Deck 3: Developing a Business Plan: Budgeting

Question 1

A ____________________ is a report that gives a financial description of one part of a business' planned activities.

Answer 1

budget

Question 2

Using budgeting to describe a business' plans allows the entrepreneur to uncover potential ___________________before they occur.

Answer 2

problems

Question 3

A budget ___________________ the operating activities needed to meet the business' goals.

Answer 3

quantifies

Question 4

Under _________________________, the entrepreneur periodically compares the results of the business' actual operating activities with the related budget amounts, and focuses on improving the activities that show significant differences between actual and budget.

Question 5

A retail business' ____________________ is the average time it takes the business to use cash to buy goods for sale, to sell these goods and to collect cash from its customers.

Question 6

____________________ is goods purchased for sale to customers.

Question 7

When businesses charge their purchases, these are called ____________________ purchases.

Question 8

When a business obtains their purchases using credit it results in ____________________.

Question 9

When a business' customers charge their purchases it results in ____________________.

Question 10

A ____________________ is a set of interrelated reports showing the relationships among a business' goals, activities to be performed, resources to be used and expected financial results.

Question 11

By the nature of their operations, a service business' master budget does not include a ____________________ budget.

Question 12

The ____________________ budgets prepared in a business' budgeting process are the projected financial statements for the budget period.

Question 13

The ____________________ shows the number of units of inventory that the business expects to sell each month, the related monthly sales revenue, and the monthly cash collections from sales.

Question 14

If a business allows credit sales, its ____________________ from accounts receivable will lag behind its sales revenue.

Question 15

Some businesses sales occur evenly throughout the year, while other businesses experience ____________________ sales.

Question 16

The ____________________ shows the purchases in units required each month to make the expected sales and to keep inventory at the desired level.

Question 17

The ____________________ shows the expenses and related cash payments associated with planned selling activities.

Question 18

The ____________________ budget helps the business to avoid having excess cash that could be better used for profitable projects or investments.

Question 19

A projected____________________ summarises a business' expected revenues and expenses for the budget period.

Question 20

Budgeting is a valuable tool for ____________________ how a business, division, department or team actually performed.

Question 21

The ____________________ gives a manager a starting point to begin an investigation between actual and budgeted amounts.

Question 22

A manager can use information from the master budget to help to identify the causes of ____________________ between budgeted and actual expenses.

Question 23

Differences between planned and actual results can have both ____________________ and_______________ consequences.

Question 24

Businesses can build ____________________ into corporate budgeting and planning by following five basic steps.

Question 25

Budgeting helps the entrepreneur recognise and avoid potential operating problems.

Question 26

Budgeting will be most useful after the planning decisions have been implemented.

Question 27

In the operating cycle, credit sales of goods or services by a business result in accounts payable.

Question 28

In the operating cycle, credit purchases of goods or services by a business result in accounts payable.

Question 29

The sales budget is the first component of the master budget.

Question 30

The cash budget is the first component of the master budget.

Question 31

The purchases budget is the first component of the master budget.

Question 32

The purchases budget shows the purchases required to meet the goals in the sales budget.

Question 33

The purchases budget for a service business shows the purchases required to meet the goals in the sales budget.

Question 34

In preparing the selling expenses budget, variable costs will be dependent on the projected units to be sold.

Question 35

In preparing the selling expenses budget, fixed costs will be dependent on the projected units to be sold.

Question 36

In preparing the selling expenses budget, variable costs will be independent of the projected units to be sold.

Question 37

The general and administrative expenses budget indicates projected costs for activities other than selling activities.

Question 38

Excessive cash balances are good for a business.

Question 39

The cash budget shows the projected business revenues and expenses for the budget period.

Question 40

The projected income statement shows projected cash receipts and payments.

Question 41

The cost report for a budget would not be prepared until after the budget had been implemented.

Question 42

By understanding why differences between budgeted and actual amounts occurred, a manager can decide what actions to take for future time periods.

Question 43

Managers of service business do not need to use budgets as planning tools.

Question 44

Comparing budgeted amounts to actual performance is not an important part of the budgeting process.

Question 45

Budgets add discipline to the planning process because:

A) They are orderly and detailed.
B) They are detailed.
C) They are quantified.
D) They are estimates.

Question 46

Management by exception includes:

A) a management tool to save time and effort.
B) a technique that focuses on unplanned results.
C) made possible by establishing benchmarks.
D) All of the options given.

Question 47

Focussing on improving the activities showing significant differences between budgeted and actual results is:

A) quantifying plans.
B) creating benchmarks.
C) cash management.
D) management by exception.

Question 48

An operating cycle for a retail business is:

A) an entire year.
B) the time it takes for a business to realise a profit.
C) the average time it takes for a business to buy inventory, sell it to customers and to collect cash from customers.
D) the average time before a business must reorder inventory.

Question 49

The operating cycle for a retail business:

A) is the daily activities of the employees.
B) may be thought of as the cash to cash cycle.
C) is the expense aspect of a budget.
D) is the amount of time is takes employees to make the product to be sold.

Question 50

If cash is collected at the sale:

A) the operating cycle will be shorter than if sold on credit.
B) the operating cycle will be longer than if sold on credit.
C) the account receivable will be increased as a result of the sale.
D) the account payable will be decreased as a result of the sale.

Question 51

Which of the following items would not appear in a budget?

A) How many products the business plans to sell.
B) Projected sales.
C) Anticipated rent costs.
D) Actual sales.

Question 52

Which of the following items would appear in a budget?

A) Products competitors plan to sell.
B) Projected sales.
C) Actual rent costs.
D) Actual sales.

Question 53

The master budget:

A) is a set of interrelated budgets.
B) is the same for all businesses, service or retail.
C) is not prepared until after the sales budget is complete.
D) includes the end of period financial statements.

Question 54

Which of the following is an interrelated report associated with a master budget?

A) Goals to be met.
B) Activities associated with the operating cycle.
C) General and administrative expenses budget.
D) Expected financial results.

Question 55

The master budget will be different from business to business. This is due to all of the following except:

A) varying sizes and complexities of businesses.
B) number of different products sold.
C) retail versus service versus manufacturing businesses.
D) profitability of the business.

Question 56

Master budgets describe the relationships among a business' goals, activities, resources and expected results:

A) regardless of whether the entity is a retail, service or manufacturing business.
B) for retail businesses only.
C) for retail and manufacturing businesses, but not service businesses.
D) for service businesses only.

Question 57

The master budget for a service business:

A) excludes a purchases budget.
B) excludes a sales budget.
C) excludes the cash budget.
D) excludes the projected financial statements.

Question 58

The term just-in-time refers to:

A) cash collections.
B) sales to customers.
C) inventory.
D) collections from customers.

Question 59

A variable selling expense is:

A) an expense that is directly proportional to sales.
B) an expense that is indirectly proportional to sales.
C) an expense that never changes.
D) an expense that varies between the selling and general and administration budgets

Question 60

All of the following are included in the selling expenses budget, except:

A) the cost of the inventory that is expected to be sold.
B) the salespersons' salaries and commissions.
C) the cost of advertising.
D) the salespersons petrol costs.

Question 61

What is an example of a fixed expense?

A) Sales commissions.
B) Cost of goods sold.
C) Rent.
D) Cost of electricity

Question 62

Cash management involves keeping an eye on the business' cash balance to make sure:

A) the business is generating a profit.
B) there is enough cash on hand to pay for planned operations during the current period.
C) all cash receipts are included in the sales budget.
D) all cash payments are included in the purchases budget.

Question 63

The projected income statement is important because it shows what the business' profit will be if the business:

A) only has cash sales.
B) collects expected cash receipts.
C) follows its plans.
D) does not incur fixed costs.

Question 64

In using the accounting information included in budgets for decision making for a service business, entrepreneurs must also consider other:

A) non-financial information.
B) personal expenses.
C) increases in purchases.
D) decreases in cash payments for purchases.

Question 65

Why should a business budget?

Question 66

How does budgeting add discipline to the planning process?

Question 67

Explain the principle of management by exception.

Question 68

What is a master budget and what are the components of a master budget for a retail business?

Question 69

Why does the budgeting process start with the sales budget?

Question 70

What are the three primary objectives of cash management?

Question 71

How may budgeting be used in evaluating actual performance?

Question 72

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Refer to Example 3.1. What are June's total projected sales in dollars? When will the cash be collected for these sales?

Question 73

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Refer to Example 3.1. Assume that Bob ended May with 120 t-shirts on hand. How many t-shirts should Bob purchase in June? How much will these purchases cost? When will Bob pay cash for these purchases?

Question 74

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Refer to Example 3.1. Assume that Bob ended the second quarter with 100 t-shirts on hand. How many t-shirts should Bob purchase in July? How much will these purchases cost? When will Bob pay cash for these purchases?

Question 75

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Refer to Example 3.1. Prepare a sales budget for Bob's Shirt Shop for the third quarter.

Question 76

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Refer to Example 3.1. Prepare a purchases budget for Bob's Shirt Shop for the third quarter.

Question 77

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Refer to Example 3.1. Prepare a selling expenses budget for the third quarter.

Question 78

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Refer to Example 3.1. Prepare a general and administrative expenses budget for the third quarter.

Question 79

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Refer to Example 3.1. Prepare a cash budget for the third quarter of the year, assuming that Bob ended the second quarter with a cash balance of $25 000.

Question 80

Example 3.1
The information below is used for the following problems.
Bob's Shirt Shop sells t-shirts at soccer tournaments. The shirts sell for $20 each. This year, Bob expects to sell 500 shirts in May, 600 shirts in June, 500 shirts in July, 700 shirts in August, 900 shirts in September and 800 shirts in October. On average, 30% of his clients purchase on credit. Bob allows those customers to pay for their purchases the month after they have made their purchase. Bob's policy is to end each month with an ending inventory equal to 20% of the next month's projected sales. Bob pays $5 for each t-shirt that he purchases. Bob's supplier allows him to pay for his purchases 30 days after the purchase. Bob's Shirt Shop expects to incur the following expenses for each month of the third quarter of this year:
$$\begin{array} { l r } \text { Rent (60\% general and administrative, } 40 \% \text { selling) } & \$ 1000 \\\text { Utilities (50\% general and administrative, } 50 \% \text { selling) } & 600 \\\text { Advertising } & 500 \\\text { Salaries (70\% general and administrative, } 30 \% \text { selling) } & 2500 \\\text { Commissions (per each shirt sold) } & 3\end{array}$$ Bob must pay for his selling and general and administrative expenses in the month that they are incurred.

-Prepare a projected income statement for the third quarter of the year.