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Exam 7: Planning for Profit and Cost Control

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Question 1

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What is the ending accounts receivable balance that would be reported on the pro forma balance sheet prepared as of June 30?

A) $164,700
B) $121,500
C) $283,500
D) $86,400

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

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Question 2

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Scranton Company expects to begin operating on July 1,Year 1.The company's master budget contained the following operating expense budget: $\begin{array} { | l | r | r | r | } \hline & { \text { July } } & \text { August } & { \text { September } } \\\hline \text { Salary expense } & \$ 36,000 & \$ 36,000 & \$ 36,000 \\\hline \text { Sales commissions, } 5 \% \text { of sales } & 30,000 & 32,000 & 24,000 \\\hline \text { Utilities } & 2,800 & 2,800 & 2,800 \\\hline \text { Depreciation on store equipment } & 1,000 & 1,000 & 1,000 \\\hline \text { Rent } & 7,200 & 7,200 & 7,200 \\\hline \text { Miscellane ous } & 1,800 & 1,800 & 1,800 \\\hline \text { Total operating expenses } & \$ 78,800 & \$ \quad 80,800 & \$ 72,800 \\\hline\end{array}$ Sales commissions are paid in cash in the month following the month in which the expense is recognized.All other expense items requiring cash payment are paid in the month in which they are recognized.The amount of commissions payable that would appear on the company's pro forma balance sheet as of September 30,Year 1 is:

A) $32,000.
B) $30,000.
C) $36,000.
D) $24,000.

E) B) and C)
F) None of the above

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Question 3

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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.

Which of the following would not be included in the inventory purchases budget?

Hernandez Company expects credit sales for January to be $100,000.Cash sales are expected to be $60,000.The company expects credit and cash sales to increase 10% for the month of February.Credit sales are collected in the month following the month in which sales are made.Based on this information the amount of cash collections in February would be:

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?

Expressing plans for a business in financial terms is commonly called:

Najimi Enterprises recently began selling on internet.Internet sales for the fourth quarter of Year 2 totaled $600,000.The company's internet sales are expected to grow at a rate of 20% per quarter.All sales are made on account.The company's collection experience is that 70% of accounts receivable will be collected in the quarter of sale and 25% in the next quarter.Five percent of receivables will prove uncollectible and are written off during the quarter following the quarter of sale.The balance in accounts receivable at the end of December Year 1 was $180,000. Required: a)Prepare a sales budget for internet sales for the four quarters of Year 2;include a total column that shows total budgeted internet sales for the year. b)Compute the accounts receivable balance as of the end of Year 2. c)Prepare a cash receipts schedule for all four quarters of Year 2 and the year as a whole.

Hilliard Company budgeted the following transactions for April Year 2: $\begin{array}{|l|r|}\hline \text { Sales (75\% collected in month of sale) } & \$ 200,000 \\\hline \text { Cash Operating Expenses } & 105,000 \\\hline \text { Cash Purchases of Investments } & 75,000 \\\hline \text { Cash Payment of Debt } & 15,000 \\\hline \text { Depreciation on Operating Assets } & 12,000\\\hline\end{array}$ The beginning cash balance was $50,000.The company desires to have a $25,000 ending cash balance.The surplus (or shortage) of cash before considering any financing activities (that is,borrowings or repayments) during in April would be:

Why is cash management important to a business?

Select the incorrect statement regarding the cash budget.

Strategic planning deals with the establishment of long term company objectives.

Sales for January are budgeted at 50,000 units,and the company expects sales to increase 4% each month.How many units will need to be purchased in February if the company's policy is to keep ending inventory each month at 10,000 units?

With regards to financial statements,"pro forma" means:

The following budget information is available for the Arch Company for January Year 2: $\begin{array}{|l|r|}\hline \text { Sales }& \$ \quad 860,000 \\\hline \text { Cost of goods sold } & 540,000 \\\hline \text { Utilities expense } & 2,800 \\\hline \text { Administrative salaries } & 100,000 \\\hline \text { Sales commissions } & 5 \% \text { of sales } \\\hline \text { Advertising } & 20,000 \\\hline \text { Depre ciation on store e quipment } & 50,000 \\\hline \text { Rent on administration building } & 60,000 \\\hline \text { Miscellane ous administrative expenses } & 10,000 \\\hline\end{array}$ All operating expenses are paid in cash in the month incurred.Compute total budgeted selling and administrative expenses (excluding interest) amount for January Year 2.

Greenhill Company's balance sheet as of December 31,Year 1is provided below: $\begin{array} { | l | r | } \hline\quad \quad \quad \quad \quad \quad \quad { \text { Greenway Compary } } \\\hline\quad \quad \quad \quad \quad \quad \quad \quad \quad { \text { Balance Sheet } } \\\hline\quad \quad \quad \quad \quad \quad \quad \quad { \text { December } 31,2013 } \\\hline \text { Assets } & \\\hline \text { Cash } & \$ 35,000 \\\hline \text { Accounts recervable } & 40,000 \\\hline \text { Inventory } & 25,000 \\\hline \text { Plant and equipment, net of depreciation } & 300,000 \\\hline \text { Total assets } & \$ 400,000 \\\hline & \\\hline \text { Liabilities and stockhalders' equity } &\\\hline \text { Accounts payable } &\$30,000 \\\hline \text { Notes payable } &50,000 \\\hline \text { Capital stock, no par } & 2000,000 \\\hline \text { Retained earrings } & 120,000 \\\hline \text { Total liabilities and stockholders' equity } & \$ 400,000 \\\hline\end{array}$ CHANGE NEEDS TO BE MADE TO TABLE Change the "2013" in the heading to: Year 1 In anticipation of preparing the company's operating budget for the upcoming period,the company's accountant has gathered the following information: (a)December Year 1 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,Year 2.All inventory purchases are on account. (c)Selling and administrative expenses for January Year 2 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,Year 2.The amount due will be $50,500.The $500 represents interest expense for the month of January,Year 2. (e)The company expects to purchase a new machine during January Year 2 at a cost of $5,000. Required: Prepare a budgeted income statement for the month of January Year 2.Use the traditional income statement format and ignore income taxes.

Janice was questioned recently about her department's spending in excess of the budget.This is an example of using the budget for performance measurement.

Which of the following items will not appear on a cash budget?

O'Hare Company is in the process of preparing a purchases budget for the first quarter of Year 2.The company has budgeted sales as follows: $\begin{array}{|l|ll|}\hline \text { Dec. Year 1 } & \text { \$ } & 44,000 \\\hline \text { Jan. Year 2 } & \$ & 46,500 \\\hline \text { Feb. Year 2 } & \$ & 51,000 \\\hline \text { Mar. Year 2 } & \$ & 61,500 \\\hline\end{array}$ 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 Year 2 is:

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