Exam 7: Planning for Profit and Cost Control

Stuart's Electronics is a relatively small company that provides computer-assisted technology to manufacturing companies.During the last few years,the company has begun to take budgeting seriously.Each year,the budget is developed during a two-day retreat of the company's top management.Lower-level employees say that the budget reflects unrealistic targets that they cannot meet even with their best efforts.What problems are there with Stuart's budgeting process,and what can be done about them?

Virginia Jackson is opening Jackson Realty on January 2.For several weeks she has been busy putting together an operating budget for the first quarter of operation for her new business.Virginia has estimated her selling and administrative (S&A)costs as follows: January February March Depreciation \ 1,000 \ 1,000 \ 1,000 Marketing expenses 2,000 1,400 1,000 Miscellaneous costs 500 400 400 Rent expense 5,000 5,000 5,000 Salary expense 4,000 8,000 8,000 Sales commissions 1,000 1,200 1,400 Utilities expense Total S\&A cost before interest All selling and administrative costs are paid when incurred except utilities,marketing expenses,and sales commissions.These items are paid in the month following the month incurred. Required: 1)Prepare a schedule of cash payments for selling and administrative expenses for January through March. 2)What liabilities,in what amounts,would be reported on the pro forma balance sheet as of March 31?

Select the incorrect statement about budgeting committees.

Which of the following would not be included in a selling and administrative expenses budget?

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

Budgeted cash payments for inventory would appear on the:

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

Select the incorrect statement about the planning process.

Which of the following is not an advantage of budgeting?

Which of the following would not be included in the inventory purchases budget?

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

What is the relationship or connection between a company's pro forma financial statements and the end-of-period financial statements reported to stockholders and other external users?

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. October November December Budgeted Cost of Goods Sold 60,000 40,000 50,000 Plus: Desired Ending Inventory 6,000 ? ? Inventory Needed 66,000 ? ? Less: Beginning Inventory 9,000 ? ? Required purchases (on Account) 57,000 ? ? What is the amount of cost of goods sold the company will report on its fourth quarter pro forma income statement?

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

Barnes Company expects to begin operating on January 1.The company's master budget contained the following operating expense budget: January February March Salary expense \ 36,000 \ 36,000 \ 36,000 Sales commissions, 5\% of sales 30,000 32,000 24,000 Utilities 2,800 2,800 2,800 Depreciation on store equipment 1,000 1,000 1,000 Rent 7,200 7,200 7,200 Miscellaneous Total operating expenses 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 accumulated depreciation appearing on the company's March 31 pro forma balance sheet is:

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: First January February March Quarter Budgeted Sales \ 200,000 \ 250,000 \ 300,000 \ 750,000 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 sale 20% in the month following sale 6% 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: Greenway Company Balance Sheet December 31, Year 1 Assets Cash \ 35,000 Account receivable 40,000 Inventory 25,000 Plant and equipment, net of depreciation Total assets Liabilities and stockholders' equity Accounts payable \ 30,000 Notes payable 50,000 Capital stock, no par 200,000 Retained earnings Total liabilities and stockholder's equity In anticipation of preparing the company's operating budget for the upcoming period,the company's accountant has gathered the following information: (a)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. (b)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. (c)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. (d)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. (e)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.

Which of the following is a benefit associated with budgeting?

The inventory purchases budget is based on which budget?

The basic cash budget format is Total cash available − Total cash disbursed = Surplus or shortage of cash +/ − Effects of financing = Ending cash.