Budgeted Financial Statements

The final step in the budgeting process is the development of budgeted (pro forma) financial statements for the period. These financial statements reflect the results that will be achieved if the estimates and assumptions used for all previous budgets actually occur. Such statements allow management to determine whether the predicted results are acceptable. If they are not acceptable, management has the opportunity to change and adjust items before the period for which the budget is being prepared begins.
 

When expected net income is not considered reasonable, management may investigate the possibility of raising selling prices or finding ways to decrease costs. Any specific changes considered by management might have related effects that must be included in the revised projections. 

 

For example, raising selling prices may decrease volume. Alternatively, reductions in costs from using lower-grade material could increase spoilage during production or cause a decline in demand. With the availability of the computer, changes in budget assumptions and their resultant effects can be simulated quickly and easily.