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Exam 14: Planning for Profit and Cost Control

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Question 41

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Benton Company's sales budget shows the following expected total sales: $\begin{array}{ll}\text { Month}& \text {Sales }\\ \text { January } & \$ 25,000 \\\text { February } &\$ 29,000 \\\text { March } & \$ 34,000 \\\text { April } &\$41,000\end{array}$ The company expects 70% of its sales to be on account (credit sales) . Credit sales are collected as follows: 25% in the month of sale and 67% in the month following the sale, with the remainder being uncollectible and written off. The total cash receipts during April would be:

A) $19,200.
B) $21,525.
C) $27,105.
D) $35,421.

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

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Question 42

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The cash budget includes three sections: (1) operating activities, (2) investing activities, and (3) financing activities.

A) True
B) False

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Question 43

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-What is the amount of sales commissions payable that the company will report on its pro forma balance sheet at the end of the fourth quarter?

Why is cash management important to a business?

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.

Which of the following is a benefit of participative budgeting?

Barnes Company expects to begin operating on January 1. The company's master budget contained the following operating expense budget: $\begin{array}{lrrr}&\text { January}&\text { February}&\text { March }\\\text { Salary expenses } & \$ 40,000 & \$ 36,000 & \$ 36,000 \\\text { Sales commissions, } 5\% \text { of sales } & 30,000 & 32,000 & 24,000 \\\text { Utilities } & 2,800 & 2,800 & 2,800 \\\text { Depreciation on store equipment } &1,000 & 1,000 & 1,000\\\text { Rent } & 7,200& 7,200& 7,200 \\\text { Miscellaneous } & \underline{ 1,800}& \underline{1,800}& \underline{1,800 }\\\text { operating expenses } & \underline{ \$ 78,800}& \underline{\$80,800}& \underline{\$72,800}\end{array}$ 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:

Washington Company's balance sheet as of December 31, Year 1 is provided below: $\begin{array}{c}\text {Washington Company}\\\text {Balance Sheet}\\\text {December 31, Year 1}\\\\\begin{array}{lr}\text { Assets }\\\\\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 40,000 \\\text { Inventory } & 45,000 \\\text { Plant and equipment, net of depreciation } & \underline{ 290,000} \\\text { Total assets } & \underline{ \$400,000}\\\text { Liabilities and stockholders' equity }\\\\\text { Accounts payable } & \$ 50,000 \\\text { Notes payable } & 40,000 \\\text { Capital stock, no par } & 200,000 \\\text { Retained earnings } & \underline{ 110,000 }\\\text { Total liabilities and stockholder's equity } & \underline{\$ 400,000}\end{array}\end{array}$ In anticipation of preparing the operating budget for the upcoming period, the firm's accountant has gathered the following information: 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.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.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.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.

A schedule of cash receipts is often prepared in conjunction with the sales budget.

Valley Farm Supply started the period with $80,000 cash. Cash receipts for January were expected to total $350,000. Cash disbursements for January were expected to be $290,000. What is the expected cash balance at the end of January?

Which of the following would be prepared first when a merchandising company uses a master budget?

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?

Select the incorrect statement about the planning process.

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

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. $\begin{array}{lccc}&\text { October}&\text { November }&\text { December }\\\text { Budgeted cost of goods sold } & 60,000 & 40,000 &50,000\\\text { Plus: Desired ending inventory } & 6,000 & ?&? \\\text { Inventory needed } &66,000& ? &? \\\text { Less: Beginning inventory } & 9,000 & ?&? \\\text { Required purchases (on account) } & 57,000 & ? & ? \end{array}$ -What is the amount of cost of goods sold the company will report on its fourth quarter pro forma income statement?

The inventory purchases budget is based on which budget?

Proper handling of human relations is essential to the establishment of an effective budgeting system. There is a natural tendency for people to be uncomfortable with budgets. Describe how participative budgeting helps create a healthy atmosphere surrounding the budgeting process.

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

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

Bantam Industries has budgeted the following information for March: $\begin{array}{llr} \text { Cash receipts } &\$271,000\\ \text {Beginning cash balance } &5,000\\ \text { Cash payments } &280,000\\ \text { Desired ending cash balance } &25,000\end{array}$ If there is a cash shortage, the company borrows money from the bank. All cash is borrowed at the beginning of the month in $1,000 increments, and interest is paid monthly at 1% on the first day of the following month. The company had no debt before March 1. How much cash will the company need to borrow in March?