Management Accounting. Part 2 – Profit Plan, Finance Plan, Budgeted Balance Sheet - Werner Seebacher - ebook

Management Accounting. Part 2 – Profit Plan, Finance Plan, Budgeted Balance Sheet ebook

Werner Seebacher

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„Management Accounting, Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” is based constantly on the textbook “Management Accounting”. The textbook “Management Accounting.” deals with the “Big Picture” – the Accounting/Controlling Overall Context – as well as with the elements presenting this connection: Balance Sheet | Profit/Loss Account | Profit Plan | Finance Plan | Budgeted Balance Sheet. “Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” – basing on the “Big Picture” – deals with the contents of and the connections between profit plan, finance plan and budgeted balance sheet. Building on them, the effects of concrete business activities in and on profit plan, finance plan and budgeted balance sheet are presented and annotated. They are described in form of case studies. “Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” is directed towards students and practitioners – to students doing business courses in the framework of their basic education or their introductory semesters respectively, to students doing postgraduate programs as well as practitioners in management jobs. “Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” is supplemented by “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account”.

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Werner Seebacher

Management Accounting.Part 2

Profit Plan | Finance Plan | Budgeted Balance Sheet

AuthorWerner Seebacher

ISBN 978-3-7375-8628-3

First Edition 2016

www.management-accounting.net

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Foreword

“Management Accounting, Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” is based constantly on the textbook “Management Accounting”.

The textbook “Management Accounting.” deals with the “Big Picture” – the Accounting/Controlling Overall Context – as well as with the elements presenting this connection: Balance Sheet | Profit/Loss Account | Profit Plan | Finance Plan | Budgeted Balance Sheet.

“Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” – basing on the “Big Picture” – deals with the contents of and the connections between profit plan, finance plan and budgeted balance sheet. Building on them, the effects of concrete business activities in and on profit plan, finance plan and budgeted balance sheet are presented and annotated. They are described in form of case studies.

“Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” is directed towards students and practitioners – to students doing business courses in the framework of their basic education or their introductory semesters respectively, to students doing postgraduate programs as well as practitioners in management jobs.

“Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” is supplemented by “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account”.

Overview of the Contents

1. Introduction

2. Survey of the Contents

3. Profit Plan | Finance Plan | Budgeted Balance Sheet

4. Profit Plan | Finance Plan | Budgeted Balance Sheet - Numerical Examples

5. Key Figures | Ratios

Table of Contents

1. Introduction

2. Survey of the Contents

2.1. Balance Sheet

2.2. Profit/Loss Account

2.3. Balance Sheet | Profit/Loss Account

2.4. Balance Sheet | Profit/Loss Account

Profit Plan | Finance Plan | Budgeted Balance Sheet

2.5. Profit Plan

2.6. Finance Plan

2.7. Profit Plan | Finance Plan

2.8. Budgeted Balance Sheet

2.9. Finance Plan | Budgeted Balance Sheet

2.10. Profit Plan | Finance Plan | Budgeted Balance Sheet – the Big Picture

3. Profit Plan | Finance Plan | Budgeted Balance Sheet

3.1. Profit Plan

3.1.1. Profit Plan and Profit/Loss Account

3.1.2. Profit Plan and Contribution Margin Costing

3.1.3. Profit Plan – Internal and External Accounting

3.2. Finance Plan

3.2.1. Result after Tax

3.2.2. Depreciation

3.2.3. Provisions

3.2.4. Provisions for Taxation

3.2.5. Reserves

3.2.6. Goods on Own Account (Capitalized)

3.2.7. Receivables from Trade

3.2.8. Liabilities from Trade

5.2.9. Inventory

3.2.10. Other Receivables

3.2.11. Other Liabilities

3.2.12. Deferred Charges

3.2.13. Deferred Income

3.2.14. Investments

3.2.15. Long-Term Liabilities | Loans | Credits

3.2.16. Capital Increase

3.2.17. Dividends | Distributions

3.2.18. Surplus of Cash | Demand for Cash

3.2.19. Summary of the Items | Mathematical Signs in the Finance Plan

3.3. Budgeted Balance Sheet

3.4. Connections

3.4.1. Profit Plan | Finance Plan – Connection

3.4.2. Finance Plan | Budgeted Balance Sheet – Connection

3.4.3. The Big Picture – The Overall Context

4. Profit Plan | Finance Plan | Budgeted Balance Sheet - Numerical Examples

4.1. Example 1: Foundation of an Enterprise

4.2. Example 2: Investment

4.3. Example 3: Financing

4.4. Example 4: Investment and Financing

4.5. Example 5: Purchase of Goods, Use of Goods, Turnover/Sales

4.6. Example 6: Deferred Charges

4.7. Example 7: Deferred Income

4.8. Example 8: Provisions

4.9. Example 9: Asset Disposal

4.10. Example 10: Goods on Own Account

5. Ratios

5.1. Ratios Balance Sheet | Budgeted Balance Sheet

5.2. Ratios Profit | Profit Plan

5.2.1. Minimum Turnover

5.2.2. Volume Range

5.2.3. Price Range

5.2.4. Volume Range | Price Range - Connection

5.2.5. Minimum Turnover (price-related)

5.3. Ratios Liquidity | Finance Plan

5.4. Ratios Profit | Profit Plan – Liquidity | Finance Plan

5.4.1. Turnover Rate – Receivables from Trade

5.4.2. Turnover Rate – Liabilities from Trade

5.5. Ratios Profit | Profit Plan – Balance Sheet | Budgeted Balance Sheet

5.5.1. Return on Investment | ROI

5.5.2. Return on Equity | ROE

5.5.3. Return on Sales | ROS

Author

Method

List of Relevant Literature

Index of Figures

1. Introduction

“Management Accounting.” is based on the idea that all accounting/controlling considerations in an enterprise are always focused on the Big Picture – the comprehensive overview or comprehensive presentation of these business activities as a whole. All business activities are always analyzed and evaluated with reference to this overall connection.

For this reason there are substantial differences in “Management Accounting.” compared to classical textbooks on accounting/controlling or to standard literature in the field of accounting/controlling.

In order to give a total, general overview of the connections in accounting – independent of national and international trade and tax laws – neither references to legal texts are given nor paragraphs or legal regulations are mentioned.

In order to take the aspect of convergence in accounting/controlling into account, “Management Accounting.” integrates central elements of accounting. Internal and external accounting are connected as well as past and future, planned and current data.

For this reason accounting must be seen in a broader sense – referring to balance sheet, profit/loss account, results statement, contribution margin costing as well as to corporate planning, profit plan, finance plan, budgeted balance sheet, key figures – and should not be understood as accounting in the narrower sense of book-keeping (and balancing).

The approach that is used in “Management Accounting.” focuses on two central connections which form the basic structure of presenting the economic activities in accounting/controlling of an enterprise:

The first of these two connections is the basic connection between Balance Sheet and Profit/Loss Account.

The second decisive connection is based on the interaction of the components result (profit or loss respectively), liquidity (solvency) and balance sheet which – with a view to the future – are presented through the elements Profit Plan, Finance Plan and Budgeted Balance Sheet.

Combining the two groups of topics Balance Sheet | Profit/Loss Account and Profit Plan | Finance Plan | Budgeted Balance Sheet, the circle of the effects of economic activities of an enterprise closes. The connection of accounting/controlling as a whole opens up.

The two central groups of topics which are presented in “Management Accounting.” – Balance Sheet | Profit/Loss Account and Profit Plan | Finance Plan | Budgeted Balance Sheet meet exactly at the interface between past, current and future situation:

The group of topics: Balance Sheet | Profit/Loss Account deals with the past or the current situation of the enterprise.

The group of topics: Profit Plan | Finance Plan | Budgeted Balance Sheet deals with the future development of the enterprise.

The basic elements which are used remain the same in both groups of topics, also the contents and connections. What changes is the way they are considered and the terms which are used.

The presentation of the fundamental contents of and the connections between the the elements Balance Sheet and Profit/Loss Account is dealt with in “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account”.

“Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” deals with the central “Accounting/Controlling Overall Context“, the connection between the elements Profit Plan, Finance Plan and Budgeted Balance Sheet. The connections described are presented and annotated in form of case studies.

2. Survey of the Contents

“Management Accounting.” covers the range:

- from the effects of business activities regarding the aspects of profit/loss, liquidity or solvency respectively (presented through surplus of or demand for cash) and balance sheet,

- via the central elements of accounting/controlling: Balance Sheet, Profit/Loss Account, Profit Plan, Finance Plan and Budgeted Balance Sheet,

- as well as to their development from a time-wise point of view – from the past over the current situation (each presented through Balance Sheet and Profit/Loss Account, possibly also through a Cash Flow Statement) to the future (presented through Profit Plan, Finance Plan and Budgeted Balance Sheet).

The following short overview of the elements and connections used is meant to make the structure of “Management Accounting.” easier for the reader and also to help with assigning the contents.

The following elements are presented in this overview:

The presentation of all details referring to the elements and connections mentioned here, can be found in “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account” on the one hand, and in “Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” on the other hand, and also as an overall presentation in the textbook “Management Accounting.” which forms the basis for „Management Accounting. Part 1“ and “Management Accounting. Part 2”.

2.1. Balance Sheet

A balance sheet is always a look at the enterprise at a certain point in time. It contains permanently stock values.

The balance sheet presents – referring to a certain point in time – the goods or assets an enterprise has available at exactly this moment and in what way the enterprise is financed at this moment (with equity or debt capital / liabilities).

Figure 1: Balance Sheet

On the left side of the balance sheet, the assets side, the assets of an enterprise are presented, structured into fixed assets (non-current assets) and current assets. On the right side of the balance sheet, the liabilities side, the source of the financial means of the enterprise is presented, differentiating between equity and debt capital.

Detailed explanations concerning the balance sheet are presented in “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account ”.

2.2. Profit/Loss Account

The profit/loss account, in contrast to the balance sheet, is a period of time-oriented reflection of an enterprise, a consideration of the economic development of an enterprise in the course of time. The profit/loss account contains permanently flow values.

In the profit/loss account the result of the business activity (the profit or loss of the enterprise respectively) is presented – in form of the difference between expense and income. The income or turnover/sales which are achieved by selling products, goods or services are compared to the arising expense in the enterprise and the result of the comparison leads to the profit or loss of the enterprise.

Figure 2: Profit/Loss Account

Detailed explanations concerning the profit/loss account are presented in “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account ”.

2.3. Balance Sheet | Profit/Loss Account

The connection between balance sheet and profit/loss account can be seen in the result of the profit/loss account – in the profit or loss.

A profit which has been compiled in the profit/loss account increases the equity in the balance sheet of the enterprise, a possible loss reduces the equity in the balance sheet of the enterprise.

Figure 3: Balance Sheet and Profit/Loss Account

2.4. Balance Sheet | Profit/Loss Account | Profit Plan | Finance Plan | Budgeted Balance Sheet

In the transition from the past-oriented to the future-oriented consideration of an enterprise, the elements mentioned before, Balance Sheet and Profit/Loss Account are replaced by the elements Profit Plan, Finance Plan and Budgeted Balance Sheet.

The Profit/Loss Account is replaced by the Profit Plan.

The Balance Sheet is replaced by the Budgeted Balance Sheet.

The Cash Flow Statement (which has not been presented here) is replaced by the Finance Plan.

Profit plan, finance plan and budgeted balance sheet present the future economic or financial development of an enterprise.

2.5. Profit Plan

The profit plan which is presented here based on the structure of a results statement or contribution margin costing respectively, represents the future-oriented consideration of the expected or planned profit situation of an enterprise. With reference to the contents or the result which must be compiled (profit or loss) the profit plan equals the profit/loss account which is used for assessing the profit situation of an enterprise in a past-oriented way.

The result of both calculating schemes leads to the profit or loss of the enterprise which is denominated with various specific terms depending on the structure it is based on.

Figure 4: Profit Plan and Profit/Loss Account

Detailed explanations concerning the profit plan follow in chapter 3 - Profit Plan | Finance Plan | Budgeted Balance Sheet.

2.6. Finance Plan

The compilation of the profit plan is followed by the finance plan. Based on the planned profit/loss after tax from the profit plan, the development of the liquidity or solvency of the enterprise respectively is planned in the finance plan. The result of the finance plan is the planned surplus of cash or demand for cash of the enterprise.

The planned profit from the profit plan is converted into cash flows in the finance plan.

Figure 5: Finance Plan

Detailed explanations concerning the finance plan follow in chapter 3 - Profit Plan | Finance Plan | Budgeted Balance Sheet.

2.7. Profit Plan | Finance Plan

Profit plan and finance plan are closely linked in various ways. There are links and connections in both directions, from profit plan to finance plan and also back from finance plan to profit plan.

The profit after tax from the profit plan forms the basis for the finance plan. The result of the finance plan, the surplus of liquidity or the demand for liquidity, must be financed or can be invested and so – through the resulting interest payment (interest paid or interest income) – affects the profit plan again.

Figure 6: Profit Plan and Finance Plan

2.8. Budgeted Balance Sheet

The same as the balance sheet, the budgeted balance sheet is a presentation of the enterprise at a certain point in time.

The budgeted balance sheet presents the planned amount of assets that are available to an enterprise at the end of a planned year and also reflects the planned financing of the enterprise at that moment – whether through equity or debt capital respectively.

Figure 7: Budgeted Balance Sheet

A presentation of the budgeted balance sheet follows in chapter 3 - Profit Plan | Finance Plan | Budgeted Balance Sheet.

2.9. Finance Plan | Budgeted Balance Sheet

Under consideration of the items presented in the finance plan, the budgeted balance sheet – for the end of the planned year – is derived from the opening balance sheet at the beginning of the planned year. Each of the figures presented in the finance plan changes one item of the balance sheet from the opening balance sheet to the budgeted balance sheet.

Figure 8: Opening Balance Sheet, Finance Plan and Budgeted Balance Sheet

2.10. Profit Plan | Finance Plan | Budgeted Balance Sheet – The Big Picture

The combination of the two connections described: Profit Plan | Finance Plan and Opening Balance Sheet | Finance Plan | Budgeted Balance Sheet results in a totally closed planning system which represents the central overall connection in accounting/controlling of an enterprise – the Big Picture.

Figure 9: Big Picture

3. Profit Plan | Finance Plan | Budgeted Balance Sheet

“Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” deals with the central accounting/controlling overall context in the enterprise – the connection between profit, liquidity and balance sheet.

In the profit plan, based on the planned turnover/sales, the planned variable and fixed costs are deducted, and so lead to the planned result before or after tax. The result of the profit plan is the planned profit or loss of the enterprise.

The compilation of the profit plan is followed by the finance plan. In the finance plan the liquidity or solvency of the enterprise is planned, based on the planned result after tax from the profit plan. The result of the finance plan is the planned surplus of cash or the demand for cash of the enterprise.

Based on the finance plan the budgeted balance sheet of the enterprise is compiled in the next step. The opening balance sheet of the planned year, or the closing balance sheet of the previous business year respectively, forms the basis for compiling the budgeted balance sheet. Based on this opening balance sheet, every item of the finance plan changes the opening balance sheet to the budgeted balance sheet.

The three elements mentioned, Profit Plan, Finance Plan and Budgeted Balance Sheet are described in more detail subsequently.

Apart from the presentation of the contents and the context between the elements Profit Plan, Finance Plan and Budgeted Balance Sheet, the connection between “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account” and “Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” is also presented.