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

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

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

 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

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

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

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

      D. Selling and administrative expenses

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

B.   selling and administrative 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

                                             3.    Selling and administrative 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:

                1 = Production budget                                              3 = Direct materials purchases budget

                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
D. Manufacturing overhead 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?

A.    Manufacturing overhead budget                                      

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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