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Exam 14: Planning for Profit and Cost Control

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Question 31

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Purchases on account are given below: $\begin{array} { | r | r | r | } \hline \text { October } & \text { November } & \text { December } \\\hline 30,000 & 40,000 & 50,000 \\\hline\end{array}$ 55% of the month's purchases will be paid in the month of the purchase; the remaining 45% will be paid in the following month. How much will the cash payments for purchases be in December?

A) $44,500
B) $50,000
C) $46,000
D) $45,500

E) C) and D)
F) A) and C)

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Question 32

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The responsibility for the coordination of a company's budgeting activities normally rests with the CFO.

A) True
B) False

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Question 33

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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.

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.

Which of the following budgets would be prepared by a manufacturing company but not a merchandising company?

Although only 20 units are on hand at the beginning of the year, World Company plans to sell 100 units during 2014. Assuming the company desires an ending inventory of 10 units, it should plan to purchase 110 units.

Markham Company has completed its sales budget for the first quarter of 2014. Projected credit sales for the first four months of the year are shown below: $\begin{array} { | l | l | } \hline \text { January } & \$ 30,000 \\\hline \text { February } & \$ 36,000 \\\hline \text { March } & \$ 45,000 \\\hline \text { April } & \$ 48,000 \\\hline\end{array}$ The company's past records show collection of credit sales as follows: 40% in the month of sale and the balance in the following month. The total cash collection from receivables in March is expected to be:

Planning concerned with long-range decisions such as defining the scope of the business is referred to as:

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.

Which of the following cash budget equations is incorrect?

Managerial accounting is not bound by generally accepted accounting principles (GAAP) but clearly is influenced by GAAP. Budgets and the budgeting process demonstrate connections to GAAP. Discuss.

Barnes Company expects to begin operating on January 1. The company's master budget contained the following operating expense budget: $\begin{array} { | l | r r | r | } \hline& { \text { January } } & { \text { February } } &{ \text { March } } \\\hline \text { Salary expense } & \$ 36,000 & \$ 36,000 & \$ 36,000 \\\hline \text { Sales commissions, } 5 \% \text { of sales } & 30,000 & 32,000 & 24,000 \\\hline \text { Utilities } & 2,800 & 2,800 & 2,800 \\\hline \text { Depreciation on store equipment } & 1,000 & 1,000 & 1,000 \\\hline \text { Rent } & 7,200 & 7,200 & 7,200 \\\hline \text { Miscellaneous } & 1,800 & 1,800 & 1,800 \\\hline \text { Total operating expenses } & \$ 778,800 & \$ 80,800 & \$ 72,800 \\\hline\end{array}$ 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:

Indicate whether each of the following statements about a cash budget is true or false. 1. A cash budget helps managers to anticipate cash shortages and excess cash balances. 2. The cash budget has two main sections: a cash deficit section and a financing section. 3. The total cash available is calculated by adding cash receipts and the ending cash balance. 4. Cash payments may include outflows for inventory, selling and administrative expenses, and depreciation. 5. Cash inflows and outflows indicated on the cash budget are reported on a company's pro forma statement of cash flows.

Budgeted depreciation expense would not appear on a:

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: $\begin{array}{|lrrr}\text { Sales Budget } &\text { April } &\text { May } &\text { June }\\\text { Cash Sales } & 30,000 & 43,000 & 55,000 \\\text { Sales on Account } & 370,000 & 432,000 & 405,000 \\\hline&400,000&475,000&460,000\end{array}$ Bright Minds expects to collect 70% of the sales on account in the month of sale, and 20% in the month following the sale, and the remainder in the second month following the sale. What is the amount of sales revenue that the company will report on the second quarter pro forma income statement?

Indicate whether each of the following statements is true or false. 1. A master budget is a group of detailed, related budgets and schedules. 2. The master budget includes only operating budgets. 3. Capital budgets include projections for purchases of property, plant, and equipment. 4. A sales budget includes a schedule of cash payments for inventory. 5. The first step in preparing the master budget is to prepare an estimate of cash that will be needed during the period.

How do budget expectations influence a company's employees?

Benton Company's sales budget shows the following expected total sales: $\begin{array} { | l | c | } \hline { \text { Month } } & \text { Sales } \\\hline \text { January } & \$ 25,000 \\\hline \text { February } & \$ 30,000 \\\hline \text { March } & \$ 35,000 \\\hline \text { April } & \$ 40,000 \\\hline\end{array}$ The company expects 80% of its sales to be on account (credit sales) . Credit sales are collected as follows: 25% in the month of sale, 72% in the month following the sale with the remainder being uncollectible and written off. The total cash inflows from sales in April would be:

Indicate whether each of the following statements is true or false. 1. A pro forma income statement provides a review of a company's profitability over the past year. 2. Budgets are usually prepared using spreadsheet software. 3. The pro forma statement of cash flows is essentially the same as the cash budget. 4. Pro forma financial statements must be prepared near the end of the budgeting process because they are affected by each of a company's budgets. 5. Once the master budget is prepared, company managers should continue to review the budget and adjust it for changes in assumptions or conditions.

Skymont Company wants an ending inventory each month equal to 30% of that month's cost of goods sold. Cost of goods sold for February is projected at $45,000. Ending inventory at the end of January was $12,000. Based on this information, purchases for February would be: