Companies prepare various financial statements that report several aspects of their operations. Usually, companies use the balance sheet and income statement to provide a picture of those operations. On top of that, companies may also prepare the cash flow statement and statement of changes in equity. Each of these plays a role in presenting a picture of the company’s activities.
While the financial statements are external documents, companies also prepare internal records. Some of these records help in similar activities, while others are for control purposes. One of those includes budgets, which companies prepare annually. A budget is a financial record that sets a plan for future activities. Once completed, these tools can also help companies control and monitor actual results.
Companies also prepare budgeted financial statements. These financial statements include the elements of budgeting. Usually, companies prepare a budgeted balance sheet and income statement. Of these, the latter has relatively more importance. Companies prepare the budgeted income statement for various reasons. Before discussing that, however, it is crucial to understand what an income statement is.
What is an Income Statement?
An income statement is one of the primary financial statements prepared by companies. Usually, it is the most preferred financial statement among investors and shareholders. The income statement holds a record of a company’s revenues and expenses. When presenting these, it also calculates the different types of profits. Another name used for this statement is the statement of financial performance.
On top of that, the income statement is also called the statement of profit or loss. Both of these names justify the statement’s primary objective. Firstly, it presents a picture of a company’s financial performance for an accounting period. It does so by showing the profits or losses for that period. Therefore, the name statement of profit or loss shows its objective in reporting those profits or losses.
The income statement also segregates the different types of expenses presented on it. Usually, these include the cost of goods sold, administrative expenses, financial expenses, and taxes. It may also consist of marketing, selling, and other expenses. Furthermore, the income statement also presents these expenses under different sections. It categorizes those expenses depending on the type of profits they help calculate.
The income statement presents a picture of the financial performance during a period. It shows how much profits or losses the company has made. Usually, these aspects are significantly critical for investors to judge how a company has performed. On top of that, shareholders and other stakeholders also require this information. The income statement is also crucial in presenting the overall profits generated from products and operations.
Overall, the income statement is one of the primary financial statements along with the balance sheet. It presents two critical aspects of a company’s operations. The first includes the financial performance during an accounting period. In contrast, it also shows the revenues and expenses for that period. These aspects are crucial in allowing stakeholders to measure the company’s financial health.
What is a Budgeted Income Statement?
A budgeted income statement applies the principles of budgeting to the income statement. It is a financial report that lists estimated revenues, expenses, and profits. Usually, it includes the use of forecasting techniques to make estimations. It is a crucial part of a company’s operating budget. Most companies prepare the budgeted income statement for a single period, mostly annually.
The budgeted income statement contains all the elements of a traditional income statement. Therefore, it will consist of the revenues, cost of sales, operating expenses, financial expenses, etc. However, it does not represent actual results from past operations. On the contrary, the budgeted income statement predicts those elements. In other words, it projects what the income statement will look like in the future.
The budgeted income statement requires companies to make some assumptions. These assumptions relate to how a company perceives its future operations to occur. Therefore, companies assess the impact of any future changes in the operating activities. Based on that assessment, they increase or decrease the elements in the income statement. Usually, companies use other budgets to plug numbers into the budgeted income statement.
Companies prepared budgeted income statements for various reasons. One of these includes testing whether the projected figures seem to be reasonable. However, companies may also prepare these to satisfy the needs of some stakeholders. In particular, some credits may require companies to provide a budgeted income statement. On top of that, companies may also use it to analyze various scenarios and their impact on profits.
Budgeted income statements use budgeting techniques to report revenues, expenses, and profits. However, these elements do not come from historical activities. Instead, companies use budgeting techniques to forecast them for future periods. Companies prepare various types of budgets. From these budgets, the company obtains figures for the budgeted income statement.
How to prepare a Budgeted Income Statement?
When preparing a budgeted income statement, companies must follow various steps. As mentioned, companies prepare this income statement as a part of their operating budgets. Usually, the figures from those operating budgets become the base for use in the budgeted income statement. Nonetheless, companies must follow the steps below to prepare a budgeted income statement.
Estimate sales
The first step in preparing a budgeted income statement is to estimate the sales. Companies do so by setting revenue goals for the period in consideration. Companies can do so by increasing or decreasing their current performance for the future. Once companies establish those goals, they can estimate the number of units they will sell. Based on that estimation, they can calculate the total sales revenues.
Estimate the cost of goods sold
Once companies estimate their sale units, they can also calculate the cost of goods sold. Usually, this expense is variable and depends on a company’s sale activity. Companies can calculate the cost of goods sold by multiplying the predicted sales units with the estimated costs. Based on that, they can also add any fixed overheads to the amount. The resultant number will provide the cost of goods sold.
Calculate the operating expenses
Companies must also estimate the operating expenses they expect to incur for the budgeted period. These expenses usually include fixed amounts. However, companies may expect them to grow in the future. Therefore, companies must increase them based on their prediction. Once they do so, they can calculate the total operating expenses for the period in consideration.
Calculate other expenses
After calculating the operating expenses, companies must estimate other expenditures. Usually, these include financial expenses and income taxes. The former comes from the contracts made with different creditors. Companies can measure them based on those contracts or schedules provided by creditors. In contrast, income taxes may relate to the tax laws in the jurisdiction where companies operate.
Calculate profits or income
Once companies estimate the sales and different types of expenses, they must calculate their profits. These will include the gross, operating and net profits. For these, estimating the previous figures is highly crucial. The different types of income are the essence of the budgeted income statement. However, companies must ensure they are reasonable.
Prepare the budgeted income statement
Once companies have the above figures, they must put them in an income statement format. Usually, this format involves starting from revenues and ending on the net profits. The budgeted income statement does not fall under accounting standards. Nonetheless, companies must use the format to allow for better comparability.
Conclusion
Companies prepare various financial statements that are crucial in reporting their operations. Some companies also prepare budgeted financial statements. Usually, the budgeted income statement is the most prevalent of those statements. It includes a company’s projected revenues, expenses, and profits. Companies must go through several steps to prepare the budgeted income statement.