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Exam 14: Planning for Profit and Cost Control

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Question 1

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Chu Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: $\begin{array}{llcc}&\text { Dec. Year } 1 &\text { Jan. Year } 2 &\text { Feb. Year } 2 &\text { Mar. Year }\\&\text { (Actual) }&\text {(Budgeted) }&\text {(Budgeted) }&\text {(Budgeted) }\\\text { Cost of goods}& \$80,000 &\$140,000 &\$180,000 &\$ 120,000 \\\text { sold }\end{array}$ Desired ending inventory levels are 25% of the following month's projected cost of goods sold. Budgeted purchases of inventory in February Year 2 would be:

A) $135,000.
B) $165,000.
C) $180,000.
D) $225,000.

E) A) and C)
F) None of the above

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Question 2

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Bright Minds Toy Company prepared the following sales budget for the second quarter. Projected sales for each of the first three months of operations are as follows: $\begin{array}{lccc}\text { Sales Budget } & \text { April } & \text { May } & \text { June } \\\text { Cash sales } & 30,000 & 43,000 & 55,000 \\\text { Sales on account } & \underline{ 370,000 }& \underline{432,000 }& \underline{ 405,000}\\& \underline{400,000}& \underline{475,000}& \underline{460,000}\end{array}$ - Bright Minds expects to collect 70% of the sales on account in the month of sale, 20% in the month following the sale, and the remainder in the second month following the sale. What is the amount of sales revenue that the company will report on the second quarter pro forma income statement?

A) $1,335,000
B) $1,129,800
C) $1,207,000
D) $1,001,800

E) None of the above
F) A) and B)

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Question 3

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Payne Company provided the following information relevant to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: $\begin{array}{llcc}&\text { Dec. Year } 1 &\text { Jan. Year } 2 &\text { Feb. Year } 2 &\text { Mar. Year }\\&\text { (Actual) }&\text {(Budgeted) }&\text {(Budgeted) }&\text {(Budgeted) }\\\text { Cost of goods}& \$80,000 &\$140,000 &\$180,000 &\$ 120,000 \\\text { sold }\end{array}$ Desired ending inventory levels are 25% of the following month's projected cost of goods sold. The company purchases all inventory on account. January Year 2 budgeted purchases are $150,000. The normal schedule for inventory payments is 60% payment in month of purchase and 40% payment in month following purchase. Budgeted cash payments for inventory in February Year 2 would be:

Tableware Unlimited Company plans to sell china and other dining-related items over the internet. The company plans to begin business on January 1, Year 1. The company's accountant has prepared the following sales budget for the first quarter of Year 1: $\begin{array} { r c c c c } & \text { January } & \text { February } & \text { March } & \text { First Quarter } \\\text { Budgeted Sales } & \$ 200,000 & \$ 250,000 & \$ 300,000 & \$ 750,000\end{array}$ In anticipation of preparing a cash budget, the accountant needs to compute the expected monthly cash collections. Because the company is new and has no collection experience of its own, the accountant contacted an industry trade group and obtained the following industry collection data: Collections on account:70% in the month of sale20% in the month following sale6% in the second month following sale Uncollectible accounts have averaged 4% of receivables. The company gives a 2% discount for payments made by customers during the month of sale. Required: Prepare a schedule of cash collections from sales by month and in total for the first quarter.

Greenhill Company's balance sheet as of December 31, Year 1 is provided below: $\begin{array}{c}\text {Washington Company}\\\text {Balance Sheet}\\\text {December 31, Year 1}\\\\\begin{array}{lr}\text { Assets }\\\\\text { Cash } & \$ 35,000 \\\text { Accounts receivable } & 40,000 \\\text { Inventory } &25,000 \\\text { Plant and equipment, net of depreciation } & \underline{ 300,000} \\\text { Total assets } & \underline{ \$400,000}\\\text { Liabilities and stockholders' equity }\\\\\text { Accounts payable } & \$30,000 \\\text { Notes payable } &50,000 \\\text { Capital stock, no par } & 200,000 \\\text { Retained earnings } & \underline{ 120,000 }\\\text { Total liabilities and stockholder's equity } & \underline{\$ 400,000}\end{array}\end{array}$ In anticipation of preparing the company's operating budget for the upcoming period, the company's accountant has gathered the following information:December Year 1 sales were $220,000. Sales are expected to grow at a rate of 8% per month. Half of all sales are for cash and half are on account.Inventory purchases are expected to total $100,000 during January, and the inventory account is expected to have a $28,000 balance at January 31, Year 2. All inventory purchases are on account.Selling and administrative expenses for January Year 2 are budgeted at $60,000 (exclusive of depreciation) plus 10% of sales. Selling and administrative expenses are paid in cash. Depreciation is budgeted at $3,000 for the month.The notes payable will be paid in January, Year 2. The amount due will be $50,500. The $500 represents interest expense for the month of January, Year 2.The company expects to purchase a new machine during January Year 2 at a cost of $5,000.Required:Prepare a budgeted income statement for the month of January Year 2. Use the traditional income statement format and ignore income taxes.

Although only 20 units are on hand at the beginning of the year, World Company plans to sell 100 units during Year 2. Assuming the company desires an ending inventory of 10 units, it should plan to purchase 110 units.

If a company purchases its inventory on account, it need not prepare a schedule of cash payments for inventory purchases.

Which of the following would not be included in the cash budget?

Select the incorrect statement regarding the cash budget.

How might a company develop sales estimates to be used in preparing a sales budget?

The master budget generally starts with a sales forecast.

Budgeting that involves the development of a master budget to direct the firm's activities over the short term is referred to as:

Select the correct statement about budgeting and human behavior.

Which of the following is a benefit associated with budgeting?

The budgeting process formalizes and documents managerial plans to clearly communicate objectives to both superiors and subordinates. This budgeting requirement is an example of:

The budgeting process that involves adding a month to the end of the budget period at the end of each month, thus maintaining a twelve-month planning horizon, is referred to as:

Hernandez Company expects credit sales for January to be $48,000. Cash sales are expected to be $28,000. The company expects credit and cash sales to increase 10% for the month of February. Credit sales are collected in the month following the month in which sales are made. Based on this information, the amount of cash collections in February would be:

Select the correct statement.

Which of the following budgets needs to be prepared prior to preparing an inventory purchases budget?

Managerial accounting is not bound by generally accepted accounting principles (GAAP) but clearly is influenced by GAAP. How do budgets and the budgeting process demonstrate connections to GAAP?