Faculty of Commerce – ES M/Acc-2021/2022 4th year- Accounting Major

Chapter 7: The Master Budget: Overall plan

Components of Master Budget

a) The starting point in master budget is the sales forecasts in terms of

quantities, sales prices, and consequently sales revenues.
b) After this sales forecast is prepared, the following budgets can be
prepared.
1. The sales budget.
2. The purchases (production) budget.
3. Operating expenses budget.
4. Cash budget.
5. Expected Income statement.
6. Expected balance sheet.

1. Cash collection Schedule

Sales  Operating plan for a period expressed in terms of sales volume and
Budget selling prices for each class of product or service,
 Preparation of a sales budget is the starting point in budgeting
since sales volume influences nearly all other items,
Cash  It is easiest to prepare budgeted cash collections at the same time
Collections as the sales budget,
 Cash collections include the current month’s cash sales plus the
previous month’s credit sales,

Example 7-30: Suppose a Gap store has the following data

1. Accounts receivable, May 31 (0,3 x May sales of $ 350,000) = $ 105000
2. Monthly forecasted sales: June $ 410,000, July 440,000 , August $ 500,000,
September 530,000
3. Sales consist of 70% cash and 30% credit, All credit accounts are collected in
the month following the sales, Uncollectible accounts are negligible and may
be ignored

1
Faculty of Commerce – ES M/Acc-2021/2022 4th year- Accounting Major

Prepare a sales budget schedule and a cash collection budget schedule for June,
July and August,

410,000 440,000 500,000

Sales Budget June July August
Credit sales (30) % 123,000 132,000 150,000
Cash Collection:
Cash sales this month (70%) 287,000 308,000 350,000
Credit sales 105,000 123,000 132,000
(100% of last month’s credit sales)
Total Collection 392,000 431,000 482,000

Example 7-31
A Japanese clothing wholesaler was preparing its sales budget for the first quarter of
2008, Forecast sales (in thousands) are as follow:
l January 200,000
l February 220,000
l March 240,000
Sales are 20% cash and 80% on credit, fifty percent of the credit accounts are
collected in the month of sale,40% in the month following the sale and 10% in the
following month, no uncollectible accounts are anticipated, Accounts receivable at the
beginning of 2008 are 96 million (10% of Nov. credit sales of 180 million and 50% of
December credit sales of 156 million),
Prepare a schedule showing sales and cash collection for January, February and
March, 2008,
200,000 220,000 240,000
Sales Budget Jan Feb March
Credit sales (80) % 160000 176,000 192,000
Cash Collection:
Cash sales this month (20%) 40000 44000 48000
Credit sales
1. 50% of this month’s credit sales 80000 88000 96000
2. 40% of last month’s credit sales 62400 64000 70400
3. 10% of next-to-last month’s credit sales 18000 15600 16000
Total Collection 200400 211600 230400

2
Faculty of Commerce – ES M/Acc-2021/2022 4th year- Accounting Major

2. Purchases Budget

Budgeted purchases = Desired ending inventory + Cost of goods sold – Beginning

inventory

Example 7- 33

Quantrill Furniture Mart plans inventory levels (at cost) at the end of each month as
follow:
 May, 275,000, June, 220,000, July, 270,000, August, 240,000.
 Sales are expected to be June, 440,000, July, 350,000 and August, 420,000.
cost of goods sold is 60% of sales, purchase in April were 250,000, in May,
180,000.
 A given month’s purchases are paid as follows: 10% during that month, 80%
the next month, and the final 10% the next month.

Prepare budget schedule for June, July, and August for purchases and disbursements.

440,000 350,000 420,000

Purchase Budget June July August
COGS (60% sales) 264,000 210,000 252,000
+ Ending Inventory 220,000 270,000 240,000
Total needed 484,000 480,000 492,000
- Beginning inventory (275,000) (220,000) (270,000)
= Purchases 209,000 260,000 222,000
Disbursement for purchases
10% of this month’s purchase 20900 26000 22200
80% of last month’s purchase 144000 167200 208000
10% of second last month’s purchase 25000 18000 20900
Total cash disbursement 189900 211200 251100

Example 7-34:

The inventory of the Dublin appliance company was 210,000 on May 31, the manager
was upset because the inventory was too high, she has adopted the following policies
regarding merchandise purchases and inventory:
 At the end of any month, the inventory should be L,E. 15,000 plus 90% of
the cost of goods to be sold during the following month.
 The cost of merchandise sold average 60% of sales,
 Purchase term are generally net 30 days
 A given month’s purchases are paid as follow: 20% during that month and
80% during the following month,
Purchases in may had been L,E. 150,000, Sales are expected to be June,300,000,
July, 290,000, August, 340,000, and September, 400,000,
1. Compute the amount by which the inventory in May 31 exceeds the
manager’s policies,

3
Faculty of Commerce – ES M/Acc-2021/2022 4th year- Accounting Major

2. Prepare budget schedule for June, July, and August for purchase and
disbursement for purchases,

300,000 290,000 340,000

Purchase Budget June July August
COGS (60% sales) 171600 198600 231000
+ Ending Inventory 180,000 174,000 204000
Total needed 351600 372600 435000
- Beginning inventory (210,000) (171600) (198600)
= Purchases 141600 201000 236400
Disbursement for purchases
20% of this month’s purchase 28320 40200 47280
80% of last month’s purchase 120,000 113280 160800
Total cash disbursement 148320 153480 208080

4
Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Chapter 7: Introduction to Budgets and Preparing the Master

Budget (part 2)

Purchases Example:

Solution:

By Dr Sabah Soliman Page 1

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Cash Disbursement for Purchases table:

Example (2)

By Dr Sabah Soliman Page 2

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

By Dr Sabah Soliman Page 3

 Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Example (3)

The following data and information are used by the planning department of
CUCO to prepare some operation budgets for January, February, and March,
2016:

1. Accounts receivables balance, December 31, 2015, LE 72000 including the

following two amounts: LE 54000 Account's receivables from the
customers of December's credit sales transactions and LE 18000 Accounts
receivables from the customers of November's credit sales. The Accounts
receivable from the customers of the credit sales transactions are always
collected on due date.
2. The usual type of all monthly sales transactions are always 40% cash
transactions and 60% credit transactions.
3. The usual pattern of the cash collections of all credit transactions of sales
are 70% in the same month of sale, 20% in the month following the
month of sale, and 10% in the second month following the month of sale.
4. The forecasted total monthly sales are LE 300 000 in each of January and
February, and LE 400 000 in March 2016.

Required: Compute cash collections for the first quarter.

Forecasted Sales 300 000 300 000 400000

Jan. Feb. Mar.
Credit sales (60% of 180 000 180 000 240000
sales)
Cash collection
Collections of cash sales 120 000 120 000 160 000
(40% of sales)
From credit sales:
70% in the same month 126,000 126,000 168,000
(180000 ×70%) (180000 ×70%) (240000 ×70%)
20% in the next month 36,000 36,000 36,000
(20%Dec Credit sales) (180000 ×20%) (180000 ×20%)
10% in the second 18,000 18,000 18,000
following the month of (10% Nov Credit sales) (10%Dec Credit (180000 ×10%)
sales sales)
Total cash collections 300 000 300 000 382 000

By Dr Sabah Soliman Page 4

 Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Prepare the financial budget

Cash Budget: A statement of the firm's planned inflows and outflows of cash that is used to
estimate its short term cash requirements, Preparing the cash budget:

Cash receipt: Cash Disbursements

All of a firm's inflows of cash  All outlays of cash by the firm during a given financial
during a given financial period,  period, the most common cash disbursement are:
the most common component of  Cash purchases
cash receipts are cash sales,  Fixes asset outlays
collection of accounts  Payments of accounts payable
receivable, and other cash  Interest payments
 Rent (and lease payment)
receipts,
 Cash dividends payment
 Wages and salaries
 Principle payments (loans)
 Repurchases or retirements of stock
 Tax payment

Cash Budget Format

1st 2nd 3rd

Total
Month Month Month
Beginning cash balance X (beginning of
X X X the quarter i.e. 1st
month)
+ Total cash collections X X X XX
= Total cash available (A) XX XX XX XX
Total cash disbursement and payments (B) X X X XX
+ minimum cash in the ending X (of one month
X X X
only)
= Total cash needed (C) XX XX XX XX
Cash excess or deficit (A- C) XX XX XX XX
Financing:
Borrowings
Repayments of loan's principals
Payments of related interest
= Total financing (D) X X X X
= Ending cash balance (A-B+D) X (ending of the
X X X quarter i.e. 3rd
month)

By Dr Sabah Soliman Page 5

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

By Dr Sabah Soliman Page 6

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

By Dr Sabah Soliman Page 7

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

By Dr Sabah Soliman Page 8

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Example (3) Final 2012: The controller of Misr Co. prepares a cash budget
for January, February and March 2012. Selected data are given below:

• Cash balance, December 31, 2011 is LE 125 000.

• Accounts receivable balance, Dec. 31, 2011:
 From Dec. 2011 sales LE 80 000,
 From Nov. 2011 sales LE 30 000.
• Inventory (at cost), December 31, 2011 LE 40 000.

Budgeted sales for Jan. –April 2012:

 January LE 300 000,
 February LE 350000,
 March LE 500 000,
 April LE 500 000.
 Sales are 40% cash and 60% on credit.
 Collections of credit sales are 50% in the month of sale, 40% in the
following month, and 10% in the second month following the month of
sale.
 The inventory level at the end of each month should equal 25% of the
next month cost of goods sold. The gross margin is 30% of sales.
 All purchases are paid in the month of purchases.
 Monthly operating expenses (including LE 70 000 depreciation) are as
follow: January LE 150 250, February LE 150 250, March LE 151 600.
Operating expenses are paid as incurred.
 It is expected to purchase and pay LE 15 1500 fixed assets in February.
 The minimum cash balance to be maintained at the end of each month
is LE 60 000.
 The company can borrow (if necessary) and repay as promptly as
possible borrowing occurs at the beginning and repayment occurs at
the end of the month(s) in question. Annual interest rate is 12% and it
is paid when the related loan is repaid.
Required: Prepare the cash budget for the first quarter, 2012.

By Dr Sabah Soliman Page 9

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Cash Collection Table:

Budget Sales 300 000 350 000 500 000

Jan. Feb. Mar.

Credit sales (60% of sales) 180,000 210,000 300,000

Cash collection
From cash sales (40% of sales) 120,000 140,000 200,000
From credit sales:
50% in the same month 90,000 105,000 150,000
(180,000 ×50%) (210,000 ×50%) (300,000 ×50%)

40% in the next month 64,000 (40% of 72,000 84 000

Dec credit sales) (180 000 ×40%) (210,000 ×40%)

10% in the second following the 30,000 16,000 18,000

month of sales (10% of Nov (10% of Dec (180,000 ×10%)
credit sales) credit sales)
Total Cash Collections 304,000 333,000 452,000

Purchases Table:

Budget sales 300,000 350,000 500,000 500,000

Jan. Feb. Mar. April
Cost of goods sold (70% 210,000 245,000 350,000 350,000
of sales)
+ ending inventory 61,250 87,500 87,500
(25% of next CGS)
= 271 250 332 500 437 500

(-) Beginning inventory (40,000) (61,250) (87,500)

=Budgeted purchases 231,250 271,250 350,000

Cash Disbursement Table:

Jan. Feb. Mar.
Budget purchases (all paid cash) 231,250 271,250 350,000
Monthly cash expenses (excluding annual 80,250 80,250 81,600
depreciation)
Payments to purchase fixed assets 151,500
Total Cash Disbursements 311,500 503,000 431,600

By Dr Sabah Soliman Page 10

 Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Jan. Feb. March Total

Beginning cash balance 125,000 117,500 60,000 125,000
+ Total cash collections 304,000 333,000 452,000 1,089,000
= Total cash available (A) 429,000 450,500 512,000 1,214,000
Total cash disbursement and payments (B) 311,500 502,000 431,600 1,245,100
+ minimum cash in the ending 60,000 60,000 60,000 60,000
= Total cash needed (C) 371,500 562,000 491,600 1,305,000
Cash excess or deficit (A- C) 57,500 (111,500) 20,400 (91,100)
Financing:
Borrowings 111,500 111,500
Repayments of loan's principals (20,000) (20,000)
Payments of related interest (400) (400)
= Total financing (D) 111,500 (20,400) 91,100
= Ending cash balance (A-B+D) 117,500 60,000 60,000 60,000
For Mar.:
Mar. Excess = part of Feb. loan + interest of this part
20400 = P + ( P× 12%× 2/12)
P = LE 20000
Interest = 20000 × 12%× 2/12= LE 400

By Dr Sabah Soliman Page 11

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Case (4) Final January 9th, 2019: The controller of" IRW" Company
presented the following data for preparing the cash budget for the first
quarter of 2019:

A. Actual and projected sales can be summarized as follows: November

LE 600 000, December 2018 LE 800 000, January 2019 LE 500 000,
February LE 400 000 and March LE 400 000.
B. Sales are 90% on credit and 10% cash. Credit sales are collected 80%
in the month following the sale and 20% in the following month.
C. Payments to suppliers for goods purchased are calculated and
summarized as follows: January 2019, LE 420 000, February LE 460
000 and March LE 237 000.
D. Salaries, wages and commissions averages are 20% of sales. All other
variable expenses are 4% of sales. All variable expenses require cash
disbursements each month.
E. Other monthly operating expenses are as follows: Rent LE 15 000 paid
as incurred. Monthly property taxes LE 20 000, paid for the quarter in
the first month of each quarter, and Depreciation LE 10 000.
F. On December, 1st 2018 the company paid LE 12 000 to purchase 6-
months insurance policy. Equipment costing LE 16 000 will be
purchased and paid for cash in January 2019. Dividends previously
declared will be paid in February 2019 LE 39 000.
G. At the beginning of December, 2018 a 18%-LE 100 000-Loan was
actually obtained The minimum cash balance at the end of each month
is LE 25 000. Planned cash balance at December 31, 2018 is LE 25 000.
H. All borrowings are effective at the beginning of the month and all
repayments are made at the end of the month. Management wants to
minimize borrowing and repay rapidly. Money can be borrowed and
repaid in multiple of 10 000 at annual interest rate 18%. Interest is
paid only at time of repaying - in full or in part – principals of loans.
The related interest charges are to be paid regardless of the multiples
of LE 10 000.
Now, the company is preparing the monthly cash budgets for January,
February and March, 2019, and for the first quarter of 2019, in total.

By Dr Sabah Soliman Page 12

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

1. During January, 2019, the collections from all credit sales shall be in LE 1000:
A. 450 B. 662 C. 684 D. None of these.
2. In the balance sheet of the company which is to be prepared as of March 31, 2019,
the debit balance of the Accounts Receivable account shall be listed in LE 1000 at:
A. 360 B. 432 C. 472 D. None of these.
3. During the first quarter of 2019, the total collections from all sales shall be in LE
1000:
A. 1566 B. 1588 C. 1696 D. None of these
4. During January,2019 , the total cash operating expenses shall be in LE 1000:
A. 195 B. 135 C. 611 D. None of these.
5. The total operating expenses in the income statement for January shall be in LE
1000:
A. 195 B. 205 C. 165 D. None of these.
6. In the balance sheet of the company which is to be prepared as of December 31,
2018, the credit balance of the Accrued Interest shall be listed in LE 1000 at:
A. 3 B. 0 C. 1.5 D. None of these.
7. During the first quarter of 2019, the total disbursements shall be in LE 1000:
A. 1589 B. 1614 C. 1611 D. None of these.
8. The total of the financing part as it appears in the cash budget of January, 2019, is
in LE 1000:
A. (100) B. 100 C. (106) D. None of these.
9. The ending cash balance of March, 2019, should be in LE 1000:
A. 25 B. 29 C. 26 D. None of these.
10. The total of the financing part as it appears in the cash budget of February, 2019, is
in LE 1000:
A. (66) B. 66 C. 70 D. None of these.
11. The beginning cash balance of March, 2019, should be in LE 1000:
A. 25 B. 26 C. 28 D. None of these.
12. The total of the financing part as it appears in the cash budget of March, 2019, is in
LE 1000:
A. (70) B. 70 C. 74 D. None of these.
13. The total of the financing part as it appears in the cash budget of the first quarter,
2019, is in LE 1000:
A. (70) B. 170 C. (107) D. None of these.
14. The amount, in LE 1000, of the ending cash balance of the first quarter of 2017,
shall be:
A. 25 B. 29 C. 26.9 D. None of these.

By Dr Sabah Soliman Page 13

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Case (5)

By Dr Sabah Soliman Page 14

 Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

First requirement: Schedule of cash collections from sales& other cash collection
Nov. Dec. Jan. Feb. Mar.
Sales 300000 350000 700000 400000 400000
(300000×90%) (350000×90%) (700000×90%) (400000×90%) (400000×90%)
Credit sales (90% of 270000 315000 630000 360000 360000
total monthly sales)
Cash collection from
credit sales
(270000 × (315000 × (630000 × (360000 ×
80%) 80%) 80%) 80%)
80% in the next 216000 252000 504000 288000
month
(270000 × (315000 × (630000 ×
20%) 20%) 20%)
20% in the following 54000 63000 126000
month
1) Collection 306000 567000 414000
from credit
sales
(700000×10%) (400000×!0%) (400000×!0%)
2) Collection 70000 40000 40000
from cash
sales
= Total collections 376000 607000 454000

Second requirement: Schedule of cash disbursements for purchases and other

payments:
Jan. Feb. Mar.
1) Payments to suppliers 420000 240000 240000
(700000 × (400000 × (400000 ×
20%) 20%) 20%)
2) Salaries cash (20% of sales) 140000 80000 80000
(700000 × (400000 × (400000 ×
4%) 4%) 4%)
3) Other variable cost cash 28000 16000 16000
4) Cash Rent 15000 15000 15000
5) Cash property tax 60000
6) purchasing equipment 17000
7) dividends cash 39000
= Total payments 680000 351000 390000

By Dr Sabah Soliman Page 15

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Cash budget
Jan. Feb. March Total
Beginning cash balance 29000 25000 26000 29000
+ Total cash collections 376000 607000 454000 1437000
= Total cash available (A) 405000 632000 480000 1466000
Total cash disbursement and 680000 351000 390000 1421000
payments (B)
+ minimum cash in the ending 25000 25000 25000 25000
cash balance
= Total cash needed (C) 705000 376000 415000 1446000
Cash excess or deficit (A- C) (300000) 256000 65000 20000
Financing:
Borrowings 300000 0 0 300000
Repayments of loan's principals 0 (250000) (50000) (300000)
Payments of related interest 0 (5000) (1500) (6500)
= Total financing (D) 0 (255000) (51500) (6500)
= Ending cash balance (A-B+D) 25000 26000 38500 38500

For Feb.:
Excess = part of Jan. loan + interest of this part
256000 = P + (P× 12%× 2/12) P = LE 250980
Will pay LE 250000 only
Interest = 250000 × 12%× 2/12= LE 50000.
Interest expense will be recorded in monthly income statement
= beginning loan balance× interest rate× period
In Jan. income statement= 300 000 × 12% × (1/12) = 3 000 LE.
In Feb. income statement= 300 000 × 12% × (1/12) = 3 000 LE.
In March income statement= 50 000 × 12% × (1/12) = 500 LE.
Interest payable will be recorded in balance sheet on
Jan. 31st = 3 000 LE.
Feb. 28th = 1 000 LE.
March 31st = Zero.

By Dr Sabah Soliman Page 16

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Case (6)

By Dr Sabah Soliman Page 17

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Steps:
Step (1): Schedule of cash collections from sales& other cash collection
Jan. Feb. Mar. April
Budget Sales ( all are on credit) 80000 80000 90000 90000
Cash collection from credit sales
(80000 × 60%) (80000 × 60%) (90000 × 60%)

60% in the same month 48000 48000 54000

(80000 × 30%) (80000 × 30%)
30% in the next month 24000 24000
(80000 × 10%)

10% in the second following the month of 8000

sales
3) Collection from credit sales 48000 72000 86000
(40000 × (40000 ×
(30%÷40%)) (10%÷40%))

4) Collections from Dec. credit sales 30000 10000

5) Collections from Nov. credit sales 10000
6) Collections from selling 12220
investments
= Total collections 88000 82000 98220
Step (2): Schedule of cash disbursements for purchases and other payments:
First: calculate purchases:
Jan. Feb. Mar. April
Budget sales 80000 80000 90000 90000
(80000×70%) (80000×70%) (90000×70%) (90000×70%)

Cost of goods sold (70% of sales) 56000 56000 63000 63000

(30%×56000) (30%×63000) (30%×63000)
+ ending inventory 16800 18900 18900
= 72800 74900 81900
(30%×80000)

(-) Beginning inventory 16800 16800 18900

= purchases 56000 58100 63000
Second: Schedule of cash disbursements for purchases and other payments
Jan. Feb. Mar. April
8) All Purchases are cash 56000 58100 63000
9) Payments for current costs cash 24000 24000 24000
10) Payments for acquisition of fixed 8000 21900
assets
= Total payments 88000 104000 87000

By Dr Sabah Soliman Page 18

Faculty of Commerce – ES M/Acc-2021/2022 4th year English Section

Cash budget
Jan. Feb. March Total
Beginning cash balance 22000 22000 22000 22000
+ Total cash collections 88000 82000 98220 268220
=total cash available (A) 110000 104000 120220 290220
Total cash disbursement and payments (B) 88000 104000 87000 279000
(+) minimum cash in the ending cash 22000 22000 22000 22000
balance
= Total cash needed (C) 110000 126000 109000 301000
Cash excess or deficit (A- C) 0 (22000) 11220 (10780)
Financing:
Borrowings 0 22000 0 22000
Repayments of loan's principals 0 0 (11000) (11000)
Payments of related interest 0 0 (220) (220)
= total financing (D) 0 22000 (11220) 10780
= Ending cash balance (A-B+D) 22000 22000 22000 22000
For March:
Excess = part of Feb. loan + interest of this part
11220 = P + ( P× 12%× 2/12) P = LE 11000
Paid Interest = 11000 × 12%× 2/12= LE 220.
Interest expense will be recorded in monthly income statement
= beginning loan balance× interest rate× period
In Jan. income statement= zero.
In Feb. income statement= 22 000 × 12% × (1/12) = 220 LE.
In March income statement= 22 000 × 12% × (1/12) = 220 LE.
Interest payable will be recorded in balance sheet on
Jan. 31st = zero.
Feb. 28th = 220 LE.
March 31st = 220 LE.

By Dr Sabah Soliman Page 19