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Exam 7: Planning for Profit and Cost Control

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Question 71

Multiple Choice

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The cash budget is based on which budget?

A) Sales budget
B) Inventory purchases budget
C) Selling and administrative expense budget
D) All of the answers are correct.

E) A) and B)
F) A) and C)

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Question 72

Multiple Choice

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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: $\begin{array}{lrrr}\text { Sales Budget } & \text { April } & \text { May }& \text { June}\\\text { Cash Sales } & 30,000 & 43,000 & 55,000 \\\text { Sales on Account } &\underline{ 370,000} &\underline{ 432,000 }&\underline{405,000}\\&\underline{400,000}&\underline{475,000}&\underline{460,000}\end{array}$ 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 budgeted cash collections for June?

A) $406,900
B) $461,900
C) $460,000
D) $424,900

E) B) and C)
F) All of the above

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Question 73

Multiple Choice

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A company's numerous specific budgets (sales,inventory purchases,etc.) together are referred to as the:

Select the correct statement about the master budget.

Washington Company's balance sheet as of December 31,Year 1 is provided below: $\begin{array}{c}\text { Washington Company}\\\text { Balance Sheet}\\\text { December 31 , Year 1}\\\begin{array}{lrr}\text { Assets }\\\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 40,000 \\\text { Inventory } & 45,000 \\\text { Plant and equipment, net of depreciation } & \underline{290,000} \\\text { Total assets } & \underline{\$ 400,000}\\\text { Liabilities and stockholders' equity } & \\\text { Accounts payable } & \$ 0,000 \\\text { Notes payable } & 40,000 \\\text { Capital stock, no par } & 200,000 \\\text { Retained earnings } & \underline{110,000 }\\\text { Total liabilities and stockholder's equity } &\underline{ \$ 400,000}\end{array}\end{array}$ In anticipation of preparing the operating budget for the upcoming period,the firm's accountant has gathered the following information: (a)Sales are budgeted at $320,000 for January Year 2.Of these sales,half will be cash sales and half will be credit sales.Eighty percent of the credit sales are collected in the month of sale,and the remainder is collected in the next month.Therefore,all of the December 31 receivables will be collected in January. (b)Inventory purchases are expected to total $200,000 during January,all on account.Sixty percent of all purchases are paid for in the month of purchase,and the remainder is paid in the following month.Therefore,all of the December 31 accounts payable will be paid during January.The inventory account is expected to have a $40,000 balance at January 31,Year 2. (c)Selling and administrative expenses for January are budgeted at $100,000 (exclusive of depreciation).S&A expenses are paid in cash.Depreciation is budgeted at $3,000 for the month. (d)The notes payable will be paid in April.There is no cash outflow related to the note in January. The sales manager wishes to purchase a new display case for the showroom during January if sufficient funds are available.The equipment has a cost of $9,000. Required: Can the company afford to purchase the display equipment without additional borrowing? Prepare a cash budget for January Year 2 to support your answer.Be sure to show your computations.

Pro forma financial statements are prepared at the end of the year and are used to evaluate the performance of managers.

Which of the following cash budget equations is incorrect?

How can participative budgeting improve the effectiveness of a company's budgeting process?

Hilliard Company budgeted the following transactions for April Year 2: $\begin{array} { l r } \text { Sales (75\% collected in month of sale) } & \$ 200,000 \\\text { Cash Operating Expenses } & 105,000 \\\text { Cash Purchases of Irvestrnents } & 75,000 \\\text { Cash Payment of Debt } & 15,000 \\\text { Depreciation on Operating Assets } & 12,000\end{array}$ The beginning cash balance was $50,000.The company desires to have a $25,000 ending cash balance.The surplus (or shortage) of cash before considering any borrowings in April would be:

The master budget includes several individual budgets,which are interdependent.Provide at least two examples of connections (relationships)among budgets.

Sales for January are budgeted at 50,000 units,and the company expects sales to increase 4% each month.How many units will need to be purchased in February if the company's policy is to keep ending inventory each month at 10,000 units?

In a participative budgeting system,budget information flows in both directions,from bottom to top and from top to bottom.

Which of the following is a benefit of participative budgeting?

Hernandez Company expects credit sales for January to be $100,000.Cash sales are expected to be $60,000.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:

Indicate whether each of the following statements is true or false.

The cash budget is not the same as the pro forma cash flow statement.

The nature of planning changes with the length of the time period being considered.Generally,the shorter the time period,the more general the plans.

The master budget details:

Vector Company seeks input from salespeople regarding the number of units they believe they can sell during the upcoming budget period.This is an example of participative budgeting.

Dobson Company expects to begin operating on January 1.The company's master budget contained the following operating expense budget: $\begin{array}{lrrr}&\text { January }&\text { February }&\text { March }\\\text { Salary expense } & \$ 40,000 & \$ 36,000 & \$ 36,000 \\\text { Sales commissions, } 5 \% \text { of sales } & 24,000 & 30,000 & 28,000 \\\text { Utilities } & 2,800 & 2,800 & 2,800 \\\text { Depreciation on store equipment } & 1,800 & 1,800 & 1,800 \\\text { Rent } & 7,200 & 7,200 & 7,200 \\\text { Miscellaneous } &\underline{ 1,800 }&\underline{ 1,800}&\underline{ 1,800} \\\text { Total operating expenses } &\underline{ \$ 77,600} &\underline{ \$ 79,600} & \underline{\$ 77,600}\end{array}$ Sales commissions are paid in cash in the month following the month in which the expense is recognized.All other expense items requiring cash payment are paid in the month in which they are recognized.The amount of cash to be paid for operating expenses during the month of January is: