Question 1

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

Accepted Answer

Operations budgeting involves the development of a master budget for the short term, which directs the day-to-day activities of the firm. Capital budgeting involves longer-term investment decisions, while strategic planning involves the development of broad long-term goals and initiatives.

Question 2

Which of the following is not an advantage of budgeting?

Accepted Answer

Providing assurance that accounting records are in accordance with generally accepted accounting principles is not an advantage of budgeting - it is a requirement of basic accounting principles. The other options listed are all advantages of budgeting.

Question 3

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?

Accepted Answer

Performance measurement is the advantage of budgeting that enables the company to establish its recognition program. By setting sales targets and measuring performance against these targets, the company can identify salespeople who have exceeded their targets and provide them with bonuses as a form of recognition. This promotes a culture of high performance and incentivizes salespeople to work towards exceeding their targets.

Question 4

Select the incorrect statement about budgeting committees.

Accepted Answer

Membership on the budget committee is not restricted solely to accountants. In fact, budget committees often include members from various departments within an organization to ensure comprehensive representation and coordination.

Question 5

The master budget normally covers:

Accepted Answer

The master budget typically covers a period of 1 year, as it includes all of the individual budgets for each department and function within the organization. However, some companies may prepare multi-year master budgets for long-term strategic planning purposes.

Question 6

Select the correct statement about the master budget.

Accepted Answer

The master budget usually includes both operating budgets and capital budgets as well as pro forma financial statements. A is incorrect because the master budget represents plans for the future, not the past. C is incorrect because the budgeting process usually begins with preparing the sales budget, not the strategic budget. D is incorrect because the cash budget is usually prepared after the operating budgets are completed.

Question 7

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

Accepted Answer

The master budget is the comprehensive financial plan that includes all of the smaller, departmental budgets such as sales, production, and inventory. It provides a detailed view of the company’s financial goals and performance. Therefore, option D is the correct answer.

Question 8

The cash budget includes three sections: (1) operating activities, (2) investing activities, and (3) financing activities.

Accepted Answer

The cash budget typically includes sections for cash receipts, cash disbursements, and net cash flow, focusing on cash management rather than the broader categories of operating, investing, and financing activities found in the statement of cash flows.

Question 9

The pro forma income statement gives managers an advance estimate of a company's profitability.

Accepted Answer

The pro forma income statement is a financial projection that estimates a company's future profitability based on expected revenues and expenses. It is used by managers to plan and make decisions regarding the company's operations and finances.

Question 10

The cash budget is not the same as the pro forma cash flow statement.

Accepted Answer

The cash budget and pro forma cash flow statement are two different financial planning tools. A cash budget outlines planned cash inflows and outflows for a specific period of time, while a pro forma cash flow statement provides projected cash flow information for a company over a longer period of time.

Question 11

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

Accepted Answer

Strategic planning is a process by which an organization defines its direction and makes long-term decisions on allocating its resources to pursue this direction. It involves analyzing the organization's current situation, setting goals, and developing strategies to achieve those goals. It is concerned with defining the scope of the business and developing plans to achieve its objectives in the long term. Operations budgeting is concerned with short-term budgeting decisions, capital budgeting is concerned with investment decisions, and master planning is a broad term that can refer to a range of planning activities.

Question 12

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?

Accepted Answer

Coordination is the advantage of budgeting that reduces the likelihood of having two incompatible systems. If the district managers had coordinated their proposals before submitting them, they would have realized that the southern district's proposal for a new system was incompatible with the existing one used at headquarters. This would have allowed them to adjust their proposals, avoid redundancies, and achieve better alignment and compatibility.

Question 13

The basic cash budget format is Total cash available − Total cash disbursed = Surplus or shortage of cash +/ − Effects of financing = Ending cash.

Accepted Answer

This is the correct format for the basic cash budget. Total cash available minus total cash disbursed equals the surplus or shortage of cash, which can then be adjusted for any financing effects to determine the ending cash balance.

Question 14

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?

Accepted Answer

Performance measurement allows for tracking and monitoring of actual results against budgeted expectations. This would have allowed Jason to identify the increased scrap generation sooner and take corrective action before it became a bigger problem.

Question 15

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

Accepted Answer

The budgeting process is a key aspect of planning, as it involves setting specific goals and objectives for the organization's financial future. The process of budgeting helps to formalize and document these plans, making them clear and actionable for both superiors and subordinates. While performance measurement, budget coordination, and taking corrective action may also be important aspects of financial management, they are not the primary focus of the budgeting process.

Question 16

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:

Accepted Answer

The budgeting process described is continuous budgeting, as it involves adding a month to the end of the budget period at the end of each month, thereby maintaining a continuous twelve-month planning horizon. Participative budgeting involves involving employees in the budgeting process, capital budgeting involves allocating funds for long-term, large-scale investment projects, and zero-based budgeting involves setting each department's budget from scratch based on their needs and goals.

Question 17

Depreciation expense will appear on the schedule of cash payments for selling and administrative expenses.

Accepted Answer

Depreciation expense is a non-cash expense, meaning it does not result in actual cash payments. It is therefore not included in the schedule of cash payments for selling and administrative expenses.

Question 18

Pro forma financial statements are prepared at the end of the year and are used to evaluate the performance of managers.

Accepted Answer

Pro forma financial statements are prepared in advance of a particular event, such as a merger or acquisition, and are used to project how the event will impact the financial statements. They are not used to evaluate the performance of managers at the end of the year.

Question 19

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

Accepted Answer

Capital budgeting involves making long-term investment decisions such as purchasing equipment, building new facilities, and expanding operations. It is a key aspect of strategic planning as it involves evaluating the potential benefits and costs of investing in different capital projects and selecting the best option to achieve the company's goals. Operations budgeting, on the other hand, focuses on short-term expenses related to day-to-day operations and does not involve major investment decisions. Facilities planning is a related process that involves determining the optimal use and design of physical facilities, but it is not the same as capital budgeting. Therefore, A) capital budgeting is the most appropriate choice.

Question 20

Select the incorrect statement about the planning process.

Accepted Answer

The longer the time period, the less specific plans tend to be, as it becomes more difficult to predict future conditions and specifics over an extended period.

Quiz 14: Planning for Profit and Cost Control