QUESTIONS 1. Budgets are useful only for small com- panies that can estimate sales with accuracy....

Transcribed Image Text:

QUESTIONS 1. Budgets are useful only for small com- panies that can estimate sales with accuracy. Do you agree with this statement? 2. Why does preparing the master budget re- quire a committee? 3. What are the three levels of planning? Explain each briefly. 4. What is the primary factor that distin- guishes the three different levels of plan- ning from each other? 5. What is the advantage of using a perpetual budget instead of the traditional annual budget? 6. What are the advantages of budgeting? 7. How may budgets be used as a measure of performance? 8. Ken Shilov, manager of the marketing de- partment, tells you that "budgeting simply does not work." He says that he made bud- gets for his employees and when he repri- manded them for failing to accomplish budget goals, he got unfounded excuses. Suggest how Mr. Shilov could encourage employee cooperation. 9. What is a master budget? 10. What is the normal starting point in devel- oping the master budget? 11. How does the level of inventory affect the production budget? Why is it important to manage the level of inventory? 12. What are the components of the cash bud- get? Describe each. 13. The primary reason for preparing a cash budget is to determine the amount of cash to include on the budgeted balance sheet. Do you agree or disagree with this state- ment? Explain. 14. What information does the pro forma in- come statement provide? How does its prep- 15. How does the pro forma statement of cash aration depend on the operating budgets? flows differ from the cash budget? прие Problem 7-21A Preparing budgets with the company's accountant to prepare next year's budget. Ms. King estimates that sales will incre Hammond Fruits Corporation wholesales peaches and oranges. Lashanda King is working 5 percent for peaches and 10 percent for oranges. The current year's sales revenue data follow. Peaches. Oranges Total First Quarter $220,000 400,000 $620,000 Second Quarter $240,000 450,000 $690,000 Third Quarter $300,000 570,000 $870,000 Fourth Quarter $240,000 380,000 $620,000 Total $1,000,000 1,800,000 $2,800,000 Based on the company's past experience, cost of goods sold is usually 60 percent of sales revenue. Company policy is to keep 10 percent of the next period's estimated cost of goods sold as the current period's ending inventory. (Hint: Use the cost of goods sold for the first quarter to determine the beginning inventory for the first quarter.) Required a. Prepare the company's sales budget for the next year for each quarter by individual product. b. If the selling and administrative expenses are estimated to be $700,000, prepare the com pany's budgeted annual income statement. c. Ms. King estimates next year's ending inventory will be $34,000 for peaches and $56,000 for oranges. Prepare the company's inventory purchases budgets for the next year showing quarterly figures by product.. Problem 7-22A Preparing a master budget for retail company with no beginning account balances Patel Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2012. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks. Exercise 7-1A Budget responsibility Sony Huffman, the accountant, is a perfectionist. No one can do the job as well as she can. Inderd, she has found budget information provided by the various departments to be worthless. She east change everything they give her. She has to admit that her estimates have not always been ourate, but she shudders to think of what would happen if she used the information sup- plied by the marketing and operating departments. No one seems to care about accuracy. Indeed, some of the marketing staff have even become insulting. When Ms. Huffman confronted one of the salesmen with the fact that he was behind in meeting his budgeted sales forecast, he responded by saying, "They're your numbers. Why don't you go out and make the sales? It's a heck of a lot easier to sit there in your office and make up numbers than it is to get out and get the real work done." Ms. Huffman reported the incident, but, of course, nothing was done about it. Required Write a short report suggesting how the budgeting process could be improved. Required October sales are estimated to be $120,000 of which 40 percent will be cash and 60 p will be credit. The company expects sales to increase at the rate of 25 percent per month. 9. Nov. surplus before fir a sales budget. Prepare a percent c. Dec. purchases: $113 & The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts. activities: $19,505 The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month's cost of goods sold. However, end- ing inventory of December is expected to be $12,000. Assume that all purchases are made on account. Prepare an inventory purchases budget. 3. C. d. The company pays 70 percent of accounts payable in the month of purchase and the remain- ing 30 percent in the following month. Prepare a cash payments budget for inventory purchases. e. Budgeted selling and administrative expenses per month follow. Salary expense (fixed) Sales commissions Supplies expense Utilities (fixed) Depreciation on store fixtures (fixed)* Rent (fixed) Miscellaneous (fixed) $18,000 5 percent of Sales 2 percent of Sales $1,400 $4,000 $4,800 $1,200 *The capital expenditures budget indicates that Patel will spend $164,000 on October 1 for store fixtures, which are expected to have a $20,000 salvage value and a three-year (36-month) useful life. Planning for Profit and Cost Control CHECK FIGURES CL loating Use this information to prepare a selling and administrative expenses budget. 1. Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses. & Patel borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 1 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $12,000 cash cushion. Prepare a cash budget. h. Prepare a pro forma income statement for the quarter. i. Prepare a pro forma balance sheet at the end of the quarter. j. Prepare a pro forma statement of cash flows for the quarter. CHECK QUESTIONS 1. Budgets are useful only for small com- panies that can estimate sales with accuracy. Do you agree with this statement? 2. Why does preparing the master budget re- quire a committee? 3. What are the three levels of planning? Explain each briefly. 4. What is the primary factor that distin- guishes the three different levels of plan- ning from each other? 5. What is the advantage of using a perpetual budget instead of the traditional annual budget? 6. What are the advantages of budgeting? 7. How may budgets be used as a measure of performance? 8. Ken Shilov, manager of the marketing de- partment, tells you that "budgeting simply does not work." He says that he made bud- gets for his employees and when he repri- manded them for failing to accomplish budget goals, he got unfounded excuses. Suggest how Mr. Shilov could encourage employee cooperation. 9. What is a master budget? 10. What is the normal starting point in devel- oping the master budget? 11. How does the level of inventory affect the production budget? Why is it important to manage the level of inventory? 12. What are the components of the cash bud- get? Describe each. 13. The primary reason for preparing a cash budget is to determine the amount of cash to include on the budgeted balance sheet. Do you agree or disagree with this state- ment? Explain. 14. What information does the pro forma in- come statement provide? How does its prep- 15. How does the pro forma statement of cash aration depend on the operating budgets? flows differ from the cash budget? прие Problem 7-21A Preparing budgets with the company's accountant to prepare next year's budget. Ms. King estimates that sales will incre Hammond Fruits Corporation wholesales peaches and oranges. Lashanda King is working 5 percent for peaches and 10 percent for oranges. The current year's sales revenue data follow. Peaches. Oranges Total First Quarter $220,000 400,000 $620,000 Second Quarter $240,000 450,000 $690,000 Third Quarter $300,000 570,000 $870,000 Fourth Quarter $240,000 380,000 $620,000 Total $1,000,000 1,800,000 $2,800,000 Based on the company's past experience, cost of goods sold is usually 60 percent of sales revenue. Company policy is to keep 10 percent of the next period's estimated cost of goods sold as the current period's ending inventory. (Hint: Use the cost of goods sold for the first quarter to determine the beginning inventory for the first quarter.) Required a. Prepare the company's sales budget for the next year for each quarter by individual product. b. If the selling and administrative expenses are estimated to be $700,000, prepare the com pany's budgeted annual income statement. c. Ms. King estimates next year's ending inventory will be $34,000 for peaches and $56,000 for oranges. Prepare the company's inventory purchases budgets for the next year showing quarterly figures by product.. Problem 7-22A Preparing a master budget for retail company with no beginning account balances Patel Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2012. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks. Exercise 7-1A Budget responsibility Sony Huffman, the accountant, is a perfectionist. No one can do the job as well as she can. Inderd, she has found budget information provided by the various departments to be worthless. She east change everything they give her. She has to admit that her estimates have not always been ourate, but she shudders to think of what would happen if she used the information sup- plied by the marketing and operating departments. No one seems to care about accuracy. Indeed, some of the marketing staff have even become insulting. When Ms. Huffman confronted one of the salesmen with the fact that he was behind in meeting his budgeted sales forecast, he responded by saying, "They're your numbers. Why don't you go out and make the sales? It's a heck of a lot easier to sit there in your office and make up numbers than it is to get out and get the real work done." Ms. Huffman reported the incident, but, of course, nothing was done about it. Required Write a short report suggesting how the budgeting process could be improved. Required October sales are estimated to be $120,000 of which 40 percent will be cash and 60 p will be credit. The company expects sales to increase at the rate of 25 percent per month. 9. Nov. surplus before fir a sales budget. Prepare a percent c. Dec. purchases: $113 & The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts. activities: $19,505 The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month's cost of goods sold. However, end- ing inventory of December is expected to be $12,000. Assume that all purchases are made on account. Prepare an inventory purchases budget. 3. C. d. The company pays 70 percent of accounts payable in the month of purchase and the remain- ing 30 percent in the following month. Prepare a cash payments budget for inventory purchases. e. Budgeted selling and administrative expenses per month follow. Salary expense (fixed) Sales commissions Supplies expense Utilities (fixed) Depreciation on store fixtures (fixed)* Rent (fixed) Miscellaneous (fixed) $18,000 5 percent of Sales 2 percent of Sales $1,400 $4,000 $4,800 $1,200 *The capital expenditures budget indicates that Patel will spend $164,000 on October 1 for store fixtures, which are expected to have a $20,000 salvage value and a three-year (36-month) useful life. Planning for Profit and Cost Control CHECK FIGURES CL loating Use this information to prepare a selling and administrative expenses budget. 1. Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses. & Patel borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 1 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $12,000 cash cushion. Prepare a cash budget. h. Prepare a pro forma income statement for the quarter. i. Prepare a pro forma balance sheet at the end of the quarter. j. Prepare a pro forma statement of cash flows for the quarter. CHECK