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Exam 7: Planning for Profit and Cost Control

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Question 21

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The inventory purchases budget is based on which budget?

A) Cash budget
B) Sales budget
C) Selling and administrative expense budget
D) None of the answers are correct.

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

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Question 22

Multiple Choice

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Barnes Company expects to begin operating on January 1.The company's master budget contained the following operating expense budget: $\begin{array}{lrrr}&\text { January }&\text { February }&\text { March }\\\text { Salary expense } & \$ 36,000 & \$ 36,000& \$ 36,000 \\\text { Sales commissions, 5\% of sales } & 30,000 & 32,000 & 24,000 \\\text { Utilities } & 2,800 & 2,800 & 2,800 \\\text { Depreciation on store equipment } & 1,000 & 1,000 & 1,000\\\text { Rent } & 7,200 & 7,200 & 7,200 \\\text { Miscellaneous } & \underline{ 1,800 }&\underline{ 1,800}&\underline{ 1,800 }\\\text { Total operating expenses } & \underline{ \$ 78,800} &\underline{ \$ 80,800} & \underline{ \$ 72,800}\end{array}$ 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 accumulated depreciation appearing on the company's March 31 pro forma balance sheet is:

A) $1,000.
B) $2,000.
C) $3,000.
D) $12,000.

E) C) and D)
F) B) and C)

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Question 23

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

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: $\begin{array} { c c c c c } &&&& \text { First } \\& \text { January } & \text { February } & \text { March } &\text { Quarter }\\\text { Budgeted Sales } & \$ 200,000 & \$ 250,000 & \$ 300,000 & \$ 750,000\end{array}$ 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.

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

Budgeted cash payments for inventory would appear on the:

Which of the following is a benefit associated with budgeting?

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

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. $\begin{array}{lrrr}&\text { October }&\text { November }&\text { December }\\\text { Budgeted Cost of Goods Sold } & 60,000 & 40,000 & 50,000 \\\text { Plus: Desired Ending Inventory } & 6,000 & ? & ? \\\text { Inventory Needed } & 66,000 & ? & ? \\\text { Less: Beginning Inventory } & 9,000 & ? & ? \\\text { Required purchases (on Account) } & 57,000 & ?&?\end{array}$ 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 not be included in the inventory purchases budget?

Greenhill Company's balance sheet as of December 31,Year 1 is provided below: $\begin{array}{c}\text { Greenway Company}\\\text { Balance Sheet}\\\text { December 31, Year 1}\\\begin{array}{lr}\text { Assets }\\\text { Cash } & \$ 35,000 \\\text { Account receivable } & 40,000 \\\text { Inventory } & 25,000 \\\text { Plant and equipment, net of depreciation } & \underline{ 300,000} \\\text { Total assets } & \underline{ \$ 400,000} \\\text { Liabilities and stockholders' equity }\\\text { Accounts payable } & \$ 30,000 \\\text { Notes payable } & 50,000 \\\text { Capital stock, no par } & 200,000 \\\text { Retained earnings } & \underline{ 120,000 }\\\text { Total liabilities and stockholder's equity } & \underline{\$ 400,000}\end{array}\end{array}$ 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.

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?

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

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: $\begin{array}{lccc}&\text { January } & \text { February } &\text { March }\\\text { Depreciation } & \$ 1,000 & \$ 1,000 & \$ 1,000 \\\text { Marketing expenses } & 2,000 & 1,400 & 1,000\\\text { Miscellaneous costs } & 500& 400 & 400 \\\text { Rent expense } & 5,000 & 5,000 & 5,000 \\\text { Salary expense } & 4,000 & 8,000 & 8,000 \\\text { Sales commissions } & 1,000&1,200& 1,400\\\text { Utilities expense } &\underline{ 1,000} &\underline{ 800 } &\underline{ 1,000 }\\\text { Total S\&A cost before interest } &\underline{ \$ 14,500 }&\underline{ \$ 17,800} &\underline{ \$ 17,800}\end{array}$ 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?

Which of the following is not an advantage of budgeting?

Select the incorrect statement about the planning process.

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

Select the incorrect statement about budgeting committees.