Budgeting

CHAPTER VII BUDGETING: PLANNING FOR SUCCESS

STUDY OBJECTIVE: After studying this chapter, you should be able to answer the following: 1. What is budgeting? 2. What are the forms and functions of budgeting? 3. What are the benefits (advantages) and disadvantages of budgeting? 5. What is a master budget? 6. What are the components of a master budget?

"Wise is the person who profits from the mistakes of the past, recognizes the opportunities of the present, and anticipates the challenges of the future."

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BUDGETING The process of budget preparation is sometimes seen as painful, and it is not always clear how the effort that is required leads to any productive output. Furthermore, budgets can be seen as imposing constraints that are hard to live with, and establishing goals that are hard to meet! Despite the rather dismal remarks, it is imperative that organizations carefully plan their financial affairs to achieve financial success. These plans are generally expressed as "budgets." A budget is a detailed financial plan that quantifies future expectations and actions relative to acquiring and using resources. Budgets don't guarantee success, but they certainly help to avoid failure. In a more specific sense budgeting can be seen as a management plan, expressed in quantitative terms, and used for both planning and control of operations for a given period of time. The budget is a plan or standard at the start of the period; at the end of the period, it serves as a control device to help management measure its performance against the plan so that future performance may be improved. The term budgeting is used to denote the process of coming up with budgets.

FORMS AND FUNCTIONS Budgets can take many forms and serve many functions. Budgets can provide the basis for detailed sales targets, staffing plans, inventory production, cash investment/borrowing, capital expenditures (for plant assets, etc.), and on and on. Budgets provide benchmarks against which to compare actual results and develop corrective measures. Budgets give managers "preapproval" for execution of spending plans. Budgets allow managers to provide forward looking guidance to investors and creditors. Budgets are necessary to convince banks and other lenders to extend credit. In small organizations, formal budgets are actually a rarity. The individual owner/manager likely manages only by reference to a general mental budget. The person has a good sense of expected sales, costs, financing, and asset needs. Each transaction is under direct oversight of this person and hopefully they have the mental horsepower to keep things on a logical course. When things don't go well, the owner/manager can usually take up the slack by not taking a paycheck or engaging in some other form of financial exigency. Of course, many small businesses ultimately fail anyway. Explanations for failure are many and varied, but are often pinned on "undercapitalization" or "insufficient resources to sustain operations." Many of these postmortem assessments reflect a failure to adequately plan! Even in a small business, an authentic business plan/budget can often result in anticipating and avoiding disastrous outcomes. Medium and larger organizations invariably rely on budgets. This is equally true in businesses, government, and not-for-profit organizations. The budget provides a formal quantitative expression of expectations. It is an essential facet of the planning and control process. Without a budget, an organization will be highly inefficient and ineffective.

BENEFITS OF BUDGETING As you can see, the budget is an essential tool to translate abstract or general plans into specific action oriented goals and objectives. By adhering to the budgetary guidelines, the expectation is that the identified goals and objectives can be fulfilled. It is crucial to remember that a large organization consists of many people and parts. These components need to be orchestrated to work together in a cohesive fashion. The budget is the tool that communicates the expected outcome, and provides a detailed script to coordinate all of the individual parts to work in concert.

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When things don't go as planned, the budget is the tool that provides a mechanism for identifying and focusing on departures from the plan. The budget provides the benchmarks against which to judge success or failure in reaching goals and objectives and facilitates timely corrective measures. “Money is a scarce resource”. Within most organizations it becomes very common for managers to argue and compete for allocations of limited resources. Each business unit likely has employees deserving of compensation adjustments, projects needing to be funded, equipment needing to be replaced, and so forth. This naturally creates strain within an organization, as the sum of the individual resource requests will usually be greater than the available pool of funds. Successful managers will learn to make a strong case for the resources needed by their unit. But, successful managers also understand that their individual needs are subservient to the larger organizational goals. Once the plan for resource allocation is determined, a good manager will close ranks behind the overall plan and move ahead to maximize results for the overall entity. Personal managerial ethics demands loyalty to an ethical organization, and success requires team work. Here, the budget process is the device by which the greater goals are mutually agreed upon, and the budget reflects the specific game plan that is to be followed in striving to reach those goals. Without a budget, an organization can be destroyed by constant bickering about case-by-case resource allocation decisions. Another advantage of budgets is that they can be instrumental in identifying constraints and bottlenecks. A carefully developed budget will always consider capacity constraints. Managers can learn well in advance of looming production and distribution bottlenecks. Knowledge of these sorts of problems is the first step to resolving or avoiding them. In summary, the budget is a necessary and defining instrument for successful operation of most organizations. This observation is equally true of business, governmental, and not-for-profit entities. As a result, the budget should be taken seriously and great care should be given to its construction. Let's next turn our attention to the processes used to prepare effective budgets.

SUMMARY OF ADVANTAGES & LIMITATIONS OF BUDGETING      

Uses/Advantages of Budgeting It compels periodic planning. It provides a means of allocating resources efficiently and effectively. It enhances cooperation, coordination, communication and motivation. It provides network for performance evaluation. It satisfies some legal and contractual requirements. It directs the activities toward the achievement of organizational goals.

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Limitations of Budgeting Considerable time and costs are required Budgets are merely estimates, employing certain amount of judgment, requiring certain modification or revision if necessary. To be successful, a budgetary system requires cooperation of all members of the organization. Budgets sometimes restrict decisionmaking process. The budget program is merely a guide, not a substitute for good management ability.

BUDGET PROCESSES AND HUMAN BEHAVIOR BUDGET COMMITTEE A comprehensive budget usually involves all segments of a business. As a result, representatives from each unit are typically included throughout the process. The process is likely to be spearheaded by a budget committee consisting of senior level personnel. Such individuals bring valuable insights about all aspects of sales, production, and other phases of operations. Not only are these individuals ideally positioned to provide the best possible information relative to their respective units, they also need to be present to effectively advocate for the opportunities and resource needs within their unit.

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The budget committee's work is not necessarily complete once the budget document is prepared and approved. A remaining responsibility for many committees is to continually monitor progress against the budget, and potentially recommend mid-course corrections. The budget committee's decisions can greatly impact the fate of specific business units, in terms of resources made available as well as setting the benchmarks that will be used to assess performance.

BUDGET ESTIMATION “One thing is sure; no one can see the future”. And, budgets clearly involve a good deal of forward looking prognostication. As a result, a certain amount of error is inevitable. Accordingly, it is easy to slip into a trap of becoming cavalier about the estimates that form the basis for a budget. This should be avoided. Budget estimates should be given careful consideration. They should have a basis in reason and logically be expected to occur. Haphazardness should be replaced by study and statistical evaluation of historical information, as this provides a good starting point for predictions. Changing economic conditions and trends need to be carefully evaluated.

COMPONENTS OF THE BUDGET MASTER BUDGET Is a comprehensive budget that consolidates the overall plan of the organization within a budget period. It consists of all the individual budgets for each of the segments of the organization aggregated or consolidated into one overall budget for the entire firm (other terms: pro forma budget, planning budget, forecast budget, master profit plan) Such budgets consist of many individual building blocks that are tied together in logical harmony, and reflect the financial plan for the entire organization. Careful articulation is essential. The starting point for the master budget is an assessment of anticipated sales via the sales budget. The expected sales level drives both the production plans and the selling, general, and administrative budget. Production drives the need for materials and labor. Factory overhead may be applied based on labor, but it is ultimately driven by overall production.

SALES BUDGET The budgeting process usually begins with a sales budget. The sales budget reflects forecasted sales volume and is influenced by previous sales patterns, current and expected economic conditions, activities of competitors, and so forth. The sales budget is complimented by an analysis of the resulting expected cash collections. Sales often occur on account, so there can be a delay between the time of a sale and the actual conversion of the transaction to cash. For the budget to be useful, careful consideration must also be given to the timing and pattern of cash collections.

PRODUCTION BUDGET Sales drive the level of production. Production is also a function of the beginning finished goods inventory and the desired ending finished goods inventory. The budgeted units of production can be calculated as the number of units sold, plus the desired ending finished goods inventory, minus the beginning finished goods inventory. In planning production, one must give careful consideration to the productive capacity, availability of raw materials, and similar considerations.

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SHORTCUT ILLUSTRATION OF A MASTER BUDGET MASTER BUDGET

OPERATING BUDGET Sales budget Production budget Direct materials budget Direct labor budget Factory overhead budget Inventory budget Budgeted cost of goods sold Budgeted operating expense Budgeted operating income Budgeted net income Budgeted income statement

FINANCIAL BUDGET Cash budget Budgeted balance sheet Budgeted cash flow statement Capital expenditure budget Working capital budget APPROPRIATION-TYPE BUDGET Advertising budget Research and development budget Joint venture budget

Materials Budget Sales Budget

Production Budget

Labor Budget FOH Budget

SG & A Budget

Cash Budget

Budgeted Income Statement

Budgeted Balance Sheet

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BUDGETING-RELATED TERMINOLOGIES FIXED BUDGET

a budget prepared for a one level of activity within a certain period (other term: static budget)

FLEXIBLE BUDGET

a budget prepared for different levels of activity within a certain period (other terms: variable budget, sliding scale budget)

CONTINUOUS BUDGET

a 12-month budget that rolls forward one month as the current month is completed (other term: perpetual budget)

ZERO-BASED BUDGETING

a method of budgeting in which managers are required to justify all costs as if the programs involved were being proposed for the firs time

IMPOSED BUDGETING

a process wherein budgets are prepared by top management with little or no inputs from operating personnel

PARTICIPATORY BUDGETING

a process wherein budgets are developed through joint decisions by top management and operating personnel

BUDGET COMMITTEE

a group of key management persons responsible for overall policy matters relating to the budget program and for coordinating the budget preparation

BUDGET MANUAL

This describes how a budget is prepared and includes a planning calendar and distribution instructions for all budget schedules.

Wrap-up Exercises

(Multiple Choices)

1. The master budget usually begins with the a. Production budget b. Operating budget

c. Financial budget d. Sales budget

2. The production budget process usually begins with the a. Direct labor budget b. Direct materials budget

c. Manufacturing overhead budget d. Sales budget

3. All of the following are considered operating budgets, except the a. Sales budget b. Materials budget

c. Production budget d. Capital budget

4. Which of these budgets is usually prepared first? a. Production budget b. Materials purchases budget

c. Cash disbursement budget d. Cash budget

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5. Hawaii Inc. has projected sales to be P 260,000 in June, P 270,000 in July and P300,000 in August. Hawaii collects 30% of a month’s sales in the month of sale, 50% in the month following the sale, and 20% in the second month following the sale. What is the accounts receivable balance on August 31? a. 90,000 b. 210,000

c. 264,000 d. Some other number

6. Arizona Inc. has projected sales: February, P 10,000; March, P 9,000; April, P 8,000; May, P 10,000; and June, P 11,000. Arizona has 30% cash sales and 70% sales on account. Accounts are collected 40% in the month following the sale and 55% collected the second month. What would be the total cash receipts in May? a. 3,000 b. 8,150

c. 8,705 d. Some other number

7. The Ohio Company has the following historical pattern on its credit sales: 70-15-10-4 July August September October November December

60,000 70,000 80,000 90,000 100,000 85,000

What would be the estimated total cash collections during the fourth calendar quarter from sales made on open account during the fourth calendar quarter? a. 172,500 b. 230,000

c. 251,400 d. 265,400

8. Alabama Consortium is constructing a corporate planning model. Cash sales are 30% of the company’s sales, with the remainder subject to the following collection pattern: One month after sale Two months after sale Three months after sale Uncollectible

60% 30% 8% 2%

If Sn is defined as total sales in month ‘n’, which one of the following expressions correctly describes Alabama’s collection on account in any given month? a. 0.6 S n-1 + 0.3 Sn-2 + 0.08 Sn-3 b. 0.42 Sn+1 + 0.21 Sn+2 + 0.056 Sn+3 c. 0.42 Sn-1 + 0.21 Sn-2 + 0.056 Sn-3 c. 0.6 Sn-1 + 0.3 Sn-2 + 0.08 Sn-3 – 0.02 S 9. Nevada Company manufactures a single product. Nevada keeps inventory of raw materials at 50% of the coming month’s budgeted production needs. Each unit of product requires three pounds of materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600.

Determine the raw materials purchases in July. a. 1,450 pounds b. 2,400 pounds

c. 3,900 pounds d. Some other number

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10. Georgia Co. has projected sales to be P 60,000 in January, P 75,000 in February, and P 80,000 in March. Georgia wants to have 25% of next month’s sales needs on hand at the end of a month.

If Georgia has an average gross profit of 40%, what are the February purchases? a. 30,500 b. 45,750

c. 46,250 d. 76,250

11. Philadelphia Company has budgeted sales of 24,000 finished units for the forthcoming 6month period. It takes 4 lbs. of direct materials to make one finished unit. Given the following: Beginning inventory Target ending inventory

Finished Units 14,000

Direct Materials (pounds) 44,000

12,000

48,000

How many pounds of direct materials should be budgeted for purchase during the 6-month period? a. 92,000 b. 88,000

c. 96,000 d. 100,000

12. Michigan Merchandising is preparing its cash budget for January 2010 and made the following projections: Sales Gross Profit Rate Decrease in Inventories Decrease in Accounts Payable for Inventories

P 1,500,000 25% P 70,000 P 120,000

For January 2010, what were the estimated cash disbursements for inventories? a. 935,000 b. 1,050,000

c. 1,055,000 d. 1,175,000

13. Comparing actual results with a budget based on achieved volume is possible with the use of a a. Monthly budget b. Master budget

c. Rolling budget d. Flexible budget

14. Texas Company has prepared the following flexible budget for production costs: costs = 340,000 + 9X, where X is the number of units produced. Texas produced 20,000 units at a total cost of P 490,000.

What is the variance of actual costs from budgeted costs? a. 150,000 favorable b. 30,000 favorable

c. 30,000 unfavorable d. 90,000 unfavorable

15. The use of standard costs in the budgeting process signifies that an organization has most likely implemented a a. Flexible budget b. Capital budget

c. Zero-based budget d. Static budget

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Brief Exercises: 1. The SPSBL Corporation manufactures and sells two products, Onething and Twothing. In July 2008, the SPSBL’s budget department gathered the following information in order to project sales and budget requirements for 2009.

2009 Projected Sales: Products Onething Twothing

Units 60,000 40,000

Price P70 100

2009 inventory in units: Products Onething Twothing

Expected 01/01/09 12/31/09 20,000 25,000 8,000 9,000

In order to produce Onething and Twothing, the following raw materials are used: Amount used per unit Material Unit Onething Twothing A Kilos 4 5 B Kilos 2 3 C Each 1 Projected data for 2009 with respect to materials is as follows: Expected Purchase Expected Inventory Raw Material Price January 1, 2009 A P 8.00 32,000 kilos B 5.00 29,000 kilos C 3.00 6,000 each

Desired Inventory December 31, 2009 36,000 kilos 32,000 kilos 7,000 each

Projected direct labor requirements for 2009 and rates follow: Product Hours per unit Rate per unit Onething 2 P3.00 Twothing 3 4.00 Overhead is applied at the rate of P2.00 per direct labor hour. REQUIRED: Based on the above projections and budget requirements for 2009 for Onething and Twothing, prepare the following budgets for 2009. 1. Sales budet (in pesos) 2. Production budget (in units) 3. Raw materials usage budget (in quantities) 4. Raw materials purchase budget (in pesos) 5. Direct labor budget (in pesos) 6. Budgeted finished goods inventory at December 31, 2009 (in pesos) (Adapted: Management Advisory Services by Ricardo M. Harina) 2. Tomlinson Retail Store seeks your assistance to develop cash and other budget information for May, June and July 2009. At April 30, 2009, the company had cash of P5,500, accounts receivable of P437,000, inventories of P309,400, and accounts payable of P133,055.

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The budget is based on the following assumptions: a. Sales 1. Each month’s sales are billed on the last day of the month. 2. Customers are allowed 3% discount if payment is made within 10 days after the billing date. Accounts receivable are booked gross. 3. Sixty percent of the billings are collected within the discount period, 25% are collected by the end of the month, 9% are collected by the end of the second month, and 6% prove uncollectible. b. Purchases 1. 54% of all purchases of materials and selling, general, and administrative expenses are paid the month purchased and the remainder in the following month. 2. Each month’s months units of ending inventory is equal to 130% of the next month’s units of sales. 3. The cost of each unit of inventory is P20. 4. Selling, general and administrative expenses, of which P2,000 is depreciation, are equal to 15% of the current month’s sales.

Actual and projected sales are as follows: 2009 March April May

Pesos 354,000 363,000 357,000

Units 11,800 12,100 11,900

2009 June July August

Pesos 342,000 360,000 366,000

Units 11,400 12,000 12,200

REQUIRED: Prepare cash forecast for the months of May, June and July 2009, based on the above data and supported by the following schedules: a. Cash receipts from accounts receivable. b. Cash disbursements on accounts payable. c. Purchases of inventory d. Cash disbursements on selling, general and administrative expenses. (Adapted: Management Advisory Services by Ricardo M. Harina) 3. Forks Company budgets sales at P 100,000 and expects a profit before tax of 10% of the sales. Expenses are estimated as follows: selling = 15% of sales; administrative = 10% of sales. Labor is expected to be 40% of the total manufacturing costs. Factory overhead is to be applied at 75% of direct labor costs. Inventories are to be as follows: Materials Work-in-process Finished goods

January 1 P 25,000 8,000 15,000

December 31 P 30,000 13,000 20,000

REQUIRED: Determine the following: 1. Cost of goods sold 2. Total manufacturing cost 3. Factory overhead 4. Materials purchases 4. Past collections experienced by Wolf Company proved that 60% of the net sales billed in a month are collected during the month of sales, 30% are collected in the following month, and 10% are collected in the second following month. A record of monthly net sales of previous months is as follows:

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2009 2010

November December January February

P 450,000 P 460,000 P 480,000 P 420,000

2010

March April May June

P 500,000 P 550,000 P 600,000 P 700,000

On January 1, 2010, the net accounts receivable balance showed P 229,000. REQUIRED: Determine the following:  Cash collections on accounts receivable during: 1. January 2010 2. March 2010  Accounts receivable balance at the end of: 4. February 2010 5. April 2010

3. May 2010 6. June 2010

5. The sales manager of Bella Merchandising has budgeted the following sales for the 4 th quarter of 2010: October P 123,500 November 156,000 December 208,000 Other budgeted estimates are:  All merchandises are to sell at its invoice cost plus 30% mark-up.  Beginning inventories of each month are budgeted at 40% of that particular month’s projected cost of goods sold. REQUIRED: Determine the following: 1. Projected merchandise purchases for the month of October 2. Projected merchandise purchases for the month of November 6.

The following information is taken from Swan Corporation’s accounting records for the year ended December 31, 2009. These data would be used as the basis for the next year’s cash budget. A.) Customer sales receipts for P 870,000 B.) Purchased machinery and equipment for P 125,000 cash C.) Settled income taxes of P 110,000 D.) Sold investment securities for P 500,000 E.) Paid dividends of P 600,000 F.) Received rentals of P 105,000 G.) Issued 500 shares of common stock (ordinary shares) for P 250,000 H.) Paid a sum of P 100,000 due to suppliers and payroll to employees I.) Purchased real estate for P 550,000 cash that was borrowed from a bank J.) Paid P 450,000 for treasury shares

REQUIRED: Determine the following: 1. Net cash flow provided by operations 2. Net cash used in investing activities 3. Net cash used in financing activities 4. Net cash increase or decrease

Additional Exercises: (Sources: CMA/CIA/RPCPA/AICPA/Various test banks)

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1. Which of the following is not an advantage of budgeting? a. It requires managers to state their objectives. b. It facilitates control by permitting comparisons of budgeted and actual results. c. It facilitates performance evaluation by permitting comparisons of budgeted and actual results. d. It provides a check-up device that allows managers to keep close tabs on their subordinates.

2. Budgets are a necessary component of financial decision making because they provide a (n) a. Efficient allocation of resources b. Means to use all the firm’s resources

c. Means to check managerial discretion d. Automatic corrective mechanism for errors

3. In an organization that plans by using comprehensive budgeting, the master budget is a. A compilation of all the separate operational and financial budget schedules of the organization b. The booklet containing budget guidelines, policies and forms to use in the budgeting process c. The current budget updated for operations for part of the current year d. A budget for a non-profit entity after it is approved by the appropriate authoritative body NOTE: Letter ‘b’ describes a budget manual.

4. The master budget process usually begins with a. Production budget b. Operating budget

c. Financial budget d. Sales budget

5. The sales budget is classified as a. A financial budget b. A flexible budget

c. An operating budget d. A program budget

6. Using the concept of ‘expected value’ in sales forecasting means that the sales forecast to be used is a. Developed using the indicator method b. The sum of the sales expected by individual c. Based on expected selling prices of the products d. Based on probabilities

7. Ohio Company developed the following sales forecasts and associated probabilities Sales Forecast P 600,000 P 650,000 P 700,000 P 800,000

Probability 10% 50% 35% 5%

The expected value of sales is a. 650,000 b. 670,000

c. 667,500 d. 800,000

8. Which of the following is included in a firm’s financial budget? a. Budgeted income statement b. Capital budget

c. Production schedule d. Cost of goods sold budget

9. Which of the following equations can be used to budget purchases? (BI = Beginning Inventory, EI = Ending Inventory desired, CGS = Budgeted Cost of Goods Sold) a. Budgeted purchases = CGS + BI – EI

c. Budgeted purchases = CGS + EI + BI

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b. Budgeted purchases = CGS + BI

d. Budgeted purchases = CGS + EI – BI

10. Colorado Company desires an ending inventory of P 60,000. It expects sales of P 120,000 and has a beginning inventory of P40,000. Cost of sales is 60% of sales. Budgeted purchases are a. 60,000 b. 72,000

c. 92,000 d. 132,000

11. Individual budget schedules are prepared to develop an annual comprehensive or master budget. The budget schedule that would provide the necessary input data for the direct labor budget would be the a. Sales forecast b. Raw materials purchases budget

c. Schedule of cash receipts and disbursements d. Production budget

12. South Dakota Company budgets sales of 22,000 units for January, 30,000 units in February. The budgeted beginning inventory for January 1 was 7,000 units. South Dakota desires an ending inventory equal to one-half of the following month’s sales needs. Budgeted production for January is a. 37,000 units c. 26,000 units b. 30,000 units d. 14,000 units 13. New Mexico Company plans to sell 24,000 units of Product A in July and 30,000 units in August. Sales of Product A during June were 25,000 units. Past experience has shown that end-of-month inventory must equal 3,000 units plus 30% of the next month’s sales. On June 30, this requirement was met. Based on these data, how many units of Product A must be produced during the month of

July? a. 28,800 b. 22,200

c. 24,000 d. 25,800

14. Florida Co. Manufactures a single product. Florida keeps its inventory of finished goods at 75% of the coming month’s budgeted sales and inventory of raw materials at 50% of the coming month’s budgeted production needs. Each unit of product requires two pounds of materials. The

production budget is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in June would be a. 1,525 pounds b. 2,500 pounds

c. 2,800 pounds d. 3,050 pounds

15. New Jersey Co. is budgeting sales of 53,000 units of product A1 for 2010. The manufacture of one unit of A1 requires 4 kilos of chemical Z5. During 2010, New Jersey plans to reduce the inventory of Z5 by 50,000 kilos and increase the finished goods inventory of A1 by 6,000 units. There is no work-in-process inventory. How many kilos of Z5 is New Jersey budgeting to purchase in 2010? a. 138,000 b. 162,000

c. 186,000 d. 238,000

16. Washington Company has the following 2010 budget data: Beginning finished goods inventory Sales Ending finished goods inventory Direct materials Direct labor Variable factory overhead Fixed factory overhead

40,000 units 70,000 units 30,000 units P 10 per unit P 20 per unit P 5 per unit P 80,000

What are the 2010 total budgeted production costs? 118

a. 2,100,000 b. 2,180,000

c. 2,240,000 d. 2,320,000

17. Montana Company’s budget contains the following information: Beginning finished goods inventory Beginning work-in-process in equivalent units Desired ending finished goods inventory Desired ending work-in-process in equivalent units Projected sales

Units 85 10 100 40 1,800

How many equivalent units should Montana plan to produce? a. 1,565 b. 1,800

c. 1,815 d. 1,845

18. The information contained in a cost of goods manufactured budget most directly relates to the a. Materials used, direct labor, overhead applied and ending work-in-process b. Materials used, direct labor, overhead applied, and work-in-process inventories budgets c. Materials used, direct labor, overhead applied, and work-in-process inventories, and finished goods inventories budgets d. Materials used, direct labor, overhead applied, and finished goods inventories budgets 19. Nebraska Company, a merchandising firm, is preparing its master budget and has gathered the following data to help budget cash disbursements: Budgeted data: Cost of goods sold P 1,680,000 Desired decrease in inventories 70,000 Desired decrease in accounts 150,000 payable All of the accounts payables are for inventory purchases and all inventories are purchased on

account. What are the estimated cash disbursements for inventories for the budget period? a. 1,460,000 b. 1,600,000

c. 1,900,000 d. 1,760,000

20. Maine Co. makes payments for purchases 30% during the month of purchase and the remainder the following month. April purchases are projected to be P 80,000; May purchases will be P 120,000. Cash payments on account for May will be a. 36,000 b. 54,000

c. 84,000 d. 92,000

Items 21 and 22 are base on the following information

Operational budgets are used by a retail company for planning and controlling its business activities. Data regarding the company’s monthly sales for the last 6 months of the year and its projected collection patterns are shown below. Forecasted sales July August September October November

P 775,000 750,000 825,000 800,000 850,000

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December

900,000

Types of sales Cash sales Credit sales

20% 80%

Collection pattern for Credit Sales In the month of sale In the first month following the sale Uncollectible

40% 57% 3%

The cost of merchandise averages of 40% of its selling price. The company’s policy is to maintain an inventory equal to 25% of the next month’s forecasted sales. The inventory balance at cost is P 80,000 as of June 30.

21. The budgeted cost of the company’s purchases for the month of August would be a. 302,500 b. 305,000

c. 307,500 d. 318,750

22. The company’s total cash receipts from sales and collections on account that would be budgeted for the month of September would be a. 757,500 c. 793,800 b. 771,000 d. 856,500

23. Alaska Company has budgeted sales on account of P 120,000 for July, P 211,000 for August, and P 198,000 for September. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36% the second month, and 4% will be uncollectible. The cash from accounts receivable that should be budgeted for September would be a. 169,800 b. 194,760

c. 197,880 d. 198,600

24. The cash receipts budget includes a. Funded depreciation b. Operating supplies

c. Extinguishment of debt d. Loan proceeds

25. Which one of the following schedules would be the last item to be prepared in the normal budget preparation process? a. Direct labor budget b. Cost of goods sold budget

c. Cash budget d. Manufacturing overhead budget

26. The Pennsylvania Company is preparing its cash budget for the month of May. The following information is available concerning its accounts receivable. Estimated credit sales for May P 200,000 Actual credit sales for April 150,000 Estimated collections in May for credit sales in May 20% Estimated collections in May for credit sales in April 70% Estimated collections in May for credit sales prior to April P 12,000 Estimated write-offs in May for uncollectible credit sales 8,000 Estimated provision for bad debts in May for credit sales in May 7,000

What are the estimated cash receipts from accounts receivable collections in May? a. 142,000

c. 150,000

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b. 149,000

d. 157,000

27. The cash budget should help to ensure a. That enough cash is on hand at all times to satisfy maximum cash requirements b. Sufficient liquidity without an excess amount of idle cash c. That cash dividends can be paid every quarter d. That sufficient cash is available to pay salaries and wages, even if it means borrowing the money 28. The cash budget for 2012 would be affected in some way by all of the following, except a. A cash dividend declared in 2011 for payment in 2012. b. A cash dividend declared in 2012 for payment in 2013. c. Interest expense on loans taken out and repaid during 2012. d. The sales forecast for the first month in 2013. 29. A company has prepared a cash budget for January through June of 2010. Which of the following, discovered in February 2010, is least likely to require the cash budget? a. February sales are lower than budgeted. b. The interest rate on short-term borrowing is higher than budgeted. c. The company increased from 10% to 20% the down payment it requires from customers d. The company changed inventory methods from LIFO to FIFO.

30. Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is the a. Income statement b. Statement f cost of goods sold

c. Statement of cash flows d. Statement of manufacturing costs

Be thankful that you don’t already have everything you desire. If you did, what would there be to look forward to? Be thankful when you don’t know something, for it gives you the opportunity to learn. Be thankful for the difficult times. During those times you grow. Be thankful for your limitations, because they give you opportunities for improvement. Be thankful for your mistakes. They will teach you valuable lessons. Be thankful when you’re tired and weary, because it means you’ve made a difference. It’s easy to be thankful for the good things. But a life of rich fulfillment comes to those who are also thankful for the setbacks.

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Find a way to be thankful for your troubles, and they can become your blessings.

- Sir Juls

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