154 Accounting for Non-Accountants
Capital Budget The capital budget is concerned with those items that will last longer than one year: the company’s Long-Term Assets. To determine if any additional space would need to be rented or built, the business must do a long-range sales forecast. Assuming that the business is growing at a fairly constant rate, Sam has predicted that within two years another building must be purchased in order to meet the business’s production and sales demands. Sam’s research of local real estate indicates that the cost of a building with sufficient space for the next five years would be $48,000. Therefore the capital budget per month for the next two years (when the purchase will actually have to be made, since Sam does not want to incur any additional debt by taking out a mortgage on this building) would be $2,000 ($48,000/24 months). In order to purchase the building two years from now, $2,000 must be set aside every month for the next two years. (This assumes no inflation during the next two years.) With the information that has been gathered to this point, it is now possible to create a cash budget and a budgeted Income Statement, Balance Sheet, and cash flow. Let’s examine this information.
Budgeted Income Statement Using the figures calculated earlier, Sam can create a budgeted Income Statement like the one shown in figure 10.2:
SOLANA BEACH BICYCLE COMPANY Budgeted Income Statement For the Year Ended December 31, 2011
Figure 10.2:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,000 Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,000
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,000 Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income from Operations . . . . . . . . . . . . . . . . . . .
17,850 $33,150
Other Revenue: Repair Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9,500