Wiley

CMAexcel Learning System

Exam Review 2015
Part 1: Financial Reporting, Planning,
Performance, and Control
Session 4

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Session 3 Recap
• Section B, Topic 2: Budgeting Concepts
• Section B, Topic 5: Annual Profit Plan and Supporting
Schedules
• Exercise: Preparing Operating Budgets and Pro Forma
Income Statement

Part 1: Financial Reporting, Planning, Performance, and Control 2

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Session 4
• Recap of Session 3
• Section B, Topic 5: Annual Profit Plan and
Supporting Schedules—Cash Budgets
• Exercise: Preparing a Cash Budget
• Comprehensive Problem
• Section B, Topic 4: Budget Methodologies
• Section B, Topic 6: Top-Level Planning and Analysis

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Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Section B, Topic 5: Annual Profit Plan and
Supporting Schedule—Cash Budgets

Financial Budgets
• Capital budget
• Cash budget
• Pro forma balance sheet
• Pro forma statement of cash flows

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 4

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Financial Budget Flow

Pro Forma
Pro Forma
Income Capital Cash
Income
Statement Budget Budget
Statement

Pro Forma Pro Forma

Balance Statement
Sheet of Cash Flows

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 5

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Cash Budget
• Plan to maintain liquidity
• Time financing and investment decisions
• Three parts:
Cash available
Cash disbursements
Financing

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 6

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Calculation of Cash Sales
Estimated sales for a firm’s first 3 months of the year:
January: $600,000 February: $650,000 March: $700,000
20% of sales are in cash, the rest in credit. Collection patterns are 30% in
month of sale, 40% the following month, and 25% the third month. The
amount of cash collected in March from sales will be:
a. $308,000
b. $636,000
c. $700,000
d. $760,000
Answer: b.
Of the estimated January sales, 80% will be collected in credit, and 25% of this will be
collected in March, or (80% × 25%) × $600,000 = $120,000. Estimated February sales
collected in March: (80% × 40%) × $650,000 = $208,000. Of the $700,000 in estimated
March sales, 20% ($140,000) will be collected in cash, and 80% in credit, of which 30% will
be collected in the month of the sale (30% × 80%) × $700,000 = $168,000. March cash
collections: $120,000 + $208,000 + $140,000 + $168,000 = $636,000.

Based on ICMA Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 7
question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Pro Forma Schedule of Cash Receipts and
Cash Disbursements

• A/R balance patterns/disbursement patterns

• Reflect prior months’ activities and thus will not match same
month’s budget numbers
• Interest and tax payments part of cash disbursements
• Depreciation expense removed from fixed overhead

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 8

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Pro Forma Schedule of Cash Receipts
AA Models Pro Forma Schedule of Cash Receipts
$23,384,000
Sales

Cash receipts
Sales—40% same month $9,353,600
30%—1-month lag 6,985,000
20%—2-month lag 3,906,400
10%—3-month lag 2,005,000
Total cash receipts $22,250,000

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 9

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Pro Forma Schedule of Cash Disbursements
AA Models Pro Forma Schedule of Cash Disbursements
Cash disbursements
DM purchases—50% same month $3,416,000
50% following month 2,540,000
DL and benefits—paid same month 994,000
Variable factory overhead—paid following month 353,920
Fixed factory overhead—paid following month 35,200
Interest and tax payments—paid same month 4,619,208
Selling and administrative expenses—paid following month 2,120,000
Total cash disbursements $14,078,328

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 10

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Cash Budget Example
AA Models Cash Budget Example
Cash balance, beginning $475,000
Add receipts: Collections from customers 22,250,000
Total cash available for needs 22,725,000
Deduct total disbursements 14,078,328
Minimum cash needed 200,000
Total cash needed 14,278,328
Cash excess (deficiency) $8,446,672
Financing: Borrowing ---
Repayment ---
Total financing needs ---
Cash balance, ending $8,646,672
(Total Cash Avail. – Total Disbursements + Total Effects of Financing)

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 11

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Relationship Among Cash Budget, Capital Expenditure
Budget, and Pro Forma Financial Statements
• Cash Budget:
Combines the results of the cash collections and cash disbursements budgets

• Capital Expenditure Budget

A line item in the cash disbursements budget

• Pro Forma Financial Statements

 Pro Forma Income Statement
Combines sales and expense budgets
 Pro Forma Balance Sheet
Projects an organization’s financial position
 Pro Forma Statement of Cash Flows
Classifies all cash receipts and disbursements into operating, investing, and
financial activities

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 12

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Session 4 Exercise
Preparing a Cash Budget

Section B, Topic 5: Annual Profit Plan and Supporting

Schedules

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 13

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Session 4
Comprehensive Problem
Preparing a Cash Budget

Section B, Topic 5: Annual Profit Plan and Supporting

Schedules

Part 1, Section B, Topic 5: Annual Profit Plan and Supporting Schedules 14

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Topic 4:
Budget Methodologies
• Activity-based budgeting
• Zero-based budgeting
• Continuous (rolling) budgeting
• Other budgeting methodologies

Part 1, Section B, Topic 4: Budget Methodologies 15

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Activity-Based Budgeting
• Focus on value-added activities
• Each activity matched to cost driver
• Cost drivers
Volume-based unit (labor hours)
Activity-based unit (number of setups)
• Fixed costs separated from variable costs
• Connects resource consumption and output
• Emphasis on teamwork, synchronized activity, and customer
satisfaction

Part 1, Section B, Topic 4: Budget Methodologies 16

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Cost Determination Using ABB for
Robin Manufacturing
Subcomponent Machining Final Assembly

Amount to produce in July 720,000 subcomponents 72,000 units

100 subcomponents/lot 100 units/lot
Subcomponents or units per lot

Number of lots to inspect 720,000/100 = 7,200 lots 72,000/100 = 720 lots

Inspection time per lot 0.2 hours/lot 0.3 hours/lot
Total inspection hour 7,200 x 0.2 =1,440 hours 720 x 0.3 = 216 hours

If subcomponent inspection labor costs $12 per hour and the final assembly
inspection costs $15 per hour, what amount would be included as inspection
labor in the indirect labor amounts?
Answer: 1,440 hours × $12 = $17,280
216 hours × $15 = $3,240
$17,280 + $3,240 = $20,520
Based on ICMA Part 1, Section B, Topic 4: Budget Methodologies 17
question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Budget Methodologies
In which method of budgeting must the cost of each program be
justified, starting with the one most vital to the company?
a. Continuous budgeting
b. Flexible budgeting
c. Incremental budgeting
d. Zero-based budgeting
Answer: d.
Zero-based budgets, as the name implies, start with zero
dollars allocated.

Based on ICMA Part 1, Section B, Topic 4: Budget Methodologies 18

question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Question: Continuous Budgets
A continuous (rolling) budget
a. works best for a company that can reliably forecast its sales revenue and
expenses.
b. presents the plan for a range of activity so the plan can be adjusted for
changes in activity.
c. is one of the budgets that is part of a long-range strategic plan, unchanged
unless the strategy of the company changes.
d. presents the plan for only one level of activity and does not adjust to
changes in the level of activity.
e. is a plan that is revised monthly or quarterly, dropping one period and
adding another.
Answer: e.
A continuous budget adds a new period on the end of the budget at the end of
each period so that there are always several periods planned for the future
and the budgets remain up to date with the operating environment.
Based on ICMA Part 1, Section B, Topic 4: Budget Methodologies 19
question, used Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
with permission Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Other Budget Methodologies

• Project budgeting. Focuses on a project within an

organization.
• Flexible budgeting. Performance/control
mechanism.

Part 1, Section B, Topic 4: Budget Methodologies 20

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Topic 6: Top-Level Planning
and Analysis
• Estimating funding needs
• Assessing anticipated performance
• Performing what-if analysis

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 21

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Estimating Funding Needs
Sales Budget, COGS
Budget, S&A Budget

Pro Forma Income

Capital Budget Statement

Cash Budget Pro Forma Balance Sheet Pro Forma Statement of CF

Step 1. Use pro forma income statement to determine internal

funding generated.
Step 2. Use pro forma balance sheet to determine external funding
needed.

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 22

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Percentage of Sale Method:
Memory Lane, Inc.
• Projected sales for coming year: $200,000
• COGS: 80% of sales
• S&A expenses: 10% of sales
• Interest expense: $5,000
• Tax rate: 35%
• Dividends: 40% of earnings

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 23

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Projecting a Pro Forma Income Statement
• Dividend: Memory Lane Pro Forma Income
$3,900 (= 40% of net Statement
income) Sales $200,000
• Change in retained Less: Cost of goods sold 160,000
earnings:
Gross margin 40,000
$5,850 (= 9,750 – 3,900)
Less: S&A expenses 20,000
EBIT 20,000
Less: Interest 5,000
EBT 15,000
Less: Taxes (35%) 5,250
Net income $9,750

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 24

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Memory Lane Assets and Liabilities
Assets/Liabilities Percent of sales
Current assets 30%
Fixed assets 40%
Current liabilities 25%

Notes payable $ 5,000

Long-term debt $40,000
Common stock $20,000
Retained earnings $ 4,150
Common stock outstanding 50,000 shares

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 25

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Projecting Memory Lane’s Pro Forma
Balance Sheet Memory Lane Pro Forma
Balance Sheet
• Projected retained
Current assets $60,000
earnings: $10,000 (=
$4,150 current retained Fixed assets 80,000
earnings + $5,850 retained Total assets $140,000
earnings from pro forma
income statement) Current liabilities $50,000
• External funding needed:
Notes payable 5,000
$15,000 (=
Long-term debt 40,000
$140,000 – $125,000)
Common stock 20,000
Retained earnings 10,000
Total liability and
owner’s equity $125,000
Part 1, Section B, Topic 6: Top-Level Planning and Analysis 26
Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Projecting Memory Lane’s Pro Forma
Balance Sheet, continued
Memory Lane Pro Forma
The company chooses to Balance Sheet
raise the $15,000 additional Current assets $60,000
funding with long-term debt
Fixed assets 80,000

Projected long-term debt Total assets $140,000

= $40,000 + $ 15,000
= $55,000 Current liabilities $50,000
Notes payable 5,000
Long-term debt 55,000
Common stock 20,000
Retained earnings 10,000
Total liability and
owner’s equity $140,000

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 27

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
 Assessing Anticipated Performance
Financial ratios as indicators of
performance Selected Financial Ratios for Memory Lane
Current Ratio = CA/CL Current Ratio 1.20 (= $60,000/$50,000)
ROA 6.96% (= $9,750/$140,000)
ROA = NI/TA ROE 32.50% (= $9,750/$30,000)
ROE = NI/TE Debt to TA Ratio 0.7857 (= $110,000/$140,000)
Basic EPS $0.1950 (= $9,750/50,000 shares)
Debt to TA Ratio = TL/TA
Basic EPS = NI/Avg. Weighted
Common Shares Outstanding

Where:
CA = Current Assets TA = Average Total Assets
CL = Current Liabilities TE = Average Total Equity
NI = Net Income TL = Total Liabilities

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 28

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Performing What-If Analysis:
Sensitivity Analysis
• Change one assumption and keep all others the same.
• Pro forma financial statement created based on changes.
• Analysis of key ratios and financial positions to
determine effect of changes.

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 29

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Performing What-If Analysis: Memory Lane

Sensitivity analysis Selected Financial Ratios for Memory Lane

• Changing COGS and COGS 75% 80% 85%
analyzing impact on Current Ratio 1.20 1.20 1.20
financial ratios and ROA 11.61% 6.96% 2.32%
external funding
ROE 47.94% 32.50% 12.45%
needed
Debt Ratio 0.7579 0.7857 0.8136
• Changing other
EPS $0.3250 $0.1950 $0.0650
variables?
Funding Needed $11,100 $15,000 $18,900

Part 1, Section B, Topic 6: Top-Level Planning and Analysis 30

Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.
Session 4 Wrap-Up
Content covered in Session 4
• Section B, Topic 5: Annual Profit Plan and Supporting Schedules—
Cash Budgets
• Exercise: Preparing a Cash Budget
• Comprehensive Problem
• Section B, Topic 4: Budget Methodologies
• Section B, Topic 6: Top-Level Planning and Analysis

Content to be covered in Session 5

• Section B, Topic 3: Forecasting Techniques
• Exercise: Preparing Pro Forma Financial Statements, Determining
External Funding Needed, and Performing Sensitivity Analysis
• Review of Section B Exam Practice Questions
Part 1: Financial Reporting, Planning, Performance, and Control 31
Wiley CMAexcel Learning System, Part 1: Financial Reporting, Planning, Performance, and Control.
Copyright © 2014, Institute of Management Accountants. Published by John Wiley & Sons, Inc.