Question 1

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 a financing cost and is dependent on the company's borrowing decisions. Therefore, it cannot be estimated until the cash budget is prepared and borrowing projections are made. It is included in the cash budget and the financial budget, but not in the selling and administrative budget.

Question 2

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 3

If a budgeting system is designed correctly,top management will not have to get involved in the process.

Accepted Answer

While top management may not need to be involved in every detail of the budgeting process, they should still provide overall guidance and direction for the process. Additionally, top management may need to review and approve the final budget, which would require their involvement.

Question 4

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 not prepared at the end of the year, but rather are projected statements used for future planning and decision making. They are not typically used to evaluate the performance of managers, but rather to assess the financial impact of potential business decisions.

Question 5

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

Accepted Answer

The selling and administrative expense budget is prepared before the cash budget because it provides necessary information for estimating cash outflows related to operating expenses, which are then incorporated into the cash budget.

Question 6

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

The answer of Proper handling of human relations is essential...

Question 7

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 8

Vector Company seeks input from salespeople regarding the number of units they believe they can sell during the upcoming budget period.This is an example of participative budgeting.

Accepted Answer

Participative budgeting involves input from individuals within an organization who have experience or expertise in a certain area. In this case, the salespeople are being asked for their input on the number of units they can sell, which is a form of participative budgeting.

Question 9

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

Accepted Answer

A pro forma income statement provides a projected estimate of a company's future financial performance, including its revenues, expenses, and net income. This information can help managers plan for the future and make informed decisions about how to allocate resources and invest in new initiatives.

Question 10

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

Accepted Answer

The first budget in a master budget is typically the sales budget, followed by the production budget, direct materials budget, direct labor budget, manufacturing overhead budget, selling and administrative budget, and finally the cash budget. The cash budget is prepared after all other budgets have been completed.

Question 11

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

Accepted Answer

A schedule of cash receipts outlines the expected inflow of cash from sales and is closely related to the sales budget.

Question 12

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 inventory purchases because it will eventually have to pay for those purchases. The schedule will include the dates on which those payments will be made.

Question 13

Although only 20 units are on hand at the beginning of the year,World Company plans to sell 100 units during Year 2.Assuming the company desires an ending inventory of 10 units,it should plan to purchase 110 units.

Accepted Answer

The company should plan to purchase 90 units. Calculation: 100 units (planned sales) + 10 units (desired ending inventory) - 20 units (beginning inventory) = 90 units needed to be purchased.

Question 14

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

Accepted Answer

The marketing department plays a key role in developing sales forecasts by analyzing market trends, customer behavior, and other factors. However, sales forecasting is a collaborative effort involving other departments such as finance, operations, and sales. Therefore, while the marketing department has an important role, it is not solely responsible for establishing the sales forecast.

Question 15

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

A financial statement labeled "pro forma" means that it is a projected or forecasted statement prepared based on certain assumptions and hypothetical scenarios, not necessarily prepared by a professional accountant.

Question 16

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

Accepted Answer

The cash budget is a detailed estimate of cash inflows and outflows for a specific period, while the pro forma cash flow statement is a summary of the expected cash flows for a period, usually prepared in conjunction with a financial forecast. While both provide insight into the expected cash position of a company, they differ in their level of detail and purpose.

Question 17

In a participative budgeting system,budget information flows in both directions,from bottom to top and from top to bottom.

Accepted Answer

In participative budgeting, employees at all levels are involved in the budgeting process, and budget information is shared and discussed between employees and managers in both directions, from the bottom-up and top-down. This helps to ensure that everyone has a say in setting targets and that the budget reflects the needs and perspectives of all stakeholders.

Question 18

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

Accepted Answer

The answer of How do short-term plans differ from long-term...

Question 19

How do budget expectations influence a company's employees?

Accepted Answer

The answer of How do budget expectations influence a company's...

Question 20

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 therefore does not appear on the schedule of cash payments for selling and administrative expenses.

Quiz 7: Planning for Profit and Cost Control