Study Probes - Chapters 40 - 41 Solutions

Problem 1 - Martinez Corporation's sales of gizmos are 25% for cash and 75% on credit. Past collection history indicates that credit sales are collected as follows:

 In The Month Of Sale In the Month After Sale In The Second Month After Sale Uncollectible 30% 50% 15% 5%

In January, sales were \$80,000 and February sales were \$70,000. Projected sales for March are 3,000 gizmos at \$13 each. Projected sales for April are 4,000 gizmos at \$14 each.  Prepare the budgeted cash collections for April in the space provided.

Sales during March: 3,000 x \$13 = \$39,000

Sales during April: 4,000 x \$14 = \$56,000

Budgeted Cash Collections for April

 Collections from April Sales: Cash sales (25% x \$56,000) \$ 14,000 Credit sales (75% x \$56,000 x 30%) 12,600 Collections from March Sales: Credit sales (75% x \$39,000 x 50%) 14,625 Collections from February Sales: Credit sales (75% x \$70,000 x 15%) 7,875 Cash collections during April \$ 49,100

Problem 2 -  Werth’s Widgets pays for 30% of its inventory purchases in the month of the purchase and the remainder in the following month. The company’s inventory purchases totaled \$65,000 in October, \$87,000 in November, and \$52,000 in December. During November, Werth acquired new equipment costing \$100,000 by signing a note for \$80,000 and paid the balance in cash. Werth made one payment for \$5,000 toward the note during December that included \$600 of interest. Income taxes totaling \$30,000 were paid in December. General and admin expenses totaled \$30,000 during October, \$35,000 during November, and \$40,000 during December, of which \$5,000 per month is for depreciation. Werth pays 80% of the cash general and admin costs during the month incurred and the balance the following month. Cash at the beginning of November was \$40,000. Prepare a cash disbursements budget for November for Werth’s Widgets. Include correct labels in good form.

 Cash Disbursements Budget for November Inventory purchases – November (30%*\$87,000) \$26,100 Inventory purchases – October (70%*\$65,000) 45,500 Total inventory purchases \$71,600 Cash down payment on equipment 20,000 Cash paid for general and admin –November [(\$35,000 - \$5,000)*80%] 24,000 Cash paid for general and admin –October [(\$30,000 - \$5,000)*20%] 5,000 Cash disbursements estimated for November \$120,600

Note: Depreciation does not appear as a separate item (whether subtracted or added) anywhere on the cash disbursements budget---only direct cash flows appear. I have shown calculations for purposes of following the statement, however, your submission should display these to the side and not in the budget itself.

Problem 3   Loyd Company pays for 20% of its inventory purchases in the month of the purchase and the remainder in the following month.  The company’s inventory purchases are as follows:

 June \$120,000 July \$140,000 August \$160,000

The company also paid for capital expenditures costing \$160,000 in July that were acquired in May. Income taxes paid in July totaled \$18,000. Salaries paid during June, July, and August, respectively totaled \$36,000, \$30,000, and \$27,000. Prepare a cash disbursements budget for July and August.

 Disbursements July August June purchases (80%*\$120,000) \$96,000 July purchases (20%*\$140,000) 28,000 (80%*\$140,000) \$112,000 August purchases (20%*\$160,000) 32,000 Capital expenditures 160,000 Income taxes paid 18,000 Salaries paid 30,000 27,000 Total cash disbursements \$332,000 \$171,000

Problem 4   Haddock, Inc. sells only on account. In the past, 20% of the amounts charged have been paid in the same month as the sale, 60% were paid in the following month, 5% were written off as uncollectible, and the rest were paid in the second month following the sale. Sales for January through May are given below:

 January \$100,000 February 80,000 March 70,000 April 120,000 May 110,000

Prepare the cash receipts budget for March and April.

 March receipts April receipts January sales (\$100,000*15%) \$15,000 February sales (\$80,000*60%) 48,000 (\$80,000*15%) \$12,000 March sales (\$70,000*20%) 14,000 (\$70,000*60%) 42,000 April sales (\$120,000*20%) 24,000 Total cash receipts \$77,000 \$78,000

`Problem 5  Gessel Co.’s projected sales are as follows:                 `
 `August` `\$160,000` `September` `\$180,000` ` October` `\$220,000` `November` `\$200,000`

Gessel estimates that it will collect 30% in the month of sale, 50% in the month after the sale, and 18% in the second month following the sale. Two percent of all sales are estimated to be bad debts. Gessel’s purchases on account totaling \$130,000 during August, \$140,000 during September, and \$100,000 during October. Gessel pays 25% of purchases in the month purchased and 75% in the following month.

` `
`A.   How much is Gessel Co.’s budgeted cash receipts for October?  `
` `
 Collections from October sales: \$220,000*30% = \$   66,000 Collections from Sept. sales: \$180,000*50% = 90,000 Collections from August sales: \$160,000*18% = 28,800 Total budgeted cash receipts for October \$184,800
`  `
`B. How much is the net increase or decrease in cash for Gessel for October? `
` `
 Collections during October (from part A) \$184,800 Disbursements from October purchases: \$100,000*25% = \$  25,000 Disbursements from September purchases:  \$140,000*75% = 105,000 Total disbursements during October (130,000) Net increase in cash during October \$54,800

Problem 6 - Trescot, Inc. provided the following information:

 ` ` `June` `July` `August` `September` `Projected sales` `\$120,000` `\$110,000` `\$130,000` `\$100,000` `Projected merchandise purchases` ` \$76,000` ` \$65,000` ` \$70,000` ` \$58,000`
• Trescot estimates that it will collect 40% of its sales in the month of sale, 35% in the month after the sale, and 22% in the second month following the sale. Two percent of all sales are estimated to be bad debts.

• The cash balance on June 1 is \$6,000.

• Trescot pays 30% of merchandise purchases in the month purchased and 70% in the following month.

• General operating expenses are budgeted to be \$20,000 per month of which depreciation is \$2,000 of this amount. Trescot pays operating expenses in the month incurred.

• Trescot make loan payments of \$3,000 per month of which \$400 is interest and the remainder is principal.

Calculate Trescot’s budgeted cash disbursements for August.

Show ALL calculations.

 Cash paid for merchandise purchases: August purchases: \$70,000 x 30% = \$21,000 July purchases: \$65,000 x 70% = 45,500 Cash paid for operating expenses (\$20,000 - \$2,000) 18,000 Cash paid for loan (\$3,000 - \$400) 2,600 Cash paid for interest 400 Budgeted cash disbursements for August \$87,500

Problem 7 -Burchfield, Inc. pays for 30% of its budgeted materials in the month of purchase and the remaining 70% in the following month. Accounts payable is used only for material acquisitions. Additional information follows:

 March April May June Materials budgeted \$50,000 \$65,000 \$42,000 \$54,000

How much should be reported as accounts payable on Burchfield’s budgeted balance sheet at the end of May?

Only amount owed is 70% of amounts from May: 70%*\$42,000 = \$29,400 k=

Problem 8 -A merchandising company has \$64,000 of accounts receivable at April 30. In May it expects to collect 75% of these receivables and 30% of the May sales on account. Its budgeted credit sales for May are \$70,000. How much are the budgeted accounts receivable at May 31?

\$64,000 + \$70,000 - (\$64,000 x .75) - (\$70,000 x .30) = \$65,000

Problem 9 For January, sales revenue is \$400,000; sales commissions are 4% of sales; the sales manager's salary is \$80,000; shipping expenses total 1% of sales; and miscellaneous selling expenses are \$1,000 plus 7/8 of 1% of sales. Total selling expenses for the month of January are

 Sales commissions 4% x \$400,000 \$ 16,000 Sales manager salary 80,000 Shipping expenses 1% x \$400,000 4,000 Miscellaneous selling: Fixed portion 1,000 Variable: 0.875 x 1% x \$400,000 3,500 Total selling expenses \$104,500

Problem 10  Mars Company makes and sells pens. The company is in the process of preparing its Selling and Administrative Expense Budget for the last half of the year. The following budget data are available:

 Item Variable Cost Per Unit Sold Monthly Fixed Cost Sales Commissions \$0.80 \$15,000 Shipping \$1.20 Advertising \$0.30 Executive Salaries \$35,000 Depreciation on Office Equipment \$12,000 Other \$0.35 \$20,000

Expenses are paid in the month incurred. If the company has budgeted to sell 20,000 pens in October, how much is the total budgeted variable selling and administrative expenses for October?

Variable cost per unit: \$0.80 + \$1.20 + \$0.30 + \$0.35 = \$2.65

Total variable cost: \$2.65 x 20,000 = \$53,000

Problem 11 Richards Company had the following budgeted sales for the first half of 2007:

 Sales Collections on sales: January \$80,000 60% in month of sale February 60,000 30% in month following sale March 50,000 10% in second month following sale April 45,000 May 55,000

How much is the budgeted accounts receivable balance on April 30, 2007?

\$18,000 + \$5,000 = \$23,000

Since customers pay 60% of the amount due in the month of sale, 40% of the current month, April, is still due: 40% x \$45,000 = \$18,000. Customers have paid 90% (60% + 30%) of March sales so 10% is still due: 10% x \$50,000 = \$5,000. Customers have paid the entire amount due from February sales (60% during February, 30% during March, and 10% during April.)

Problem 12 . Home Depot has budgeted its activity for December according to the following information:

1. Sales at \$500,000, all for cash.
2. Merchandise Inventory on November 30 was \$250,000.
3. Budgeted depreciation for December is \$30,000.
4. The cash balance at December 1, was \$20,000.
5. Selling and administrative expenses are budgeted at \$50,000 for December and are paid for in cash.
6. The planned merchandise inventory on December 31 is \$260,000.
7. The invoice cost for merchandise purchases represents 75% of the sales price. All purchases are paid for in cash.

How much are the budgeted cash disbursements for December?

 Selling and administrative costs \$  50,000 Payment for purchases of inventory (\$5000,000*75%) 375,000 Total \$425,000

Problem 13  Simmons, Inc. expects sales volume totaling \$500,000 for November. Based on the following monthly data, how much is Simmons’ selling expense budget for November?

 `Sales commissions` `4% of sales` `Sales manager's salary` `\$30,000 per month` `Advertising expense` `\$25,000 per month` `Shipping expense.` `1% of sales` `Miscellaneous selling expenses` `\$2,100 per month plus 3/4% of sales `
` `
`Variable cost: (4% + 1% + 3/4%) x \$500,000 = \$28,750`
`Fixed cost: \$30,000 + \$25,000 + \$2,100 = \$57,100`
`Total cost: \$28,750 + \$57,100 = \$85,850`
` `

Problem 14  Kitterman Company had sales of \$60,000 in August. Sales for September are expected to be \$40,000, October to be \$50,000, and November to be \$55,000. Kitterman has found that 25% of the sales revenue is collected in the month of the sale and 75% is collected in the following month. How much is budgeted accounts receivable for Kittterman’s October 31 balance sheet?

Accounts receivable is the balance owed by customers to Kitterman: 75% x \$50,000 = \$37,500

`Problem 15  Salem Company reported the following information for 2011:          `
 September October November December January Budgeted sales \$280,000 \$300,000 \$320,000 \$360,000 \$200,000 Budgeted purchases \$90,000 \$120,000 \$128,000 \$144,000 \$88,000
• All sales are on credit.

• Customer amounts on account are collected 60% in the month of sale and 40% in the following month.

• Cost of goods sold is 40% of sales.

• Salem purchases and pays for merchandise 70% in the month of acquisition and 30% in the following month.

• Operating expenses are: Salaries, \$60,000; Depreciation, \$10,000; Rent, \$20,000; Utilities, \$11,000; Supplies are 1% of current month’s sales and are used during the month acquired.

• Operating expenses are paid during the month incurred.

• Accounts payable is used only for inventory acquisitions.

A.  How much cash will Salem receive during November?

From November sales: \$320,000 x 60% = \$192,000

From October sales: \$300,000 x 40% = \$120,000

Total = \$192,000 + \$120,000 = \$312,000

B  How much is the November 30, 2011 budgeted Accounts Receivable?

Accounts receivable is the balance that customers still owe--the amount they have not paid.

From November sales: \$320,000 x 40% = \$128,000

C. How much is the budgeted balance for Accounts Payable at November 30, 2011?

Accounts payable is the amount owed to suppliers that is not yet paid.

From November purchases: \$128,000 x 30% = \$38,400

D How much is the budgeted amount of cash to be paid for operating expenses in November?

\$60,000 + \$20,000 + \$11,000 + (1%)(\$320,000) = \$94,200

Problem 16 At January 1, 2012, Barry, Inc. has beginning inventory of 4,000 widgets. Barry estimates it will sell 35,000 units during the first quarter of 2012 with a 10% increase in sales each quarter. Barry’s policy is to maintain an ending inventory equal to 25% of the next quarter’s sales. Each widget costs \$1 and is sold for \$1.50. How much is budgeted sales revenue for the third quarter of 2012?

1st quarter units = 35,000

2nd quarter units = 35,000 x 110% = 38,500

3rd quarter units = 35,000 x 110% x 110% = 42,350

Sales revenue for 3rd quarter = 42,350 x \$1.50 = \$63,525

` `

Problem 17  Pierpoint, Inc. makes and sells a single product, lampoons. Three yards of cotton are needed to make one lampoon. Budgeted production of lampoons for the next five months is as follows: August 14,000 units, September 14,500 units, October 15,500 units, November 12,600 units, December 11,900 units The company wants to maintain monthly ending inventories of cotton equal to 20% of the following month's production needs. On July 31, 2,500 yards of cotton were on hand. The cost of cotton is \$1 per yard.

How much is ending inventory of cotton to be reported on the company’s balance sheet at September 30?

September 30 ending inventory is 20% of October's production needs:

20% x 15,500 units x 3 yards x \$1/yard = \$9,300

Problem 18  During December, the capital budget indicates a \$280,000 purchase of equipment. The ending December cash balance is budgeted to be \$40,000. The company wants to maintain a minimum cash balance of \$20,000. What is the minimum cash loan that must be planned to be borrowed from the Bank during December?

 Cash available at month end \$40,000 Cash needed for capital acquisition (280,000) Cash needed for ending balance (20,000) Amount of cash needed to borrow \$260,000

Problem 19 - Robinson Inc. provided the following information:

 March April May June July Projected sales \$104,000 \$123,000 \$115,000 \$132,000 \$141,000 Projected merchandise purchases \$82,000 \$92,000 \$78,000 \$66,000 \$73,000
• Robinson estimates that it will collect 30% of its sales in the month of sale, 45% in the month after the sale, and 22% in the second month following the sale. Three percent of all sales are estimated to be bad debts.

• The cash balance on May 1 is \$12,000.

• Robinson pays 40% of merchandise purchases in the month purchased and 60% in the following month.

• General operating expenses are budgeted to be \$31,000 per month of which depreciation is \$3,000 of this amount. Robinson pays operating expenses in the month incurred.

• Robinson make loan payments of \$4,000 per month of which \$450 is interest and the remainder is principal.

Calculate budgeted cash disbursements for May. Show ALL calculations.

 Budgeted cash disbursements for purchases: Cash paid for May purchases (\$78,000 x 40%) \$31,200 Cash paid for May purchases (\$92,000 x 60%) 55,200 Budgeted cash paid for purchases 86,400 Budgeted cash payments for operating expenses (\$31,000 - \$3,000) 28,000 Budgeted cash payments for loan (\$4,000 - \$450) 3,550 Budgeted cash payments for interest 450 Total budgeted cash disbursements for May \$118,400

Problem 20 -  Livanos, Inc.reports all its sales on credit, and pays operating costs in the month incurred. Amounts for 2005 are:

 March April May June July Budgeted sales \$300,000 \$290,000 \$320,000 \$280,000 \$210,000 Budgeted purchases \$144,000 \$120,000 \$128,000 \$132,000 \$90,000
• Customer amounts on account are collected 70% in the month of sale and 30% in the following month.

• Cost of goods sold is 60% of sales.

• Livanos purchases and pays for merchandise 40% in the month of acquisition and 60% in the following month.

• Operating expenses are: Salaries, \$50,000; Depreciation, \$12,000; Rent, \$15,000; and Utilities, \$14,000;

• Accounts payable is used only for inventory acquisitions.

A. How much cash will Livanos receive during May from customers?

Collection of May sales: \$320,000*70% = \$224,000

Collection of April sales: \$290,000*30% = \$87,000

Total \$311,000;

Note that customers do not generally pay for goods in advance, so collections from June sales are not possible. (exception if separately noted.)

B.  How much is the May 30, 2005 budgeted Accounts Receivable?

Customers paid 70% of the amount charged in May. The balance due is 30% of May: 30%*\$320,000 = \$96,000

C.  How much is the budgeted balance for Accounts Payable at May 30, 2005?

Amount owed is 60% of May purchases: 60%*\$128,000 = \$76,800

Problem 21  Johnson Company budgeted the following information for 2006:

 May June July August Budgeted sales \$320,000 \$300,000 \$288,000 \$290,000 Budgeted purchases 104,000 \$110,000 102,000 100,000 Budgeted income taxes 37,200 38,400 35,610 35,309
• All sales are on credit and are collected 30% in the month of sale and 70% in the following month.

• Cost of goods sold is 40% of sales. Accounts payable is used only for inventory acquisitions.

• Johnson purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.

• Selling and administrative expenses are budgeted at \$40,000 for May and are expected to increase 5% per month.

• They are paid during the month of acquisition. In addition, budgeted depreciation is \$10,000 per month.

• Johnson pays \$4,500 per month for its 6% note payable and interest.

• Income taxes are 30% of income before taxes and are paid during the month after accrual.

How much are the budgeted cash disbursements for July?

 Cash disbursements: Cash paid for July purchases (60%*\$102,000) \$61,200 Cash paid for June purchases (40%*\$110,000) 44,000 Cash paid for July selling and admin (\$40,000*1.05*1.05) 44,100 Cash paid for note payment and interest 4,500 Cash paid for income taxes 38,400 Total cash disbursements \$192,200

Problem 22 - Harrah Company provided the following information for the month of August:

Beginning cash balance                         \$  11,000

Cash receipts                                            178,000

Cash disbursements                                187,000

Harrah’s policy is to keep a minimum end of the month cash balance of \$12,000. How much will Harrah’s need to borrow during August?

\$11,000 + \$178,000 - \$187,000 - \$12,000 = \$10,000

Problem 23 - The May 1 cash balance is \$128,000. May sales are forecasted at \$300,000 of which 70% will be on credit. 50% percent of credit sales are expected to be collected in the month of sale. Cash expenditures for the month are forecasted at \$218,000. Collections from customers who charged on account in April total \$8,000 and will be collected in the current month. How much will be reported as ‘cash’ on the May 31 budgeted balance sheet?

\$128,000 - [\$300,000 x 70% x 50%] + [\$300,000 x 30%] + \$8,000 - \$218,000 = \$113,000

Problem 24 - Carlina, Inc. pays for 40% of its budgeted materials in the month of purchase and the remaining 60% in the following month. Accounts payable is used only for material acquisitions. Additional information follows:

 March April May June Materials purchases budgeted \$80,000 \$90,000 \$84,000 \$93,000

How much should be reported as accounts payable on Carlina’s budgeted balance sheet at the end of May?

\$84,000 x 60% = \$50,400

Problem 25 - Harley Company has completed all of its operating budgets.  The sales budget for June shows 50,000 units and total sales of \$200,000. The total unit cost of making one unit of sales is \$2.40. The company had 1000 units on hand at the beginning of June. Selling and administrative expenses are expected to be \$30,000 for June which includes \$12,000 of depreciation. Income taxes are estimated to be \$15,000 and are accrued. How much is budgeted net income for June?

Revenue - expenses = net income

\$200,000 - [\$2.40 x 50,000] - \$30,000 - \$15,000= \$35,000

Problem 26 -  Farley Company reported the following budgeted information for 2006:

 September October November December January Sales \$240,000 \$310,000 \$290,000 \$360,000 \$200,000 Purchases \$90,000 \$120,000 \$128,000 \$144,000 \$88,000
• Cost of goods sold is 35% of sales.

• Farley purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.

• Accounts payable is used only for inventory acquisitions.

• Operating expenses are: Salaries, \$50,000; Depreciation, \$20,000; Rent, \$10,000; Utilities, \$14,000

• Operating expenses are paid during the month incurred.

How much is the budgeted amount of cash to be paid for operating expenses in November?

\$50,000 + \$10,000 + \$14,000 = \$74,000

Problem 27 - A company has budgeted direct materials purchases of \$150,000 in March and \$240,000 in April. Past experience indicates that the company pays for 70% of its purchases in the month of purchase and the remaining 30% in the next month. Other costs are all paid during the month incurred. During April, the following items were budgeted:

 Wages Expense \$75,000 Purchase of office equipment 36,000 Selling and Administrative Expenses 24,000 Depreciation Expense 18,000

How much is budgeted cash disbursements for April?

Note that depreciation is not a cash flow. Note also that all cash outflows are cash disbursements regardless if they are operating, investing, or financing costs.

 Payment of March purchases (\$150,000*30%) \$ 45,000 Payment of April purchases (\$240,000*70%) 168,000 Wages expense 75,000 Purchase of office equipment 36,000 Selling and administrative expenses 24,000 Total \$348,000

Problem 28 -  Con Inc. projected the following for 2006:

 Credit sales, \$240,000 Collections from customers, \$246,000 Cost of goods sold, \$92,000 Loan repayments, \$16,000 total of which \$1,000 is interest Current period cash operating expenses, \$80,000
 Depreciation expense, \$20,000 Loss on disposal of plant asset, \$5,000 Merchandise purchases, \$95,000 (10% due at year end) Year end accrued wages, \$12,000 Beginning cash balance, \$36,000

How much is cash to be reported on Con’s budgeted balance sheet at the end of 2006?

 Beginning cash balance \$  36,000 Collections from customers 246,000 Loan repayments (16,000) Operating expenses (80,000) Merchandise purchases (90% x \$95,000) (85,500) Cash at end of 2006 \$100,500

Multiple Choice

1.  Which one of the following is a main purpose of preparing a cash receipts and disbursements budget?

A.   It helps a company predict how much profit it will make.

B.   It enables a company to anticipate bankruptcy.

C.   A company can plan for investment opportunities for anticipated cash surpluses.

D.   It is required under GAAP.

GAAP does not require budgets. Profit is budgeted on an income statement using accrual basis. A cash budget is cash basis.

2. Which statement is true about a cash budget?

A. depreciation is a component of operating expenses paid

B. the ending cash balance of one month is the beginning cash balance of the following month

C. income tax payments should not be included in a cash budget
D. capital expenditures are not included in a cash budget

3.  Which of the following would be a source of information for both the cash receipts and cash disbursements portions of the cash budget?

A. Selling and administrative expense budget

B. Sales budget

C. Direct labor budget

D. Budgeted income statement

DL and selling and admin expenses are only disbursements. Sales provides info only for cash receipts.

4. Which of the following budgets would normally cover the longest time span?

A. cash budget
B. production budget

C. capital expenditure budget

D. they should all be for the same period of time

Because it represents the costs of planned capital asset acquisitions.

5.  Which of the following is NOT a component of the cash budget?

A. The beginning and ending cash balances

B. Units to be produced during the year

C. Capital expenditures

D. Plans for long-term loan repayment

6. The budget that summarizes future plans for the acquisition of plant facilities and equipment is the:

a.    capital expenditures budget
b.    production budget
c.    sales budget
d.    direct materials purchases budget

7. Planning for capital expenditures is necessary for all of the following reasons except

a.    immaterial expenditures for office equipment are charged to expenses
b.    expansion may be necessary to meet increased demand
c.    plant assets may fall below minimum standards of efficiency
d.    machinery and other plant assets wear out

8. Which of the following budgets are ALL needed in order to prepare an Income statement budget?

a.    cash, production, materials, labor, overhead, cost of goods sold
b.    sales, production, materials, labor, overhead, cost of goods sold, selling and administrative
c.    sales, production, cost of goods sold, selling and administrative
d.    sales, cash, capital expenditures, production, materials, labor, overhead, cost of goods sold, selling and administrative

9. Which set of steps best describes a logical order of activities in preparing a master budget?

a.    Capital budgeting, sales budgeting, income statement budgeting.

b.    Purchases budgeting, cash budgeting, sales budgeting.

c.    Operating expense budgeting, sales budgeting, balance sheet budgeting.

d.    Income statement budgeting, cash budgeting, balance sheet budgeting.

10. The budget of cash collections from customers includes which of the following?

a.    Current month cash sales plus collections from previous months’ credit sales.

b.    Current month cash and credit sales.

c.    Previous months’ credit sales.

d.    Current month cash and credit sales plus previous months’ credit sales.

Cash is collected from current month credit sales as well as previous month's credit sales.

11.   Which one of the following represents the correct order in which the budget documents listed for a manufacturing company would be prepared?

A. Sales budget, cash budget, direct materials budget, direct labor budget
B. Production budget, sales budget, direct materials budget, direct labor budget
C. Sales budget, cash budget, production budget, direct materials budget

D. Selling and administrative expense budget, cash budget, budgeted income statement, budgeted balance sheet

12. Of the following listed budgets, which one is prepared first?

A. Cash receipts and disbursements

B. Production

C. Materials purchases budget

The amount of materials to be purchased cannot be determined until the number of units to be produced is determined.

13.   Which of the following represents the correct order in which the budget documents listed below would most likely be prepared by a manufacturing company?

A.   Sales budget, production budget, materials purchases budget

B.   Materials purchases budget, production budget, direct labor budget
C.   Cash budget, production budget, direct materials budget

D.   Budgeted income statement, budgeted balance sheet, cash budget

Answer B is wrong because the production budget must be prepared before the materials purchases budget in order to know how many will be produced. Answer C is wrong because the cash budget is prepared after budgets related to expenses for the period since this amounts help determine cash flows for the period. Answer D is wrong because the cash budget must be prepared before the balance sheet since the amount of cash expected is needed.

14.  Which of the following is one of the main purposes of preparing a cash receipts and disbursements budget?

A.   To determine production needed

B.   To anticipate expenses to be incurred

C.   To find investment opportunities for anticipated surpluses

D.   To estimate how much sales are needed
Extra cash should be earning interest or other profits rather than sitting idle.

15.  What is the last step in preparing a master budget?

A.  Forecast cash flow needs

B.  Review old income statements

C.  Budgeted balance sheet

D.  Prepare the production budget

Each part of the budget depends on sales forecasts.

16.  What budget helps managers plan for short-term loans and investments?

A.   capital expenditures budget

C.   cash budget

D.   budgeted income statement

If a company has extra cash available, a decision to invest should be made. An anticipated shortage of cash may cause a company to request a loan from the bank or other source. Forecasting cash helps a company to anticipate what its cash needs might be in the future.

17.  What is the last step in developing the master budget?

A.   preparing the cash budget

B.   preparing the budgeted income statement

C.   preparing the cost of goods manufactured budget

D.   preparing the budgeted balance sheet

Amounts on the budgeted balance sheet come from all the other budgets.

18.  Which statement below describes the budgeted balance sheet?

a.    It is a projection of financial position of the company at the end of the budget period.

b.    It is developed solely from the budgeted balance sheet for the preceding year.

c.    It is a forecasted estimate of profits for the coming year.

d.    It shows the costs incurred by the company for the current year.

It is developed from last period's balance sheet and adjusted for the effects of all the budgets for the current period.  It is not an indicator of revenues, expenses, profits, or operations.

19. Which is the most important budget in the master budget?

a. cash budget
b. capital expenditures budget
c. labor budget
d. sales budget

Because all the other budgets rely on information generated through this budget.

20. In what order are the following budgets prepared?

1.    Budgeted income statement

2.    Production budget

4.    Materials purchases budget

a.  4, 2, 1, 3

b.  2, 4, 1, 3

c.  4, 2, 3, 1

d.  2, 4, 3, 1

21.    Which of the following budgets are ALL needed in order to prepare an income statement budget for a service company?

a.    sales, cost of sales, selling and administrative

b.    sales, production, cost of sales, selling and administrative

c.     sales, capital expenditures, selling and administrative

d.    cash, cost of goods sold, sales

A service company has no cost of goods sold since it does not sell products, however, a cost of sales can exist since service sales have labor and overhead costs. A capital expenditures budget pertains to investing activities, not income statement amounts. A service company has no production.

22.  Which one of the following represents the correct order in which the budget documents listed for a manufacturing company would be prepared?

a. Selling & administrative expense budget, cash budget, budgeted income statement, budgeted balance sheet

b.  Production budget, marketing budget, materials purchases budget, indirect labor budget

c.   Sales budget, cash budget, materials purchases budget, direct labor budget

d. Sales budget, cash budget, marketing budget, materials purchases budget

Answer B is wrong because there is no marketing budget nor an indirect labor budget. Answers C and D are wrong because the cash budget is prepared after the materials and labor budgets.

23. What is one reason the amount of cash paid out for overhead each period does not equal the total overhead incurred?

A. Depreciation is an overhead expense that does not require the use of cash.

B. Overhead expenses are only estimates, they do not require cash.

C.  Cash is only paid out for fixed manufacturing overhead expenses.

D.  The amount of cash paid out is adjusted for the number of units sold.

Income statement is accrual basis, while cash considers only cash increases and decreases.

24. In which order are the following developed? First to last:

## 2 = Budgeted income statement                                 4 = Cash receipts budget

A.  1-3-2-4

B.  3-1-4-2

C.  1-3-4-2

D.  3-1-2-4

E.  Some other order.

You can't calculate materials until you know how many units to produce. You must know how much expenses and revenues are before you can figure out how much cash will come in and get paid out. You can't calculate CGS on the income statement unless you know the materials and other product costs to be used.

25.  Which one of the budgets below applies to manufacturing, merchandising, and service organizations as part of their master budget?

A. Cost of goods sold budget
B. Purchases budget
C. Selling and administrative expense budget

Only manufacturing and merchandising companies have products, which create cost of goods sold and purchases. Only manufacturing companies have manufacturing overhead budgets.

26.    Given the following budgets, in which order should you prepare them?

1.   Budgeted balance sheet                     4.   Production budget

2.   Manufacturing costs budget               5.   Cash budget

3.   Income statement budget                   6.   Purchases budget

In which order should you prepare these budgets and schedules?

A.  4, 6, 2, 3, 5, 1                                     C.    4, 2, 6, 3, 5, 1

B.  5, 4, 6, 2, 3, 1                                     D.    6, 4, 2, 3, 5, 1

The sales budget is first followed by the production budget. The financial budgets...income statement and balance sheet are last. Each subsequent budget relies on information from at least one previous budget.

27.  Which one of the following does not provide information to prepare the budgeted income statement?

B.   Sales budget
C.    Direct labor budget

D.   Budgeted balance sheet

The balance sheet is prepared after the budgeted income statement. Amounts on the budgeted balance sheet are taken from all the other budgets.

28.    Which statement below describes the budgeted balance sheet?

a.    It is a projection of financial position of the company at the end of the budget period.

b.    It is developed solely from the budgeted balance sheet for the preceding year.

c.    It is a forecasted estimate of profits for the coming year.

d.    It shows the costs incurred by the company for the current year.

Profits, revenues, and expenses are reported on income statements, not balance sheets. Amounts on the budgeted balance sheet are taken from all the other budgets.

29.  Which of the following is NOT a component of the cash budget?

A.  The beginning cash balance

B.  Capital expenditures

C.  Plans for long-term loan repayment

D.  Cost of goods sold

A company does not pay for the cost of goods sold, it pays for purchases of merchandise inventory (if a merchandiser) or materials (if a manufacturer.) Accrual basis is necessary to determine CGS on the income statement, however, CGS is not entirely a cash flow due to changes in inventory levels.

30.   Why is the amount of cash paid out for overhead each period not equal to the total overhead expense?
A.  Since overhead expenses are only estimates, they do not require cash.

B.  Depreciation is an overhead expense that does not require the use of cash.
C.  Cash is only paid out for fixed manufacturing overhead expenses.
D.  The amount of cash paid out is adjusted for the number of units sold.

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