53,000, which is the desired ending inventory. Then we'll have total merchandise inventory required, less the beginning. What is, how do we come up with the beginning? The beginning is last month ending, 64,800. Then we find out this is what should be our budgeted purchases for the month of May. Then we repeat this process for June, we repeat this process for July. Now the only thing you want to be aware of, this is what throw students off. When you are computing the total, when you are computing the total for the period, well, you add up all of your cost of goods sold. Your desired ending inventory for July will be your desired ending inventory for the period. Okay, now your beginning inventory, when you're computing your beginning inventory, your beginning inventory will be the beginning inventory of the period. So notice here, 48,000 was the beginning inventory of the period. So at the end of the period, when you are doing the computation for the whole period, you will use the beginning inventory of the period. So please make sure you are aware of this. So two figures throw students off, the ending inventory will be the last month ending inventory, and the beginning inventory is will be the beginning inventory of the period. And now we have all these purchases, you know, now we need to, we find out how much we have to purchase for each month. Simply put, when we look at the cash payment budget, here's what our purchases would look like. We pay 50% this month, and we pay 50% the next month. So it's going to be 50% cash, 50% on account, because I kept saying, but this is going to be great. So this is the end, we're going to see this inventory purchases and cost of goods sold budget several times. Okay, the next thing we're going to complete is selling an administrative expense budget. The next budget is to estimate the selling and administrative expenses needed to meet the projected sales, because you're going to have to incur expenditure to operate your business. Well, the monthly payroll for Greg's game salaries is 2500, plus sales commission, so it's part of a fixed cost, 2500, plus 15% of sales. This is basically a mixed cost with both a fixed and a variable component, and hopefully you all know what a mixed cost is. Other monthly expenses will be as follow. They have a fixed cost of rent, 2000, they have depreciation expense per month equal to 500, insurance expense also a fixed cost of 200, and they have miscellaneous expense, which is a variable of 5% of sales. So notice they have two variable, sales commission and miscellaneous expense. Now we are ready to prepare the selling and administrative budget. Simply put, we're going to take it month by month, and once you know one month, you know the rest. Let's look at the sales budget first. The sales budget for the month of April is 50,000, therefore the sales commission is 50,000 times 15% will give us 7,500. Then we have a miscellaneous expense of 5% of sales, 50,000 times 5% will give us 2,500. So those are the variable expenses as far as the selling and administrative budget. Then we list the fixed expenses. We have salaries of 2,500, rent expense of 2,000, depreciation expense of 500, and insurance expense of 200. And notice those, those are fixed for the next four month. April, May, June, July notice they have the same number. Now for the variable expenses they're going to vary from month to month. For example, the commission for May will be different, will be 12,000 based on 80,000 sales, and miscellaneous expense will be 5% of 80,000. And for June and July, sales for June was 60,000. Sales for July was 50,000. Okay, then we add up the total for the variable expenses and the miscellaneous expenses, which is 36,000 for the commission expense and 12,000 for the miscellaneous. The salaries expense in total for the period 10,000, rent expenses 8,000, depreciation 2,000, and insurance expense 2,000. Now all these figures they're going to feed, well not all of, yeah feed, they're all going to feed into the income statement and the depreciation would also feed into the accumulated depreciation expense on the balance sheet. But this is the selling and administrative, but I just want to show you that we're going to see these figures at the end when everything fits in the financial statement, the income statement, and the balance sheet. Now let's take a look at our cash receipts. Now everything will feed into the cash receipts and cash payment, the cash budget, starting at our cash receipts from customers. April's budget, when we do each month, it's going to be, when we do April, it's going to be the cash collection consists of April cash sales, remember 60% of that month, plus it's going to be the collection from March sales, which is 40% of the prior month. Okay, and the process is repeated for all four months. For April, 60% of sales is 30,000. In the prior month, you remember we had 16,000 as an account receivable on the balance sheet. Well, we're going to receive it in April. So the total cash receipts is 46,000, which we are going to see this number again in the cash receipts and cash payment budget. For May, we'll do the same thing. 60% of the current sales, of cash sales, plus the 20,000 that we did not collect from the prior month, because the prior month was 50,000. 30,000 was collected in April and 20,000, which is 60% was collected in April, which is 30,000. And 40% was collected in May, which is 20,000. So total is 50,000. So this is why this 30,000 in April plus 20,000 in May is the total April sales. Same thing with May, 48,000 in May. Some of it will be in May and 32,000 will be collected in July, so on and so forth. The total cash receipts will be 144,000. The total, the credit sales receipts after one month, which is after the 40% is 92,000. Total cash receipts for the four month is 236,000. Again, we're going to see this number again. Those are our cash receipts. This is the good stuff. Okay. Now we're going to look at our cash payment. The cash payment consists of 50% of the March purchases and 50% will be paid in May. So every time we make a purchase, we pay immediately 50% in cash and we'll have an account receivable for the following month. So simply put, if we look at our budgeted cash payment, we're going to pay 50%. We're going to pay 50% from March last month purchases, 50% from March, whatever we purchase in March, and 50% will be for April, whatever our total purchases was from the cost of goods sold inventory. Then the same thing will happen in May. We're going to have, well, let's take a look at, maybe we need to take a look at this. So let me go back here. So simply put, if you remember here, we said 51,800 was the number in April, 50, 50, 50% will be collected in April and 50% will be collected in, I'm sorry, not collected, paid in April and 50% will be collected in May. Okay. That's what it makes it, what that's what makes this number, that's what makes this number 25,900 plus 25,900. Now, where did this 16,800 came from? This, if you look at the balance sheet, should have an accounts payable of this amount, which is you're going to pay in April. You had it as of March 31st, you paid in April. Same thing will happen in May, 22,000 and the other 22,000 will be paid in June, same thing in July, same thing for June, 18,000 will be paid in June and 18,200 will be paid in July. So the total cash payment for everything this month and the AP from the prior month, the total cash payment for purchases is 164,500. Again, we're going to see this in the cash receipts and cash payment schedule, which is the cash schedule. Schedule of cash payment for selling and administrative, and this is what it looks like. Variable expenses, they're telling us we pay 50,000 this month and we pay 50,000 of the commission expense this month and obviously the 50,000 in the following month. Same thing with the variable expenses, 50% of last month commission, then 50% of this month commission. So we pay 50, 50, miscellaneous expense, it seems we paid the whole thing all at once in the month incurred, but variable expenses for the commission, we pay them 50 immediately and we pay them 50 the following month. Fixed expenses, same thing, we're going to pay 50 this month, so we have salaries expense of 2,500, we'll pay April 1,250, we'll pay May 1,250. Okay, now I'm sorry, 1,250 and 1,250. Rent expense will be paid up, the fall will be paid during the month and by the way here it should be, yes, rent expense is 2,000, total fixed payment 4,500, total variable 9,250, the total payment for selling an administrative, again this is going to go into the cash budget is 13,750 and we'll do the same thing for each month, same thing for each month. Okay, and by the way the 50% of July in commission to be paid in August is 5,000, so we're going to have an accrual of 5,000 because 50% of the sales commission is going to be 10,000, so we're going to pay 5,000 and we're going to accrue 5,000 remaining. This is the cash budget, okay, first of all we have beginning cash April, this is coming from the balance sheet, then we have cash receipts from the cash receipt schedule 46,000 for the month of April, we already did this, this is from this figure here, so total cash receipt for April, we have cash available 62,400 and also for April we're going to have a capital expenditure, so we're going to buy a new asset, this is a new information, we're going to pay for it cash, so that's negative 3,000, purchase of merchandise inventory 42,700, this is coming from the cash payment for purchases total 42,000, 42,700, selling an administrative 13,750 we saw this on the previous slide, so total cash payment is 59,450, the ending cash balance is 2,950, well the company wants to have at least 10,000, at least 10,000 okay, what they have to do if they are short they're going to borrow to maintain this minimum fund balance and they're going to borrow on the increment of 1,000 they're going to pay 12% rate and when they pay when they have extra cash they're going to make installment payment of a thousand, so the minimum cash desired should be 10,000 okay, so we are short we have a deficiency of 7,050 okay, so we're going to borrow an increment of a thousand we cannot borrow 7,000 will be less than 10,000 therefore we borrow 8,000, so we're going to borrow 8,000, 8,000 plus the excess cash of 2,950 it's going to keep us with cash 10,950 so this is the cash for April now this 10,550 of April will be will be the beginning cash for May then in May we collected 68,000 from the cash receipt total cash available 78,950 no capital expenditure zero purchase of merchandise inventory 48,300 coming from the cash payment then selling and administrative expenses coming from the prior slide now we have interest expense of 80 dollars now where did the 80 dollars coming from we have 80,000 i'm sorry 8,000 and borrowing times 0.12, 0.12 is the 12 percent times 1 divided by 12 and this should give us this should give us 80 dollars so we have interest expense of 80 dollars total cash payment 68,666,630 our ending cash is 12,320 we're good we have access cash because the minimum is 10,000 we have access cash of 2,320 we pay per month if we have any debt a thousand so we're going to pay a thousand as a result we're going to end up with 11,320 in cash again this cash amount will be the beginning of June and the process repeats itself now we add the cash receipts then we deduct the cash payment computing the interest then we have 10,650 projected cash we're going to make a thousand dollar we're going to make a thousand dollar payment projected because we have ending cash balance 20,650 we have access of 10,650 so we're going to make a thousand dollar payment and our ending cash will be 19,650 and the process repeats itself until we get to the ending balance of cash of 24,440 and this number will go on this is going to be our ending balance balance sheet account for cash 24,440 so for July we'll follow the same process you could review the figures now now we're ready actually to complete the projected income statement the projected income statement it's going to show sales and where do sales coming from well total sales total budgeted sales 240,000 sales cost of goods sold 168 from the inventory purchases and cost of goods sold that's going to give us a gross profit of 72,000 then we have selling an administrative commission miscellaneous salaries rent and depreciation and insurance that's going to be that's kind of coming from the selling and administrative schedule total of 68,800 so if we take gross profit minus total selling and administrative so this 68,800 let me go back and show you where it's coming from it's coming from the selling and administrative budget 68,000 68,800 so then we have interest expense of 210 interest expense is coming from the cash budget because we incurred interest expense you remember we were short the first month and we had to accrue and we had to pay interest so total interest for the four month was 210 dollars now this is the income statement so we're done with the budgeted income statement now we need to prepare the budgeted balance sheet starting with cash I told you the ending cash is 24,440 and I'm sure you remember account receivable was 20,000 you remember the last month the last month sales the last month sales and 20 40 percent of it will be on account will be collected in august and that's the 20,000 the merchandise inventory also we figure out the merchandise inventory balance 42,400 prepaid was 1,800 and we're gonna deduct 800 out of it which will give us a balance of 1,000 just to just to know where this number coming from the 800 this is prepaid insurance and we incur 800 of insurance 200 per month so you can go back to the selling and administrative 200 not 800 200 per month 200 times 4 4 equal to 800 and this is how much we incur in prepaid insurance how much we consumed that's why it went down to 1,000 this is our current assets property plant and equipment we started with 32 we are giving that we purchased an additional 3,000 accumulated depreciation the beginning balance was 12,800 and 500 per month that's adding 2,000 14,800 we have total asset of 108 108,040 accounts payable is 50 percent of the last month budget actually it's coming from the cash payment sales and commission again 50 percent of them will be paid the following month which is 5000 and we still have a loan of 5000 this is coming from the cash budget a loan of 5000 this is our total liabilities we have no long-term liabilities we did not issue any common stock the beginning retained earning was 60,350 we we are projecting a profit of 2,990 therefore ending retained earning is 63,340 total stockholders equity 83,340 plus liabilities of 24,700 will equal to total assets of 108,108,040 which is total assets equal liabilities plus owners equity this is basically the budgeted balance sheet at the end of this recording i would like to remind you that if you're interested in working extra exercises or working practices you can go to farhatlatchers.com i do have this chat they do have this lesson in my managerial accounting course again if your school or if your textbook is teaching you about direct labor direct material how to find the budget for that i do have those examples on my website you can take a look at them at the end of the day i'm going to ask you to study hard stay safe invest in your career invest in yourself you are making a huge investment in your life it will pay off later