The video demonstrates how a retail company for outdoor and foul weather gear uses the classic financial budgeting process. In the fourth quarter, the process begins by starting with a sales forecast to create a business plan for the next year. These budgets are compared with actual results to measure the performance of managers and achievement of company objectives. High Sierra uses a participatory budgeting process that involves managers in various departments. Each customer account is reviewed with the appropriate sales manager. Upward and downward trends are identified and incorporated to create realistic sales budgets and obtain a collective expectation of the sales performance of the company on a monthly quarterly, and annual basis. Pro-forma balance sheets, master budget, and comparison of actual results with the budgets are used in the process to concentrate on the profitable part of its business.
Topic 1
How does the strategic plan influence preparation of the master budget? How does budgeting provide important information to managers and operating personnel? Explain how High Sierra uses the 80/20 rule, along with its budgeting process, to make major decisions to improve future profitability. Be sure to include the types of decisions a company might make based on budgets.
Topic 2
The cash budget and the budgeted statement of cash flows both provide information about cash. What information about cash is common to these two sources, and what information is unique to the two sources? Assume that in preparing the cash budget, the accountant discovers that a cash shortage will likely occur in a specific month. What actions might the accountant recommend to management to deal with the cash shortage?