Exam 7: Planning for Profit and Cost Control

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

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

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.

Which of the following is a benefit of participative budgeting?

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?

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:

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.

The master budget details:

Select the correct statement about the master budget.

Which of the following cash budget equations is incorrect?

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

Dobson Company expects to begin operating on January 1.The company's master budget contained the following operating expense budget: January February March Salary expense \ 40,000 \ 36,000 \ 36,000 Sales commissions, 5\% of sales 24,000 30,000 28,000 Utilities 2,800 2,800 2,800 Depreciation on store equipment 1,800 1,800 1,800 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 cash to be paid for operating expenses during the month of January is:

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

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: Sales Budget April May June Cash Sales 30,000 43,000 55,000 Sales on Account 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?

The cash budget is based on which budget?

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

Hilliard Company budgeted the following transactions for April Year 2: Sales (75\% collected in month of sale) \ 200,000 Cash Operating Expenses 105,000 Cash Purchases of Irvestrnents 75,000 Cash Payment of Debt 15,000 Depreciation on Operating Assets 12,000 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:

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

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

Washington Company's balance sheet as of December 31,Year 1 is provided below: Washington Company Balance Sheet December 31 , Year 1 Assets Cash \ 25,000 Accounts receivable 40,000 Inventory 45,000 Plant and equipment, net of depreciation Total assets Liabilities and stockholders' equity Accounts payable \ 0,000 Notes payable 40,000 Capital stock, no par 200,000 Retained earnings Total liabilities and stockholder's equity 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.