Question 1

Would you recommend that a business employ a participative approach to budgeting? Why or why not?

Accepted Answer

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Question 2

The first budget prepared in a master budget is the cash receipts budget.

Accepted Answer

The first budget prepared in a master budget is typically the sales budget, followed by the production budget and then the various operating budgets including the cash budget. The cash budget is different from the cash receipts budget, as it includes both cash inflows and outflows and helps to ensure that the company has enough cash on hand to meet its needs.

Question 3

How do short-term plans differ from long-term plans?

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Question 4

A schedule of cash receipts is often prepared in conjunction with the sales budget.

Accepted Answer

A schedule of cash receipts is often prepared in conjunction with the sales budget to track the cash inflow corresponding to sales projections.

Question 5

The marketing department is primarily responsible for establishing the sales forecast.

Accepted Answer

The marketing department is responsible for conducting market research and analysis to inform the sales forecast, which is then typically reviewed and adjusted by other departments such as finance or operations. However, the marketing department plays a crucial role in developing the initial sales forecast.

Question 6

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

Accepted Answer

The pro forma income statement is a projected or estimated statement that shows the expected profitability of a company. It helps managers in planning and decision-making by providing a preview of the financial performance of the company.

Question 7

How do budget expectations influence a company's employees?

Accepted Answer

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Question 8

The selling and administrative expense budget is prepared prior to the cash budget.

Accepted Answer

The selling and administrative expense budget is typically prepared before the cash budget, as it includes important details such as salaries, rent, and other expenses that impact the overall cash flow of the organization.

Question 9

Proper handling of human relations is essential to the establishment of an effective budgeting system. There is a natural tendency for people to be uncomfortable with budgets. Describe how participative budgeting helps create a healthy atmosphere surrounding the budgeting process.

Accepted Answer

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Question 10

If a financial statement is labeled "pro forma" this means that the statement was prepared by a professional accountant (usually the firm's auditor) following a prescribed format.

Accepted Answer

"Pro forma" means that the statement is based on assumptions or projections, often used for predicting future financial performance. It does not necessarily mean that it was prepared by a professional accountant following a prescribed format.

Question 11

If a company purchases its inventory on account, it need not prepare a schedule of cash payments for inventory purchases.

Accepted Answer

If a company purchases its inventory on account, it still needs to prepare a schedule of cash payments for accounts payable and to track when those payments are due. The purchases may not be paid for immediately, but they will still impact the company's cash flow in the future.

Question 12

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 planned event, such as a merger or acquisition, to estimate the future financial impact of the event. They are not prepared at the end of the year to evaluate performance.

Question 13

The basic cash budget format is total cash available - total cash disbursed = surplus or shortage of cash +/- the effects of financing = ending cash.

Accepted Answer

The basic cash budget format is indeed total cash available - total cash disbursed = surplus or shortage of cash +/- the effects of financing = ending cash.

Question 14

How can participative budgeting improve the effectiveness of a company's budgeting process?

Accepted Answer

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Question 15

Interest expense is not included in the selling and administrative budget because a company cannot estimate interest expense until it prepares the cash budget and makes borrowing projections.

Accepted Answer

Interest expense is dependent on borrowing projections which are determined in the cash budget, therefore it cannot be estimated in the selling and administrative budget.

Question 16

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

Accepted Answer

A cash budget typically includes sections for cash receipts, cash disbursements, and net change in cash, focusing on cash flows rather than categorizing activities as operating, investing, or financing.

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 and does not require an actual outflow of cash, therefore it will not appear on the schedule of cash payments for selling and administrative expenses.

Question 18

Although only 20 units are on hand at the beginning of the year, World Company plans to sell 100 units during 2014. Assuming the company desires an ending inventory of 10 units, it should plan to purchase 110 units.

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Question 19

How might a company develop sales estimates to be used in preparing a sales budget?

Accepted Answer

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Question 20

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 both financial planning tools, but they serve different purposes. The cash budget is a short-term projection of expected cash inflows and outflows, typically covering a period of one year or less, and is used to manage day-to-day cash requirements. The pro forma cash flow statement, on the other hand, provides a longer-term view of expected cash flows, covering multiple years, and is used to evaluate the overall financial health of a business and its ability to generate cash over time.

Quiz 14: Planning for Profit and Cost Control