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The Financial Budget
The financial budget presents the plans for financing the operating activities of the firm. The financial
budget is made up of the budgeted balance sheet and the budgeted statement of cash flows, each of
which provides essential financial information.
Budgeted Balance Sheet (20-41)
The budgeted balance sheet is derived from the budgeted balance sheet at the beginning of the budget
period and the expected changes in the account balances reflected in the operating budget, capital
expenditure budget, and cash budget. It is necessary to use a budgeted balance sheet for the beginning
of the period because the new budget is prepared before the previous accounting period has ended.
When the budgeted balance sheet for the coming accounting period is prepared, there may be several
months left in the current accounting period.
The budgeted balance sheet is more than a collection of residual balances resulting from other
budget estimates. Undesirable projected balances and account relationships may cause management to
change the operating plan. For instance, if a lending institution requires a firm to maintain a certain
relationship between current assets and current liabilities, the budget must reflect these requirements.
If it does not, the operating plan must be changed until the agreed requirements are met.
Budgeted Accounts Receivable (22)
Budgeted accounts receivable are a function of expected sales on open account and the period of time
that the receivables are expected to be outstanding. For C&G‟s Gift Shop, all sales are assumed to be
on open account to other businesses. The company expects that 65% of the sales during the period will
be collected in the following month, and 35% will be collected in the next month. For this exercise,
we have assumed that all of the accounts are collectible. If not, the company would have to build in a
provision for uncollectible accounts that would reduce expected collections and be reflected in the
income statement as bad debt expense.
Budget of Ending Inventories (23)
Inventories comprise a major portion of the current assets of many manufacturing firms. Separate
decisions about inventory levels must be made for raw materials, work in process, and finished goods.
Raw material scarcities, management‟s attitude about inventory levels, inventory carrying costs,
inventory ordering costs, and other variables may all affect inventory-level decisions.