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Exam 14: Planning for Profit and Cost Control

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Question 21

True/False

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

A) True
B) False

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Question 22

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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.

E) B) and D)
F) A) and C)

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Question 23

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Greenhill Company's balance sheet as of December 31, 2013 is provided below: In anticipation of preparing the company's operating budget for the upcoming period, the company's accountant has gathered the following information: (a) December 2013 sales were $220,000. Sales are expected to grow at a rate of 8% per month. Half of all sales are for cash and half are on account. (b) Inventory purchases are expected to total $100,000 during January and the inventory account is expected to have a $28,000 balance at January 31, 2014. All inventory purchases are on account. (c) Selling and administrative expenses for January, 2014 are budgeted at $60,000 (exclusive of depreciation) plus 10% of sales. Selling and administrative expenses are paid in cash. Depreciation is budgeted at $3,000 for the month. (d) The notes payable will be paid in January, 2014. The amount due will be $50,500. The $500 represents January's interest expense. (e) The company expects to purchase a new machine during January, 2014 at a cost of $5,000. Required: Prepare a budgeted income statement for the month of January 2014. Use the traditional income statement format and ignore income taxes.

Select the incorrect statement about budgeting committees.

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

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?

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

Select the correct statement about the master budget.

Oakton Furniture provided the following information relevant to its sales for December 2013 and the first quarter of 2014 $\begin{array}{|l|r|r|r|r|}\hline & \text { dec.2014}& \text {jan.2014 }& \text { feb.2014}& \text { mar.2014}\\\hline & {\text { (Actual) }} & \text { (Budgeted) } & {\text { (Budgeted) }} & {\text { (Budgeted) }} \\\hline \text { Credit sales } & \$ 120,000 & \$ 280,000 & \$ 310,000 & \$ 220,000 \\\hline \text { Cash sales } & \$ 20,000 & \$ 50,000 & \$ 60,000 & \$ 24,000\\\hline \end{array}$ Based on the company's collection history, 2% of credit sales are uncollectible, 40% are collected in month of sale and the remainder is collected in the following month. Total budgeted cash receipts in February 2014 are expected to be:

O'Hare Company is in the process of preparing a purchases budget for the first quarter of 2014. The company has budgeted sales as follows: $\begin{array} { | l | l l | } \hline \text { December, 2013 } & \$ & 44,000 \\\hline \text { January, 2014 } & \$ & 46,500 \\\hline \text { February, 2014 } & \$ & 51,000 \\\hline \text { March, 2014 } & \$ & 61,500 \\\hline\end{array}$ 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 is:

The nature of planning changes with the length of the time period being considered. Generally, the shorter the time period, the more general the plans.

Budgeted cash payments for inventory would appear on the:

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:

Purchases on account are given below: $\begin{array} { | r | r | r | } \hline \text { October } & \text { November } & \text { December } \\\hline 30,000 & 40,000 & 50,000 \\\hline\end{array}$ 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?

What is the relationship or connection between a company's pro forma financial statements and the end-of-period financial statements reported to stockholders and other external users?

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

The master budget normally covers:

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

The accountant for Haven Industries could not prepare the following budgets because an item of information is missing for each one. Identify the missing items needed prior to preparing each budget.

Which of the following statements is incorrect?