BUSS1030 · Accounting For Decision Making
Budgeting
A budget is a quantitative, forward-looking plan that expresses the business plan in financial terms. The master budget is the full set of linked budgets — each feeds the next, so a single sales forecast cascades down to a projected income statement and a closing cash balance. BUSS1030 covers a light master budget and examines it as a numeric drill on the In-Semester Test: the sales budget, the purchases budget (using the desired-ending-inventory rule), the schedule of expected cash collections, the cash budget, and the projected income statement. The highest-yield idea in the whole topic is that cash collected ≠ sales revenue — revenue is recognised when earned (accrual), cash is counted only when received. Almost every lost mark traces back to confusing those two, or to mis-aligning the collection lag by a month.
What this chapter covers
- 01Why budget — the six jobs and the budget as benchmark
- 02The master-budget sequence (each budget feeds the next)
- 033.1 The sales budget (units × price = revenue earned)
- 043.2 The purchases budget — the desired-ending-inventory rule
- 05The schedule of expected cash collections (cash ≠ revenue)
- 06The cash budget (opening + receipts − payments = closing)
- 07The projected (budgeted) income statement (accrual, not cash)
Worked example: cash collected vs revenue earned
- +1Cash portion (July). 40% × $20,000 = $8,000 collected immediately in July.
- +1Credit portion. 60% × $20,000 = $12,000 is on credit — none of it is collected in July.
- +2From July’s sales, collected in August. 70% of the $12,000 credit = $8,400 lands in August (the remaining 30%, $3,600, lands in September).
- +1Why July cash ≠ July revenue. July earns $20,000 (recognised when the sale is made) but only collects the $8,000 cash portion in July; the credit $12,000 arrives later and builds up as accounts receivable.
Key terms
- Master budget
- The full set of linked budgets a business prepares for the coming period — sales, purchases, cash collections, cash budget and projected income statement — where each budget consumes the output of the one above it, all driven by the sales forecast.
- Sales budget
- Budgeted units sold × selling price = budgeted sales revenue. It is the starting point of the master budget and is measured on the accrual basis (revenue earned), not cash received.
- Purchases budget
- Units to buy = sales (in units) + desired ending inventory − beginning inventory — the inventory equation rearranged. The desired ending inventory is usually a percentage of next month’s sales.
- Schedule of expected cash collections
- A table that re-times each month’s sales into the months the cash is actually received, applying the collection-lag pattern. It is the bridge between the sales budget (accrual) and the cash budget (cash).
- Cash budget
- Opening cash + total cash receipts − total cash payments = closing cash, with each month’s closing cash rolling forward as the next month’s opening cash. It answers a liquidity question — can we pay our bills, and when?
Budgeting FAQ
Why is cash collected not equal to sales revenue?
Because sales are recognised as revenue when earned (the accrual basis), but credit customers pay later, spread across following months on a fixed collection pattern. So in any month, cash collected = the cash portion of this month’s sales plus the lagged collections from earlier months — rarely the same as this month’s revenue. The difference builds up as accounts receivable. Putting the sales-budget figure into the cash budget is the single most-examined error.
How does the desired-ending-inventory rule work?
A merchandiser must buy enough to cover this month’s sales and leave the desired closing stock, but it starts the month already holding last month’s closing stock. So purchases = sales (in units) + desired ending inventory − beginning inventory. Two slips cost the marks: subtract beginning inventory (you already own it), and base the desired ending inventory on next month’s sales, not this month’s.
What is the difference between the cash budget and the projected income statement?
They answer different questions with different numbers. The cash budget is a liquidity tool — can we pay our bills, and when? — built from cash actually received and paid. The projected income statement is a performance tool — will we make a profit? — built on accrual sales revenue, ignoring cash timing. A business can look profitable on one while running out of cash on the other, so the two must be kept apart.
How do I line up the collection lag without slipping a month?
Tag each inflow by its source month, then map each percentage slice to the calendar month it lands in: June’s 70% → July, June’s 30% → August, July’s 70% → August, and so on. Build the table by source row and fill the columns by landing month. Mis-aligning the lag is the #1 mechanical error after the cash≠revenue confusion. If a remainder is bad debt, it is simply never collected — do not carry it forward.
Exam move
Keep revenue and cash in separate columns and the whole topic becomes careful arithmetic. Practise the sales budget, the purchases budget (subtract beginning inventory; base ending inventory on next month’s sales) and above all the cash-collection schedule until the source-month tagging is automatic. Memorise the one-line summary to carry into the test: sales budget → revenue earned; cash collections → cash received (lagged); cash budget → can we pay?; projected income statement → do we profit? Build collection and payment tables by source row, filling columns by landing month, and always reconcile each month’s closing cash forward into the next month’s opening cash. Never drop a sales-budget figure into the cash budget, and never drop cash collected into the projected income statement — the two mirror-image traps are equally fatal.
