Deck 14: Planning for Profit and Cost Control

Question 1

Which of the following would represent the order in which most master budgets are prepared?

A) Sales, Income Statement, Cash, Purchases
B) Purchases, Cash, Sales, Income Statement
C) Purchases, Sales, Cash, Income Statement
D) Sales, Purchases, Cash, Income Statement

Answer 1

D
Explanation: Preparing the master budget begins with the sales forecast. Based on the sales forecast, the detailed budgets for inventory purchases and operating expenses are developed. The schedules of cash receipts and cash payments provide the foundation for preparing the cash budget. Finally, the operating budgets are used to prepare pro forma statements.

Question 2

Budgeting that involves decisions such as whether to buy or lease equipment or build a new factory is referred to as:

A) capital budgeting.
B) operations budgeting.
C) facilities planning.
D) strategic planning.

Answer 2

A

Question 3

The budgeting process formalizes and documents managerial plans to clearly communicate objectives to both superiors and subordinates. This budgeting requirement is an example of:

A) performance measurement.
B) planning.
C) budget coordination.
D) taking corrective action.

Answer 3

B
Explanation: Unfortunately, planning is frequently as informal as making a few mental notes. Informal planning cannot be effectively communicated. Because it serves as a communication tool, budgeting can solve this problem. The budget formalizes and documents managerial plans, clearly communicating objectives to both superiors and subordinates.

Question 4

Select the incorrect statement about the planning process.

A) The longer the time period, the more specific the plans.
B) Planning decisions can often be sub-divided into three distinct planning phases, short-term, intermediate-term, and long-term.
C) The nature of planning changes with the length of the time period being considered.
D) The shorter the time period, the less general the plans.

Question 5

The master budget normally covers:

A) Three months.
B) 1 year.
C) 1-5 years.
D) 5-10 years.

Question 6

Select the correct statement about the master budget.

A) The master budget is a group of detailed budgets and schedules representing the company's operating and financial plans for the past accounting period.
B) The master budget usually includes operating budgets and capital budgets, and pro forma financial statements.
C) The budgeting process usually begins with preparing the strategic budgets.
D) Preparing the master budget begins with the cash budget.

Question 7

Jason had been operating his machine for an entire month before he realized that it was generating more scrap than usual. Which advantage of budgeting would have helped him identify this problem sooner?

A) Performance measurement
B) Coordination
C) Planning
D) Corrective action

Question 8

Select the incorrect statement about budgeting committees.

A) Membership on the budget committee is restricted most often to accountants because the budget involves numbers.
B) Budget committees usually have responsibility for the coordination of budgeting activities.
C) The budget committee is responsible for settling disputes between various departments over budget matters.
D) One of the responsibilities of the budget committee is to monitor the organization's progress toward achieving its budget standards.

Question 9

The budgeting process that involves adding a month to the end of the budget period at the end of each month, thus maintaining a twelve-month planning horizon, is referred to as:

A) participative budgeting.
B) capital budgeting.
C) continuous budgeting.
D) zero-based budgeting.

Question 10

Which of the following is not an advantage of budgeting?

A) Provides assurance that accounting records are in accordance with generally accepted accounting principles.
B) Forces coordination among departments to promote decisions in the best interests of the company as a whole.
C) Provides advance notice of potential shortages, bottlenecks, or other weaknesses in operating plans.
D) Provides a way to evaluate performance.

Question 11

Select the correct statement.

A) The four advantages of budgeting include planning, coordination, performance measurement, and reporting.
B) In a participative budgeting system, budget information flows in one direction only, from bottom to top.
C) The three major categories of the master budget are operating budgets, capital budgets, and pro forma financial statements.
D) The accounting department normally coordinates the development of the sales forecast.

Question 12

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

A) Selling and administrative expense budget
B) Budgeted income statement
C) Sales forecast
D) Inventory purchases budget

Question 13

Which of the following budgets needs to be prepared prior to preparing an inventory purchases budget?

A) Selling and administrative expense budget
B) Sales budget
C) Cash budget
D) All of the answers are correct.

Question 14

One company's practice is to provide bonuses to salespeople who exceed their sales targets. Which of the following advantages of budgeting enables the company to establish its recognition program?

A) Planning
B) Coordination
C) Performance measurement
D) Corrective action

Question 15

Expressing plans for a business in financial terms is commonly called:

A) master planning.
B) budgeting.
C) strategic planning.
D) operational planning.

Question 16

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

A) operations budgeting.
B) master planning.
C) capital budgeting.
D) strategic planning.

Question 17

A company's numerous specific budgets (sales, inventory purchases, etc.) together are referred to as the:

A) grand plan.
B) strategic plan.
C) current budget.
D) master budget.

Question 18

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

A) capital budgeting.
B) operations budgeting.
C) strategic planning.
D) None of the choices.

Question 19

Select the correct statement about budgeting and human behavior.

A) People are usually very comfortable with budgets.
B) The attitudes of upper managers significantly impact budget effectiveness.
C) Budgets increase individual freedom within an organization.
D) Participative budgeting contributes to fear and resentment.

Question 20

When a company's district managers submitted their preliminary budget proposals, top management discovered that the southern district manager had requested a new project management information system. Unfortunately, the system is incompatible with the system used at headquarters. Which of the following advantages of budgeting reduces the likelihood that the company will end up with two incompatible systems?

A) Planning
B) Coordination
C) Performance measurement
D) Corrective measures

Question 21

The following budget information is available for the Arch Company for January Year 2: All operating expenses are paid in cash in the month incurred. Compute total budgeted selling and administrative expenses (excluding interest) amount for January Year 2.

A) $262,500
B) $283,000
C) $240,000
D) $285,800

Question 22

Chu Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: Desired ending inventory levels are 25% of the following month's projected cost of goods sold. Budgeted purchases of inventory in February Year 2 would be:

A) $135,000.
B) $165,000.
C) $180,000.
D) $225,000.

Question 23

Payne Company provided the following information relevant to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: Desired ending inventory levels are 25% of the following month's projected cost of goods sold. The company purchases all inventory on account. January Year 2 budgeted purchases are $150,000. The normal schedule for inventory payments is 60% payment in month of purchase and 40% payment in month following purchase.
Budgeted cash payments for inventory in February Year 2 would be:

A) $132,600.
B) $152,600.
C) $99,000.
D) $159,000.

Question 24

What is the role of top management in a participative budgeting system?

A) Top management has no role - the budget is entirely developed by the lower-level employees.
B) Top management must always tighten employee-set budget standards to eliminate employees' attempts to build slack into the standards.
C) Top management must ensure that employee-generated objectives are consistent with those of the company.
D) All of the answers are correct.

Question 25

Which of the following items is not needed to prepare an inventory purchases budget for a merchandising business?

A) Expected unit selling price
B) Beginning inventory
C) Expected unit sales
D) Desired ending inventory

Question 26

O'Hare Company is in the process of preparing a purchases budget for the first quarter of Year 2. The company has budgeted sales as follows: Cost of goods sold is expected to be 75% of sales. The company would like to have ending inventory each month equal to 25% of the following month's predicted cost of sales. The total cost of purchases in January Year 2 is:

A) $35,719.
B) $46,500.
C) $44,438.
D) $59,250.

Question 27

Benton Company's sales budget shows the following expected total sales: The company expects 80% of its sales to be on account (credit sales). Credit sales are collected as follows: 25% in the month of sale, 72% in the month following the sale with the remainder being uncollectible and written off. The total cash receipts during April would be:

A) $16,000.
B) $28,160.
C) $24,640.
D) $36,160.

Question 28

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

A) $31,500.
B) $46,500.
C) $43,500.
D) $33,000.

Question 29

Compton Company expects the following total sales: The company expects 60% of its sales to be credit sales and 40% for cash. Credit sales are collected as follows: 30% in the month of sale, 70% in the month following the sale. The budgeted accounts receivable balance on May 31 is:

A) $12,240.
B) $12,600.
C) $20,400.
D) $21,000.

Question 30

Which of the following is a benefit of participative budgeting?

A) Employees tend to be more motivated to achieve the budget.
B) A twelve-month planning horizon is maintained at all times.
C) Budget planning is highly centralized.
D) Communication is clearer because it flows in only one direction - upward.

Question 31

Oakton Furniture provided the following information relevant to its sales for December Year 1 and the first quarter of Year 2: Based on the company's collection history, 42% of credit sales are collected in month of sale and the remainder is collected in the following month. Total budgeted cash receipts in February are expected to be:

A) $60,000.
B) $162,400.
C) $352,600.
D) $228,000.

Question 32

Select the incorrect statement regarding the human factor in the budgeting process.

A) Budgets force employees to follow the organization's plan.
B) The evaluation feature of budget systems is frightening for many people.
C) There is a tendency for people to be uncomfortable with budgets.
D) Proper handling of human relations is essential to the establishment of an effective budget system.

Question 33

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

A) continuous budgeting.
B) perpetual budgeting.
C) participative budgeting.
D) zero-based budgeting.

Question 34

Hernandez Company expects credit sales for January to be $100,000. Cash sales are expected to be $60,000. The company expects credit and cash sales to increase 10% for the month of February. Credit sales are collected in the month following the month in which sales are made. Based on this information the amount of cash collections in February would be:

A) $166,000.
B) $160,000.
C) $170,000.
D) $176,000.

Question 35

Markham Company has completed its sales budget for the first quarter of Year 2. Projected credit sales for the first four months of the year are shown below: The company's past records show collection of credit sales as follows: 40% in the month of sale and the balance in the following month. The total cash collection from receivables in March is expected to be:

A) $18,000.
B) $45,000.
C) $41,400.
D) $39,600.

Question 36

Which of the following items would be least useful in preparing a schedule of cash receipts?

A) Expected revenue from cash sales.
B) Number of units expected to be purchased.
C) Service charges for credit card sales.
D) Past accounts receivable collection experience.

Question 37

Which of the following items is not needed to prepare a sales budget by product line?

A) Expected purchase price of each product.
B) Expected unit sales of each product.
C) Expected selling price of each product.
D) All of the answers are correct.

Question 38

Sales for January are budgeted at 50,000 units, and the company expects sales to increase 4% each month. How many units will need to be purchased in February if the company's policy is to keep ending inventory each month at 10,000 units?

A) 52,000 units
B) 54,000 units
C) 62,000 units
D) None of the choices is correct.

Question 39

Select the correct equation format for the purchases budget.

A) Beginning inventory + expected sales = required purchases.
B) Cost of budgeted sales + beginning inventory - desired ending inventory = required purchases.
C) Beginning inventory + expected sales - desired ending inventory = required purchases.
D) Cost of budgeted sales + desired ending inventory - beginning inventory = required purchases.

Question 40

Oakton Furniture provided the following information relevant to its sales for December Year 1 and the first quarter of Year 2 Based on the company's collection history, 42% of credit sales are collected in month of sale and the remainder is collected in the following month. Cash collections in January from December credit sales would be:

A) $69,600.
B) $81,200.
C) $72,000.
D) $84,000.

Question 41

The following budget information is available for Crescent Company for January Year 2: All operating expenses are paid in cash in the month incurred. The amount of expected cash outflow for selling and administrative expenses would be:

A) $262,500.
B) $247,500.
C) $232,500.
D) $312,500.

Question 42

Which of the following accounts would appear on the inventory purchases budget and pro forma balance sheet?

A) Cost of goods sold
B) Sales revenue
C) Accounts receivable
D) Accounts payable

Question 43

Cheyenne Company has budgeted the following information for June: If there is a cash shortage, the company borrows money from the bank. All cash is borrowed at the beginning of the month in $1,000 increments and interest is paid monthly at 1% on the first day of the following month. The company had no debt before June 1^st. The amount of interest paid on July 1 would be:

A) $250.
B) $400.
C) $221.
D) $290.

Question 44

Barnes Company expects to begin operating on January 1. The company's master budget contained the following operating expense budget: Sales commissions are paid in cash in the month following the month in which the expense is recognized. All other expense items requiring cash payment are paid in the month in which they are recognized. The amount of accumulated depreciation appearing on the company's March 31 pro forma balance sheet is:

A) $1,000.
B) $2,000.
C) $3,000.
D) $12,000.

Question 45

Budgeted sales commissions would appear on the:

A) selling, general and administrative budget and pro forma income statement
B) selling, general and administrative budget and pro forma balance sheet
C) sales budget and pro forma balance sheet
D) sales budget and pro forma income statement

Question 46

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

A) The S&A budget is prepared after the sales budget.
B) The S&A budget is prepared before the cash budget.
C) The S&A budget is prepared before the pro forma income statement.
D) All of the answers are correct.

Question 47

Which of the following items will not appear on a cash budget?

A) Expected cash collections
B) Expected cash payments
C) Expected credit sales
D) Financing activities

Question 48

Which of the following accounts would appear on the sales budget and the pro forma income statement?

A) Selling and administrative expenses
B) Sales revenue
C) Accounts receivable
D) Both sales and accounts receivable are correct

Question 49

Which of the following budgets or schedules uses data contained in the selling and administrative expense budget?

A) Cash receipts schedule
B) Cash payments schedule
C) Inventory purchases budget
D) Sales budget

Question 50

Which of the following is not considered a pro forma financial statement?

A) Sales budget
B) Balance sheet
C) Cash flow statement
D) Income statement

Question 51

Budgeted depreciation expense would not appear on a:

A) Selling and administrative expense budget.
B) Budgeted income statement.
C) Cash budget.
D) All of the answers are correct.

Question 52

Which of the following cash budget equations is incorrect?

A) Cash payments + cash receipts = cash requirements
B) Beginning cash + cash receipts = total cash available
C) Cash payments + cash cushion = total cash needed
D) Period one ending cash balance = period two beginning cash balance

Question 53

Which of the following items typically found on the selling and administrative expense budget will also impact the cash budget?

A) Depreciation expense
B) Administrative salaries
C) Advertising expense
D) Both administrative salaries and advertising expense are correct.

Question 54

Dobson Company expects to begin operating on January 1. The company's master budget contained the following operating expense budget: Sales commissions are paid in cash in the month following the month in which the expense is recognized. All other expense items requiring cash payment are paid in the month in which they are recognized. The amount of cash to be paid for operating expenses during the month of January is:

A) $53,600.
B) $51,800.
C) $77,600.
D) None of the choices.

Question 55

Hilliard Company budgeted the following transactions for April Year 2: The beginning cash balance was $50,000. The company desires to have a $25,000 ending cash balance. The surplus (or shortage) of cash before considering any financing activities (that is, borrowings or repayments) during in April would be:

A) $40,000 surplus.
B) $40,000 shortage.
C) $20,000 surplus.
D) There is no cash surplus or shortage.

Question 56

Budgeted cash payments for inventory would appear on the:

A) inventory purchases budget and the pro forma income statement.
B) capital budget and pro forma statement of cash flows.
C) cash budget and pro forma balance sheet.
D) inventory purchases budget and pro forma statement of cash flows.

Question 57

Scranton Company expects to begin operating on July 1, Year 1. The company's master budget contained the following operating expense budget: Sales commissions are paid in cash in the month following the month in which the expense is recognized. All other expense items requiring cash payment are paid in the month in which they are recognized. The amount of commissions payable that would appear on the company's pro forma balance sheet as of September 30, Year 1 is:

A) $32,000.
B) $30,000.
C) $36,000.
D) $24,000.

Question 58

With regards to financial statements, "pro forma" means:

A) Budgeted.
B) Prepared in advance.
C) Financial condition or position that can be expected if planning assumptions prove correct.
D) All of the answers are correct.

Question 59

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

A) Cost of goods sold
B) Depreciation expense
C) Salary expense
D) Sales expense

Question 60

Bantam Industries has budgeted the following information for March: If there is a cash shortage, the company borrows money from the bank. All cash is borrowed at the beginning of the month in $1,000 increments and interest is paid monthly at 1% on the first day of the following month. The company had no debt before March 1^st. How much cash will the company need to borrowed in March?

A) $25,000
B) $29,000
C) The company should not need to borrow any cash in March
D) $4,000

Question 61

What budget is generally not included in a master budget?

A) Strategic budget
B) Capital budget
C) Operating budget
D) All of the answers are correct.

Question 62

What information does the sales budget provide for pro forma financial statements?

A) Total budgeted sales to be used on the pro forma income statement
B) Cash collections from customers to be used on the pro forma balance sheet
C) The ending balance in accounts payable which appears on the pro forma balance sheet
D) All of the answers are correct.

Question 63

The cash budget is based on which budget?

A) Sales budget
B) Inventory purchases budget
C) Selling and administrative expense budget
D) All of the answers are correct.

Question 64

Which of the following is a true statement?

A) Pro forma financial statements are based on the company's budgets.
B) Companies prepare pro forma financial statements to show how their performance for the period will "look" if actual results match the budget.
C) Companies usually prepare a pro forma income statement, pro forma balance sheet, and pro forma statement of cash flows.
D) All of the answers are correct.

Question 65

Bright Minds Toy Company prepared the following sales budget for the second quarter. Projected sales for each of the first three months of operations are as follows: Bright Minds expects to collect 70% of the sales on account in the month of sale, and 20% in the month following the sale, and the remainder in the second month following the sale.
What is the ending accounts receivable balance that would be reported on the pro forma balance sheet prepared as of June 30?

A) $164,700
B) $121,500
C) $283,500
D) $86,400

Question 66

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

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

Question 67

Sentra Sporting Company sells tennis rackets and other sporting equipment. The purchasing department manager prepared the inventory purchases budget. Sentra's policy is to maintain an ending inventory balance equal to 15% of the following month's cost of goods sold. January's budgeted cost of goods sold is $70,000. What is the amount of cost of goods sold the company will report on its fourth quarter pro forma income statement?

A) $100,000
B) $50,000
C) $150,000
D) $162,300

Question 68

Purchases on account are given below: 55% of the month's purchases will be paid in the month of the purchase; the remaining 45% will be paid in the following month.
How much will the cash payments for purchases be in November?

A) $35,500
B) $34,500
C) $40,000
D) $36,000

Question 69

Which of the following is a benefit associated with budgeting?

A) Promotes planning and coordination
B) The ability to take corrective action to improve performance
C) Enhances performance measurement
D) All of the answers are correct

Question 70

Bright Minds Toy Company prepared the following sales budget for the second quarter. Projected sales for each of the first three months of operations are as follows: Bright Minds expects to collect 70% of the sales on account in the month of sale, and 20% in the month following the sale, and the remainder in the second month following the sale.
What is the amount of budgeted cash collections for June?

A) $406,900
B) $461,900
C) $460,000
D) $424,900

Question 71

Which of the following statements is incorrect?

A) Capital budgeting affects the master budget because it considers what assets a company should have and use when achieving its budgets.
B) Capital budgeting involves decisions as whether to buy or lease equipment.
C) Capital budgeting focuses on short-term planning.
D) Cash outflows for capital budgeting will appear on the cash budget.

Question 72

Sentra Sporting Company sells tennis rackets and other sporting equipment. The purchasing department manager prepared the inventory purchases budget. Sentra's policy is to maintain an ending inventory balance equal to 15% of the following month's cost of goods sold. January's budgeted cost of goods sold is $70,000. What would be the required purchases (on account) for December?

A) $47,000
B) $50,000
C) $53,000
D) $60,500

Question 73

Bright Minds Toy Company prepared the following sales budget for the second quarter. Projected sales for each of the first three months of operations are as follows: Bright Minds expects to collect 70% of the sales on account in the month of sale, and 20% in the month following the sale, and the remainder in the second month following the sale.
What is the amount of sales revenue that the company will report on the second quarter pro forma income statement?

A) $1,335,000
B) $1,129,800
C) $1,207,000
D) $1,001,800

Question 74

Which of the following would not be included in the inventory purchases budget?

A) Required purchases
B) Cash collections
C) Budgeted cost of goods sold
D) Desired ending inventory

Question 75

Which of the following is generally included in a sales budget?

A) Schedule of cash receipts for the projected sales
B) Desired ending inventory
C) Budgeted cost of goods sold
D) Schedule of cash payments for inventory purchases

Question 76

The master budget details:

A) Long-term objectives.
B) Intermediate objectives.
C) Short-term objectives.
D) All of the answers are correct.

Question 77

The inventory purchases budget is based on which budget?

A) Cash budget
B) Sales budget
C) Selling and administrative expense budget
D) None of the choices is correct.

Question 78

Which of the following would not be included in a selling and administrative expenses budget?

A) Budgeted salary expenses
B) Budgeted rent expense
C) Cash payments for selling and administrative expenses
D) Budgeted interest expense

Question 79

Sentra Sporting Company sells tennis rackets and other sporting equipment. The purchasing department manager prepared the inventory purchases budget. Sentra's policy is to maintain an ending inventory balance equal to 15% of the following month's cost of goods sold. January's budgeted cost of goods sold is $70,000. What is the amount of ending inventory that the company will report on its pro forma balance sheet?

A) $7,500
B) $10,500
C) $35,300
D) $60,500

Question 80

The type of planning that involves long term decisions, such as defining the scope of the business and deciding what products to make is known as:

A) Continuous planning
B) Strategic planning
C) Capital budgeting
D) Operations budgeting