FINANCIAL MANAGEMENT (PART-21) TOOLS OF FINANCIAL PLANNING CASH-BUDGET (PART-2)

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1 FINANCIAL MANAGEMENT (PART-21) TOOLS OF FINANCIAL PLANNING CASH-BUDGET (PART-2) 1. INTRODUCTION Dear Students, Welcome to the lecture series on Financial Management. Today we shall cover the topic tools of financial planning. Under tools of financial planning we have discussed various tools in our previous lectures. Today we shall continue the practical question on Cash Budgets. In our previous lecture we have learnt to find out cash collected from debtors using the format as well as debtors ledger account. Continuing the cash budget question we shall learn the computation of the entire information and to find out whether there is deficit or surplus of cash. The objective of this lecture is to have an understanding of the method of computation of the cash budget for the budgeted period and for the budgeted activities so that an analysis of the position of the cash for the budgeted activities can be ascertained. So let us start with the question and solve it. 2. QUESTION BASED CASH BUDGET Now the question is giving us the following information. For the three months we have the actual data while for the remaining 3 months that is for April, May and June we have to prepare the cash budget for this budgeted period with these budgeted figures of sales, purchases, wages and expenses. 1

2 Months Sales Purchases Wages Expenses Rs. Rs. Rs. Rs. January (Actual) 80,000 45,000 20,000 5,000 February (Actual) 80,000 40,000 18,000 6,000 March (Actual) 75,000 42,000 22,000 6,000 April(Budgeted) 90,000 50,000 24,000 7,000 May(Budgeted) 85,000 45,000 20,000 6,000 June( Budgeted) 80,000 35,000 18,000 5,000 Further information 1. 20% of the Sales are for Cash. The average collection period of the company is ½ month % of the Purchases are for cash. The credit purchases are paid off regularly after one month. 3. Wages are paid half monthly. 4. Cash balance as on April 1 was 15, Income tax paid 11,000, 10,000 and 10,000 respectively for April, May and June Now the following information is also given in relation to the budgeted and actual figures for the cash budget is given Sales 1. 20% of the sales are for cash. That means if the sales for the month of April are 90,000/- our cash sales will constitute as 20% of Rs. 90,000/- is equal to 18,000/- so remaining will be the credit sale we will learn this figures while solving the question. 2. Credit period allowed- That is collection period. Here the collection period for the credit sales shall be half month. Meaning thereby whatever has been the credit sales in a particular month half of it will be recovered in the cash in that particular month only while the remaining half shall be recovered in the next month. If for 2

3 example if our sales for the month of April is Rs. 90,000/- we will subtract cash sales of Rs. 18,000/- we shall get the credit sales of Rs.72,000/- so half of Rs.72,000/- that is Rs. 36,000/- shall be recovered in the month of April itself and the remaining of the Rs.36,000/- will move in the next month that is in the month of May. Purchases: Now the purchases the following important relevant information is given: 1. Cash Purchases: 10% of the purchases are for cash. That means the cash purchases figures will be just 10% of the purchases so we can say that our budgeted figures of purchase that is Rs. 50,000 Rs. 45,000 and Rs. 35,000 So Rs. 5,000 Rs. 4,500 and Rs. 3,500 will be cash purchases and the remaining Rs. 45,000 Rs and likewise( that is Rs. 31,500) will be the credit purchase and they will be paid off as per the credit period allowed to us. 2. Credit period allowed The credit period to us is one month. That means that the April s credit purchases will be paid in the month of May and the credit purchase of May will be paid in the month of June and the March s Credit purchase that is Rs. 42,000-10% of 42,000 i.e, Rs which is equal to Rs.37,800 will be paid in the month of April. So these were the important information relating to purchases. Wages and Expenses Now let us analysis the information given for wages and expenses Expenses as the last column is being given by as they are being paid regularly That is Rs. 7,000/- is paid in the month of April as per Budgeted information Rs. 6000/- will be paid in the month of May and Rs. 5000/- will be paid in the Month of June. And if there is a bifurcation of these expenses that is particular expense is for rent or electrical expense we can bifurcate these expenses while preparing cash budgets as per information given to us. 3

4 Since our question does not say any particular bifurcation of these expenses we will take them as such Wages: Wages are paid half monthly that is out of Rs. 24,000/- Rs12,000 will be paid in the month of April and Rs.22,000/- which are wages for the month of March Rs.11,000 shall be paid out of it in the month of April. 12,000 of the month of April itself will be paid in the month of April.So Rs.11,000 and Rs.12,000 we need to pay in the month of April Similarly remaining Rs.12,000/- plus Rs.10,000 of the month of May will be paid in the month of May. Again the remaining Rs. 10,000/- of the month of May and Rs.9000/- will be paid in the month of June. We have all the all the information so we can start preparing the cash budget. 3. PREPARATION OF CASH BUDGET One more important information given is the opening balance of Cash for the month of April Rs. 15,000/-. Having known all the information we will first of all prepare the schedule for collection from debtors as well as payment of wages. Statement showing Collection From Debtors Collection from Debtors is calculated as under: Particulars March April May June Credit Sales (80% Rs. of Sales) Rs. Rs Rs. 60,000 72,000 68,000 64,000 4

5 Collection 50% of Credit 36,000 34,000 32,000 sales of the current month 50% of the credit 30,000 36,000 34,000 sales of the last month Total 66,000 70,000 66,000 Now we have to find out the collection of the cash from the debtor so we are preparing the statement to find out the collection of the month of April, May and June. The March figure is relevant because the collection period is half month. First of all let us see the credit sales For the Month of March The credit sales is 80% of Rs.75,000/- So it is constituted as Rs. 60,000/- For the Month of April- for 90,000/- the credit sales shall come out to be Rs.72,000/- For the Month of May- For 85,000- the credit sales is 68,000/- because it is 80%of Rs.85,000/- For the Month of June- It is 80,000/- So 80% of Rs.80,000 will be credit sales of Rs.64,000/- This was the information for getting the cash collected from the debtors. Now let us see the collection. Half of the march shall be received in the month of April so it will be Rs.30,000/- and Rs.36,000/- of the month of April will be collected in the month of April itself and remaining Rs.36,000/- will be collected in the month of May. 5

6 March s Rs.30,000/- would have been collected in the month of March only and remaining Rs. 30,000/- is being collected in the month of April. So together Rs.36,000 and Rs.30,000 are giving us the figure of Rs.66,000/- which is collection from the debtors for the month of April. So half of the 68,000/- i.e, Rs. 34,000/- shall be received in the month of may only and remaining half will be received in the month of June So it will give us the figure as Rs.70,000( Rs. 34,000+ Rs.36,000). Rs.70,000 will be cash collection from the month of May. Now the half of Rs.64,000 will be received in the month of June and half of 64,000 will be collected in the month of July which is not relevant for us because we are computing it for the budgeted period of 3 months. So the figures for April, May and June are relevant. We have taken the March into consideration because half of the March is collected in the month of April so we have used this figure. So the total of the June is 66,000/- So we have computed the collection from debtors as Rs.66,000 Rs.70,000 and Rs.66,000/- so this is the way collection figure of debtors have come.we have the opening balance so we will find out the total receipt. 4. COMPUTATION OF PURCHASES- CREDIT AND CASH PURCHASES Now we have to find out the figures of cash purchases and credit purchases because we have to ascertain when the payment is to be made in relation to the credit purchases. In our question it is given that the credit period allowed to us is 1 month. So the payment for the purchases which are made on credit shall be paid in the next month. 6

7 For the march the payment shall be made in the month of April, and for April it shall be made in May and for May it shall be made in the month of June. So we have to find out the relevant figure for March, April, May for the credit period and the cash purchases for April, May and June. So we are using these figures as Total Purchases for Rs. 42,000 are given for the month of March so the 10% of it will be cash purchase and the remaining one Rs 37,800 will be the credit purchases. And the payment for accounts payable for the month of March will be paid in the month of April. It is Rs. 37,800 Similarly for the month of April the figure of purchases are Rs. 50,000/- so the cash purchases will be Rs. 5,000 and the credit purchases will be Rs. 45,000/-. Rs. 45,000 shall be paid in the month of May. For the Month of June the figure of purchases are Rs. 45,000/- So Rs.4500 will be the cash purchases and Rs.40,500 shall be the credit purchases which shall be paid off in the month of June. We have to find out the cash purchases for the month of June also i.e, Rs. 3,500/- These are the figures for the total payments which we need to make for preparing cash budget Another payment which we will be made is for expenses. It will be Rs.7,000; Rs.6000; and Rs which will be made in their respective months that is April, May and June. Now one important calculation which we need to make is for wages So let us learn this with the help of a statement. 7

8 5. PAYMENTS IN RELATION TO EXPENSES AND WAGES Now we have the computation sheet for the computation of the wages to be paid that is the amount of the cash which we need for the payment of wages. Our question says that our wage payment period is half month. Half month means that 50% of the wages expenses are to be paid in the month in which they are incurred and remaining 50% of them will be paid in the next month. Here 50% for the month of the current month April will be Rs.12,000/- for the month of May will be Rs. 10,000/- and for the month of June will be Rs.9,000/- Last month s 50% will be of Rs.22,000 ie the wages for the month of March will be 11,000/- here 50% of 24,000 has been paid off.so this 12,000 and this 12,000 that is Rs has been paid off. Similarly for the month of March this 11,000 has already been paid in the month of March only since this figure is not relevant for us because we are computing the cash budget for the month of April, May and June. Amount of Wages is calculated as under Particulars April May June 50% of the current month s 12,000 10,000 9,000 wages 50% of the last month s wages 11,000 12,000 10,000 Total Payment 23,000 22,000 19,000 Now we have all the figures that is cash purchases, accounts payable expenses paid off and computation of wages so we can find out the expenses details. Similarly we have all the figures that are cash sales, opening balance of the cash accounts, payments collected from debtors, cash collected from debtors. 8

9 So we can find out the total receipts when we have total receipts and total payments we can find out surplus or deficit and can compute our cash in hand. 6. PROJECTED FINANCIAL STATEMENTS We will learn another aspect of tools of financial planning. That is called the projected financial statements. In our previous lecture we have learnt in detail about the projected balance sheet that is what are the assets side and what is the liability side and these are being prepared. Today we shall learn about the practical aspect of preparing projected financial statements. Because when we prepared projected balance sheet we have to prepare Projected income statement. Projected income statement is nothing but profit and loss account so it will tell us the profitability position because it will take into account all the expenses relevant to the production and the operation and the net result that is receipt minus expenses will be taken care of but only those receipts and expenses which are of revenue nature shall be the part of the income statements. While those assets or liabilities or those receipts and expenditure which are of capital in nature will be in the balance sheet. For example capital expenditure incurred for the acquisition of the machinery shall be constituted as an asset and shall be the part of the asset side of the balance sheet. The main criteria of distinguishing between any item of expenditure among the Profit and loss and balance sheet is its nature- whether it is of revenue in nature of capital in nature will define fate of the expense to be classified in the income statement or the balance sheet. So we are taking up a practical question to compute the income statement under this lecture. 9

10 Projected income statement is prepared for a particular period it is not prepared for a point of time but for the period that is for the entire year. So it will be prepared for the year ending 31 st March 2011 First of all we will take Sales Sales 10,00,000 Less Cost of good sold 7,00,000 Gross profit 3,00,000 Up to sales, cost of goods sold and Gross profit it will be part of Trading account. Now we shall subtract the expenses Sales 10,00,000 Less Cost of goods sold 7,00,000 Gross profit 3,00,000 Less Expenses Rents 30,000 Salaries 50,000 Office Expenses 20,000 1,00,000 Net profit (PBIT) 2,00,000 Less Interest 50,000 Profit before tax after 1,50,000 interest Less: Tax 50% 75,000 Profit after tax 75,000 This is the way we compute the income statement for a period ending. It will give us the position of profit that is profit before tax, deducting the interest element out of it and getting profit after tax. So with these income statements we can ascertain how much profitable the venture is if we take up any activity or project. This all are projected figures which we have computed taking into account all the consideration of a project. With this we have learnt the preparation of projected income statement. 10

11 7. SUMMARY Now we are summing up our lecture of today. Today we have learnt the method of computation of cash budget where we have identified the period of credit being allowed and period of credit being given to the debtors so that we can ascertain the availability of cash that is the collection of the cash is to be ascertain using statement then payment of the cash for the purchases or the suppliers are to be ascertained and what is the mode of payment of the expenses that we have taken into account and then we have found out the cash balance as on a particular month available with us and we have computed all those information in the specific format called cash budget for the budgeted period. We have also learnt to compute the projected income statement where we have taken into account all the sales, cost of goods and expenditure being incurred for a particular project and traced out the profit available for the particular project using the projected income statement. Thanks you!! 11

FINANCIAL ACCOUNTING (PART - 43) BRANCH ACCOUNTS - 1

FINANCIAL ACCOUNTING (PART - 43) BRANCH ACCOUNTS - 1 1. INTRODUCTION Dear students, I welcome you back on the lecture series of Financial accounting, today we are going to discuss Unit 8, and under Unit