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Exam 7: Planning for Profit and Cost Control

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Question 1

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Select the correct statement about the master budget.

A) The master budget is a group of detailed budgets and schedules representing the company's operating and financial plans for the past accounting period.
B) The master budget usually includes operating budgets and capital budgets, and pro forma financial statements.
C) The budgeting process usually begins with preparing the strategic budgets.
D) Preparing the master budget begins with the cash budget.

E) A) and C)
F) None of the above

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B

Question 2

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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 Stevenson's budgeting process, and what can be done about them?

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The budget is a creati...

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Question 3

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Strategic planning deals with the establishment of long term company objectives.

If a financial statement is labeled "pro forma" this means that the statement was prepared by a professional accountant (usually the firm's auditor) following a prescribed format.

Oakton Furniture provided the following information relevant to its sales for December Year 1 and the first quarter of Year 2 Based on the company's collection history, 42% of credit sales are collected in month of sale and the remainder is collected in the following month. Cash collections in January from December credit sales would be: $\begin{array}{|c|c|c|c|c|}\hline & \text { Dec. Year 1 } & \text { Jan. Year 2 } & \text { Feb. Year 2 } & \text { Mar. Year 2 } \\\hline & \text { (Actual) } & \text { (Budgeted) } & \text { (Budgeted) } & \text { (Budgeted) } \\\hline \text { Credit sales } & \$ 120,000 & \$ 280,000 & \$ 310,000 & \$ 220,000 \\\hline \text { Cash sales } & \$ 20,000 & \$ 50,000 & \$ 60,000 & \$ 24,000 \\\hline\end{array}$

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: 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.

The budgeting process formalizes and documents managerial plans to clearly communicating objectives to both superiors and subordinates. This budgeting requirement is an example of:

Cheyenne Company has budgeted the following information for June: $\begin{array} { | l | r | } \hline \text { Cash receipts } & \$ 271,000 \\\hline \text { Beginning cash balance } & 5,000 \\\hline \text { Cash payments } & 280,000 \\\hline \text { Desired ending cash balance } & 25,000 \\\hline\end{array}$ 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 June 1^st. The amount of interest paid on July 1 would be:

The master budget generally starts with a sales forecast.

Janice was questioned recently about her department's spending in excess of the budget. This is an example of using the budget for performance measurement.

Budgeted cash payments for inventory would appear on the:

Although only 20 units are on hand at the beginning of the year, World Company plans to sell 100 units during Year 2. Assuming the company desires an ending inventory of 10 units, it should plan to purchase 110 units.

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

Which of the following would not be included in the cash budget?

Which section is not included on the cash budget?

Would you recommend that a business employ a participative approach to budgeting? Why or why not?

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

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

Which of the following is generally included in a sales budget?

Pro forma financial statements are financial statements that are prepared based on budgeted future amounts.