The data from the budgets prepared earlier are combined to prepare the budgeted income statement.
This budget helps to determine whether the profits stated in the other budgets are realizable.
The cost of goods sold is calculated based on information from the direct materials, direct labor, and factory overhead budgets. In the case of the sales budget, this is used to generate a figure for estimated revenue.
Within a company, the budget director can include information from the selling expense and general/administrative expense budget to prepare the budgeted income statement.
It contains estimated inflows of cash and other assets, which are referred to as "revenues" or "sales". Budgets also list expected outflows for expenses. Income statements may also include assumptions about increases or decreases in assets and liabilities.
The budget serves as a forecast of cash inflows and outflows. These projections determine whether or not a company will remain solvent, meaning it has enough cash on hand to pay its creditors. Budgeting also helps management analyze how well it is managing costs and revenues and thus whether or not business plans are realistic.
Both are financial statements that report revenue and expenses over a specific period of time. However, the term "budgeted" indicates that this type of income statement is part of an overall business or project plan. It also reports forecasts for assets, liabilities, and which may change during the budget period.
A budgeted income statement lets management determine whether or not cash flow projections are realistic and achievable, and aids in making decisions about business operations and long-term plans. Businesses use these statements for their own internal purposes, as well as to present investors with a picture of projected revenues and expenses.
The first part lists inflows or revenues. These are followed by outflows or expenses, which may be grouped into categories such as cost of goods sold, selling costs, administrative costs, etc. The final section records changes in assets and liabilities, such as an increase in Accounts Receivable.
About the Author
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
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