Hi, good to see you again.
In this video, we start a discussion on the Master Budget.
In the last session,
we finished Capital Budget Analysis.
We're at the last step of the budget framework.
So, we're here in the framework take a look at the highlighted box.
At this point, we have all the other budgets' results.
So, we can aggregate them into the master budget.
The aggregation of the other budgets results goes to an income statement.
An income statement is the most relevant component of the master budget.
Having an income statement,
you can address some aspects of the balance sheet.
However, this process demands additional steps that are not in the scope of this course.
Anyway, we'll go through major aspects of the master budget.
So, talking about the income statement,
remember I emphasized the cash as the most relevant issue for a company?
Again, managers focus on financial performance and to do so,
they need to evaluate cash generation.
Cash generation is observable from the income statement.
We can make an analogy to have an idea of income statement and also a balance sheet.
Income statement is a film.
Like in a movie,
it tells the story of the company along the timeline.
Balance sheet is a picture of the company taken at a particular moment.
In the income statement,
you can analyze the cash generated throughout the film.
You cannot have the same perception looking at the balance sheet.
However, if you want to check the cash position at a precise moment,
then you can get this information from the balance sheet.
Anyway, income statement is a financial report that shows,
at the bottom line,
the net income or the loss of a company in a period of its operations.
So, if we aggregate the other budgeting steps outcomes,
we will have the income statement.
Check the income statement here in the video.
Now, let's assume the company's managers decide not to have a balance sheet.
So, it's possible that they have estimated
the final cash balance using a proxy from the income statement. How is it done?
Following few steps.
First, you start with the beginning cash of the period.
Then, you add the net income and you
add the depreciation because this is a non-cash item.
You deduct the investment in capital goods,
you have this in the capital budget.
Then, you deduct the dividends paid to the shareholders.
And then, you have the estimated final cash for the period.
Look at the cash estimation from the income statement we've just seen.
The problem is that this estimation is not accurate because it
doesn't incorporate the time when cash inflows and outflows occur.
And also, it's not possible to assess changes in the working capital.
To deal with these issues,
we need the balance sheet,
at least some of its aspects.
Well, let's stop this video here.
In the next session, we'll discuss the relevant components of the balance sheet.
Stay tuned. See you.