Exam 7: Budgeting

Reference: 07-03 Information on the actual sales and inventory purchases of the Law Company for the first quarter follows: Sales Inventory Purchases January \ 120,000 \ 60,000 February \ 100,000 \ 78,000 March \ 130,000 \ 90,000 Collections from Law Company's customers are normally 60% in the month of sale, 30% in the month following sale, and 8% in the second month following sale. The balance is uncollectible. Law Company takes full advantage of the 3% discount allowed on purchases paid for by the end of the following month. The company expects sales in April of $150,000 and inventory purchases of $100,000. Operating expenses for the month of April are expected to be $38,000, of which $15,000 is salaries and $8,000 is depreciation. The remaining operating expenses are variable with respect to the amount of sales in dollars. Those operating expenses requiring a cash outlay are paid for during the month incurred. Law Company's cash balance on March 1 was $43,000, and on April 1 was $35,000. -The expected cash disbursements during April for inventory purchases would be:

There are various budgets within the master budget. One of these budgets is the production budget. Which of the following BEST describes the production budget?

In a traditional incremental approach to budgeting, there is usually the assumption that the previous year's budget is used as a starting point.

Which of the following statements is true about zero-based budgeting

The direct materials to be purchased for a period can be obtained by subtracting the desired ending inventory of direct materials from the total direct materials needed for the period.

A self-imposed budget can be a very effective device to control and evaluate a manager's performance in an organization.

What is the budgeted accounts receivable balance on June 1 of the current year:

Reference: 07-14 A cash budget by quarters for the Carney Company is given below (note that some data are missing). Missing data amounts have been keyed with either question marks or lower case letters (a, b, c, etc.); these lower case letters will be referred to in the questions that follow. (It may be necessary to calculate a value for items where a question mark appears.) The company requires a minimum cash balance of at least $10,000 to start a quarter. All data are in thousands. Carney Company Cash Budget Quarters 1 2 3 4 Cash balance, beginning \ 16 \ \ 13 \ 10 Add collections from customers a 70 67 80 Total cash available ? ? 80 90 Less disbursements: Purchase of inventory 31 40 35 Operating expenses 35 22 ? 15 Equipment purchases 10 14 19 0 Dividends 0 6 0 5 Total disbursements 66 ? 55 Excess (deficiency) of cash available over disbursements 7 17 (2) 35 Financing: Borrowings - 12 - Repayments (including interest) - - (21) Total financing ? ? 12 (21) Cash balance, ending ? \ 10 \ 14 -The total disbursements during the third quarter (item f in thousands)are:

Budgets are used for planning rather than for control of operations.

Sales forecasts are drawn up after the cash budget has been completed since only then are the funds available for marketing known.

Reference: 07-02 Justin's Plant Store, a retailer, started operations on January 1. On that date, the only assets were $16,000 in cash and $3,500 in merchandise inventory. For purposes of budget preparation, assume that the company's cost of goods sold is 60% of sales. Expected sales for the first four months appear below. Expected Sales January \ 10,000 February 24,000 March 16,000 April 25,000 The company desires that the merchandise inventory on hand at the end of each month be equal to 50% of the next month's merchandise sales (stated at cost). All purchases of merchandise inventory must be paid in the month of purchase. Sixty percent of all sales should be for cash; the balance will be on credit. Seventy-five percent of the credit sales should be collected in the month following the month of sale, with the balance collected in the following month. Variable operating expenses should be 10% of sales and fixed expenses (all depreciation) should be $3,000 per month. Cash payments for the variable operating expenses are made during the month the expenses are incurred. -In a budgeted income statement for the month of February, net income would be:

The usual starting point in budgeting for a for-profit organization is to make a forecast of cash receipts and cash disbursements.

When using the self-imposed budget approach, it is generally best for top management to accept all budget estimates without question in order to minimize adverse behavioural responses from employees.

Which one of the following tasks should be done first, when developing a comprehensive budget for a manufacturing company?

The Willsey Merchandise Company has budgeted $40,000 in sales for the month o? December. The company's cost of goods sold is 30% of sales. If the company has budgeted to purchase $18,000 in merchandise during December, then the budgeted change in inventory levels over the month of December is:

Reference: 07-02 Justin's Plant Store, a retailer, started operations on January 1. On that date, the only assets were $16,000 in cash and $3,500 in merchandise inventory. For purposes of budget preparation, assume that the company's cost of goods sold is 60% of sales. Expected sales for the first four months appear below. Expected Sales January \ 10,000 February 24,000 March 16,000 April 25,000 The company desires that the merchandise inventory on hand at the end of each month be equal to 50% of the next month's merchandise sales (stated at cost). All purchases of merchandise inventory must be paid in the month of purchase. Sixty percent of all sales should be for cash; the balance will be on credit. Seventy-five percent of the credit sales should be collected in the month following the month of sale, with the balance collected in the following month. Variable operating expenses should be 10% of sales and fixed expenses (all depreciation) should be $3,000 per month. Cash payments for the variable operating expenses are made during the month the expenses are incurred. -The accounts receivable balance that would appear in the March 31 budgeted balance sheet would be:

On a budgeted balance sheet, the cash number is the ending cash balance as projected by the cash budget.

Reference: 07-14 A cash budget by quarters for the Carney Company is given below (note that some data are missing). Missing data amounts have been keyed with either question marks or lower case letters (a, b, c, etc.); these lower case letters will be referred to in the questions that follow. (It may be necessary to calculate a value for items where a question mark appears.) The company requires a minimum cash balance of at least $10,000 to start a quarter. All data are in thousands. Carney Company Cash Budget Quarters 1 2 3 4 Cash balance, beginning \ 16 \ \ 13 \ 10 Add collections from customers a 70 67 80 Total cash available ? ? 80 90 Less disbursements: Purchase of inventory 31 40 35 Operating expenses 35 22 ? 15 Equipment purchases 10 14 19 0 Dividends 0 6 0 5 Total disbursements 66 ? 55 Excess (deficiency) of cash available over disbursements 7 17 (2) 35 Financing: Borrowings - 12 - Repayments (including interest) - - (21) Total financing ? ? 12 (21) Cash balance, ending ? \ 10 \ 14 -The borrowing required during the first quarter to meet the minimum cash balance (item b in thousands)is:

In preparing a master budget for a commercial entity, the last schedule prepared is usually the cash budget which summarizes all the previously prepared schedules and provides all information required for control purposes.

As the sales forecast is the usual starting point for budgeting, not-for-profit entities do not prepare budgets as they have no sales.