12: B.5. Preparing the Budget

Question 1

Which of the following would NOT be used to evaluate the adequacy of the budgeted annual operating income?

A. Earnings per share
B. Industry average for earnings on sales
C. Price-earnings ratio
D. Internal rate of return

Answer 1

Correct Answer: D. Internal Rate of Return (IRR)
IRR is a tool used to evaluate the profitability of capital investment projects, like buying a new machine or building a factory.
It has nothing to do with evaluating how adequate or strong the company’s planned yearly profit is.

On the other hand:

Earnings per share (A) shows how much profit goes to each share, and is important for investor evaluation.

Industry average for earnings on sales (B) helps compare the company’s profit margin to competitors.

Price-earnings ratio (C) reflects investor expectations and how earnings are valued in the market.

Question 2

Holland Company is in the process of projecting its cash position at the end of the second quarter. Shown below is pertinent information from Holland’s records.

Cash balance at end of 1st quarter 36,000
Cash collections from customers for 2nd quarter 1,300,000
Accounts payable at end of 1st quarter 100,000
Accounts payable at end of 2nd quarter 75,000
All 2nd quarter costs and expenses (accrual basis) 1,200,000
Depreciation (included in costs & expenses-accrual) 60,000
Purchases of equipment (for cash) 50,000
Gain on sale of asset (for cash) 5,000
Net book value of asset sold 35,000
Repayment of notes payable 66,000
From the data above, determine Holland’s projected cash balance at the end of the second quarter.

A. $95,000
B. Zero
C. $25,000
D. $60,000

Answer 2

The correct answer is A
You solve it by yourself