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Exam 14: Planning for Profit and Cost Control

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Question 41

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The three major components of the master budget are the financial budgets, the capital budgets, and the pro forma financial statements.

A) True
B) False

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Question 42

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Under continuous budgeting a new month is added to the end of the budget period each time the present month expires so that a twelve-month budget is available at all times.

A) True
B) False

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Question 43

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Sentra Sporting Company sells tennis rackets and other sporting equipment. The purchasing department manager prepared the inventory purchases budget. Sentra's policy is to maintain an ending inventory balance equal to 15% of the following month's cost of goods sold. January's budgeted cost of goods sold is $70,000. What is the amount of cost of goods sold the company will report on its fourth quarter pro forma income statement?

With regards to financial statements, "pro forma" means:

Which of the following would represent the order in which most master budgets are prepared?

Compton Company expects the following total sales: $\begin{array} { | l | c | } \hline \text { Month } & \text { Sales } \\\hline \text { March } & \$ 30,000 \\\hline \text { April } & \$ 20,000 \\\hline \text { May } & \$ 30,000 \\\hline \text { June } & \$ 25,000 \\\hline\end{array}$ The company expects 60% of its sales to be credit sales and 40% for cash. Credit sales are collected as follows: 30% in the month of sale, 68% in the month following the sale with the remainder being uncollectible and written off. The budgeted accounts receivable balance on May 31 is:

Which of the following accounts would appear on the sales budget and the pro forma income statement?

Expressing plans for a business in financial terms is commonly called:

Indicate whether each of the following statements is true or false. 1. An inventory purchases budget is prepared based on sales projections from the sales budget. 2. The amount of budgeted purchases of inventory equals cost of goods sold plus the beginning inventory less ending inventory. 3. The inventory purchases budget generally includes a schedule of cash payments for the period. 4. The amount of cost of goods sold reported on the pro forma income statement comes from the inventory purchases budget. 5. The inventory purchases budget indicates the amount expected for ending inventory, which is reported on the pro forma income statement.

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

Which of the following is not a benefit of budgeting?

Which of the following is not considered a pro forma financial statement?

Washington Company's balance sheet as of December 31, 2013 is provided below: 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 2014. 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, 2014. (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 2014 to support your answer. Be sure to show your computations.

Sentra Sporting Company sells tennis rackets and other sporting equipment. The purchasing department manager prepared the inventory purchases budget. Sentra's policy is to maintain an ending inventory balance equal to 15% of the following month's cost of goods sold. January's budgeted cost of goods sold is $70,000. What is the amount of ending inventory that the company will report on its pro-forma balance sheet?

One of the tasks that managers at Omaha Company have to complete during the budgeting process is to develop a contingency plan for their organization in case a downturn occurs in their business. This budgeting requirement is an example of:

Purchases on account are given below: $\begin{array} { | r | r | r | } \hline \text { October } & \text { November } & \text { December } \\\hline 30,000 & 40,000 & 50,000 \\\hline\end{array}$ 55% of the month's purchases will be paid in the month of the purchase; the remaining 45% will be paid in the following month. The accounts payable balance at the beginning of the year was $85,000. The company purchased $380,000 worth of goods on account, and the ending balance of the payables account was $70,000. What were the total payments on account?

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

Spacely Sprockets' sales budget shows the following expected total sales: $\begin{array} { | l | l | } \hline \text { Month } & \text { Sales } \\\hline \text { January } & \$ 30,000 \\\hline \text { February } & \$ 40,000 \\\hline \text { March } & \$ 35,000 \\\hline \text { April } & \$ 30,000 \\\hline\end{array}$ The company expects 80% of its sales to be on account (credit sales). Credit sales are collected as follows: 30% in the month of sale, 68% in the month following the sale with the remainder being uncollectible and written off in the month following the sale. Required: a) Calculate budgeted accounts receivable at the end of each month from February through April. b) Calculate budgeted cash inflows from collection of receivables for each month from February through April.

Janice was questioned recently about her department's spending in excess of the budget. This is an example of using the budget for performance measurement.

Bonnie's Bakery is a relatively small company that makes pies, cakes, and cookies sold in supermarkets. Sales employees' bonuses are determined based on meeting or exceeding the budget. For the coming year, sales employees have set a budget target of 3 percent for sales growth. The market has been growing at 6 percent, and the company has averaged 10 percent growth for the last two years. What is the problem here, and how can it be fixed?