Budget Methodologies CMA Part 1 The Capital Expenditures Budget The capital expenditures budget is the budget in which all capital expenditures (these are expenditures for property, plant and equipment) are planned. If capital expenditures for the coming year will affect the balance sheet, income statement and cash flows, these capital expenditures must be reflected in the budgeted balance sheet, income statement and cash flow statement. This budget is often prepared years in advance so that the company is able to obtain the necessary financing or accumulate the necessary cash to carry out its capital expansion plans, and it covers multiple planning periods. Capital expenditures are generally budgeted as separate projects covering several years each. Each project is analyzed separately to determine whether it is acceptable. This analysis is covered in the Capital Budgeting section of the CMA exams, currently in the Part 2 exam, so it will not be explained in detail here. However, for this exam, you may need to be able to determine the capital expenditures budget for a single period, based upon approved projects that will affect the upcoming planning period. The capital expenditures budget consists of a list of each major project that has been approved and the amount to be funded for the coming year. The annual amount for each project is then broken down according to the quarter(s) or possibly month(s) when the expenditures for each project are expected to occur. The quarterly or monthly totals of cash funding requirements for all projects will be used in preparing the cash budget as well as the budgeted balance sheet. Any anticipated financing must also be included in the cash budget and the budgeted balance sheet. The budgeted balance sheet must reflect the investments and the financing; and the budgeted income and cash flow statements must reflect any net income planned for the coming period. The depreciable life for each asset to be purchased is also shown on the capital expenditures budget, because that will be needed in calculating the budgeted depreciation expense for the budgeted income statement as well as accumulated depreciation amounts for the budgeted balance sheet. The Master Budget All of the budgeted financial statements are interconnected in the same manner as the actual year-end financial statements. The individual budgets that make up the operating and financial budgets (the budgeted balance sheet, income statement, cash budget or budgeted statement of cash flows, and the capital budget) together make up the master budget. The master budget is the document the company relies on as its operating plan as it carries out managements plans in order to achieve its goals and objectives. It is a summary of managements operating and financial plans for the period, expressed as a set of budgeted financial statements for the period that reflects the impact of the operating decisions and financing decisions to be made during the coming period. Question 7: Which one of the following items should be done first when developing a comprehensive budget for a manufacturing company? a) Determination of the advertising budget. b) Development of a sales budget. c) Development of the capital budget. d) Preparation of a pro forma income statement. (CMA Adapted)
Posted on: Sun, 09 Mar 2014 16:17:24 +0000
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