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Exam 7: Planning for Profit and Cost Control

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Question 41

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Washington Company's balance sheet as of December 31,Year 1 is provided below: $\begin{array}{l}\quad \quad \quad \quad \quad \quad \text { Washington Company }\\\begin{array} { | l | r | } \hline \quad\quad\quad\quad\quad\quad { \text { Balance Sheet } } \\\hline \quad\quad\quad\quad\quad{ \text { December 31, 2013 } } \\\hline \text { Assets } & \$ \\\hline \text { Cash } & 25,000 \\\hline \text { Acc ounts receivable } & 40,000 \\\hline \text { Inventory } & 45,000 \\\hline \text { Plant and equipment, net of depreciation } & 290,000 \\\hline \text { Total assets } & \$ 400,000 \\\hline & \\\hline \text { Liabilities and stockholders' equity } & \\\hline \text { Accounts payable } & \$ \\\hline \text { Notes payable } & 50,000 \\\hline \text { Capital stock, no par } & 40,000 \\\hline \text { Retaine d earnings } & 200,000 \\\hline \text { Total liabilities and stockholders' equity } & \$ 110,000 \\\hline\end{array}\end{array}$ CHANGE NEEDS TO BE MADE TO TABLE Change the "2013" to: Year 1 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.

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Question 42

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

A) Receipts from customers
B) Ending cash balance
C) Interest expense
D) Depreciation expense

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

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Question 43

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

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?

Which of the following would appear on a selling and administrative expense budget,but would not appear on a schedule of cash payments for selling and administrative expenses?

The budgeting technique that provides for employee input into the planning process is known as:

The accounts payable balance at the beginning of the year was $85,000.The company purchased $380,000 worth of goods on account,and the ending balance of the payables account was $70,000. What were the total payments on account?

Which of the following statements is incorrect?

Which of the following is not an advantage of budgeting?

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

What is the total amount of S&A expenses for the fourth quarter that the company will report on its pro forma income statement?

Select the correct statement regarding the selling and administrative (S&A) expense budget.

If a company purchases its inventory on account,it need not prepare a schedule of cash payments for inventory purchases.

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

Interest expense is not included in the selling and administrative budget because a company cannot estimate interest expense until it prepares the cash budget and makes borrowing projections.

Rachel Robinson owns a small retail store in Cairo,Georgia.The following summary information regarding expectations for the month of January is provided: As of December 31 there is $1,000 in the bank and the balance in accounts receivable is $5,000.Budgeted cash and credit sales for January are $6,000 and $4,000,respectively.Ninety percent of credit sales are collected in the month of sale and the remainder is collected in the following month.Rachel's suppliers do not extend credit.Cash payments for January are expected to be $24,000.Rachel has a line of credit that enables the store to borrow funds on demand.However,funds must be borrowed on the first day of the month and interest paid in cash on the last day of the month.Rachel's bank charges annual interest of 12% per year.Rachel desires a minimum $1,000 cash balance at the end of each month. Required: 1)Compute the amount of funds that needs to be borrowed. 2)Compute the amount of interest expense that will appear on the January 31 pro forma income statement.

The following budget information is available for Crescent Company for January Year 2: Sales $ 800,000 Cost of goods sold 540,000 Utilities expense 2,500 Administrative salaries 100,000 Sales commissions 5% of sales Advertising 20,000 Depreciation on store equipment 50,000 Rent on administration building 60,000 Miscellaneous administrative expenses 10,000 Percentage of sales on credit 80% All operating expenses are paid in cash in the month incurred.The amount of expected cash outflow for selling and administrative expenses would be:

Under continuous budgeting a new month is added to the end of the budget period each time the present month expires so that a twelve-month budget is available at all times.

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

Budgeting that involves the development of a master budget to direct the firm's activities over the short-term is referred to as: