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Flashcards in B2-4 Deck (34):
1

A static budget contains which of the following amounts?

a.

Actual costs for budgeted output.

b.

Budgeted costs for actual output.

c.

Actual costs for actual output.

d.

Budgeted costs for budgeted output.

 

Choice "d" is correct. A static budget is based on costs at one level of output. Static budgets thus include budgeted costs for budgeted output. They are not based on or adjusted for actual performance.

Choice "c" is incorrect. Actual costs for actual output represent actual activity, not budget.

Choice "a" is incorrect. Actual cost for budgeted output would not be computed as part of static budget.

Choice "b" is incorrect. Budgeted costs for actual output are the basis for flexible budget computations and would not be part of a static budget.

2

Which of the following is most useful when risk is being prioritized?

a.

Uncontrollable risks.

b.

Expected value.

c.

Low and high probability exposures.

d.

Low and high-degree loss exposures.

 

Choice "b" is correct. Expected value computations that assign probabilities to potential outcomes quantify both the likelihood (percentage) and outcome (amounts) into a single value. Expected value is therefore the most useful of the listed statistics when risk is being prioritized.

Choice "c" is incorrect. Low and high probability exposures identify ranges of likelihood but do not consolidate findings into a single expected value.

Choice "d" is incorrect. Low and high degree loss exposures identify ranges of impact but do not consolidate findings into a single expected value.

Choice "a" is incorrect. Uncontrollable risks are, by definition, not within the ability of the manager to mitigate. Like sunk costs that will not change regardless of priorities, uncontrollable risk is not useful when prioritizing risk.

3

A flexible budget is appropriate for a:

~Marketing budget
~Direct material usage budget
a.

No

Yes

b.

No

No

c.

Yes

Yes

d.

Yes

No

Choice "c" is correct. A flexible budget is a budget prepared at different levels of operating activity. It is appropriate for any activity that has variable costs. It is not necessary for the control of fixed costs since fixed costs do not vary with changes in the level of activity.

Choice "b" is incorrect. Both of these budgets have variable cost components, so flexible budgets would be meaningful at different levels of activity.

Choice "a" is incorrect. The marketing budget would have variable costs, making a flexible budget appropriate for control over marketing costs.

Choice "d" is incorrect. The direct materials usage budget includes variable costs, making a flexible budget appropriate for control over direct material usage costs.

4

The cash budget provides management with information. Which of the following is not an example of information a cash budget provides?

a.

Availability of funds for investment purposes.

b.

Availability of funds for the repayment of debt.

c.

Availability of funds for distribution to owners.

d.

The need for internal financing.

Choice "d" is correct. The cash budget provides information concerning the need for external financing, not internal financing.

Choices "c", "b", and "a" are incorrect. They are all examples of information a cash budget provides.

5

A firm develops an annual cash budget in order to:

a.

Support the preparation of its cash flow statement for the annual report.

b.

Avoid the opportunity costs of noninvested excess cash and minimize the cost of interim financing.

c.

Ascertain which capital expenditure projects are feasible and which capital expenditure projects should be deferred.

d.

Balance the noncash and cash activities of the company.

Choice "b" is correct. The main reason for preparing a cash budget is to anticipate cash flows so that excess cash can be invested and to minimize the need for interim financing.

Choices "a" and "d" are incorrect. A budget would not be used to support the statement of cash flows or balance noncash and cash activities of the company (which are based on actual uses of cash, not budgeted).

Choice "c" is incorrect. Capital projects often require the use of various types of financing. The annual cash budget, while it considers these issues in determining the amount of external financing to obtain, is not specifically developed to ascertain which capital expenditure projects are feasible, etc. The capital expenditure budget must be done before the cash budget can be prepared.

6

Which of the following options lists the correct sequence for preparing budgets?

a.

Material purchases budget, production budget, cost of goods sold budget, cash receipts budget.

b.

Cost of goods sold budget, sales budget, budgeted income statement, budgeted balance sheet.

c.

Sales budget, production budget, budgeted balance sheet, budgeted income statement.

d.

Production budget, material purchases budget, budgeted income statement, budgeted balance sheet.

 

Choice "d" is correct. The production budget will drive the material purchases budget, while the pro forma financial statements come at the very end of the process. In addition, the budgeted income statement must come before the budgeted balance sheet.

Choice "b" is incorrect. The cost of goods sold budget will come after the sales budget is established.

Choice "a" is incorrect. The production budget will drive the materials purchases budget, which along with the direct labor and factory overhead budgets, will drive the cost of goods sold budget.

Choice "c" is incorrect. The budgeted income statement needs to come before the budgeted balance sheet.

7

Which one of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for the calendar year Year 1?

a.

Borrowing funds from a bank on a note payable taken out in June Year 1 and agreeing to pay the principal and interest in June Year 2.

b.

Dividends declared in November Year 1 to be paid in January Year 2 to shareholders of record as of December Year 1.

c.

The amount of uncollectible customer accounts for Year 1.

d.

A purchase order issued in December Year 1 for items to be delivered in February Year 2.

Choice "a" is correct. Borrowing funds on a note in June Year 1 would be a cash inflow in Year 1 and would have to be included in a schedule of cash receipts and disbursements for Year 1. The repayment would be a cash outflow in Year 2.

Choice "d" is incorrect. A purchase order is a commitment, but not a cash event.

Choice "b" is incorrect. Dividends declared are a non-cash item until paid in Year 2.

Choice "c" is incorrect. Uncollectible accounts are a non-cash item.

8

Which of the following types of budgets is the last budget to be produced during the budgeting process?

a.

Cash.

b.

Cost of goods sold.

c.

Capital.

d.

Marketing.

Choice "a" is correct. The annual business plan process typically begins with operating budgets that are driven by sales budgets that, in turn, provide the required variables for production, selling and personnel budgets. Financial budgets including pro forma financial statements and cash budgets come at the end of the process and are prepared last. Cash budgets are typically derived from the operating budgets that assume accrual basis assumptions (e.g., credit sales and credit purchases).

Choice "c" is incorrect. Capital budgets would be developed as part of a business's strategic planning process and would precede the development of cash budgets derived from operating budgets.

Choice "b" is incorrect. The annual business plan process is comprised of the development of operating budgets followed by financial budgets. The cost of goods sold budget is an operating budget that is driven by the purchases and sales budgets. The operating budgets precede the financial budgets that include the cash budget.

Choice "d" is incorrect. The annual business plan process is comprised of the development of operating budgets followed by financial budgets. The marketing (selling and administration) budget is an operating budget that precedes the financial budgets that include the cash budget.

9

The basic difference between a master budget and a flexible budget is that a master budget is:

a.

Based on a fixed standard and a flexible budget allows management latitude in meeting goals.

b.

Only used before and during the budget period and a flexible budget is only used after the budget period.

c.

Based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range.

d.

For an entire production facility and a flexible budget is applicable to single departments only.

Choice "c" is correct. A master budget is an overall budget, consisting of many smaller budgets, that is based on one specific level of production. A flexible budget is a series of budgets based on different activity levels within the relevant range.

Choice "b" is incorrect. The usefulness of master budgets and flexible budgets is not limited to specific periods.

Choice "d" is incorrect. The master budget includes the entire company, not just the production facility. The flexible budget can cover many levels of activity, not just one department.

Choice "a" is incorrect. Flexible budgets do not allow management latitude in meeting goals, but they do give management the opportunity to compare actual results to the budget for the activity level achieved.

10

The cash budget must be prepared before you can complete the:

a.

Production budget.

b.

Forecasted balance sheet.

c.

Forecasted income statement.

d.

Capital expenditure budget.

Choice "b" is correct. The cash budget must be prepared before you can complete the forecasted balance sheet.

Choice "d" is incorrect. The capital expenditure budget must be done before the cash budget.

Choice "a" is incorrect. The production budget must be done before purchases, labor and overhead budgets can be prepared, all of which impact the cash budget.

Choice "c" is incorrect. The forecasted income statement may be prepared before the cash budget.

11

Which of the following listings correctly describes the order in which the four types of budgets must be prepared?

a.

Production, direct materials purchases, sales, cash disbursements.

b.

Sales, direct materials purchases, production, cash disbursements.

c.

Cash disbursements, direct materials purchases, production, sales.

d.

Sales, production, direct materials purchases, cash disbursements.

 

Choice "d" is correct. The order of budget preparation begins with the sales budget which logically drives the production budget (to support sales), which, in turn, drives the direct materials purchases (to support production) from which the cash disbursements budget is derived.

Choice "a" is incorrect. Budgets are driven by sales forecasts. To begin with the production budget is illogical and presumes that the budget preparer can mandate sales levels based on production or is not constrained by inventory levels.

Choice "c" is incorrect. Budgets are driven by sales forecasts that ultimately determine cash flows. Beginning with cash disbursements is incorrect.

Choice "b" is incorrect. Although the order presented in this selection properly begins with sales, it does not logically support anticipated sales with production. The placement of direct materials before production appears to indicate that direct material purchases are determined independently of production as determined by sales. That relationship is generally not logical

12

Companies in what type of industry may use a standard cost system for cost control?

~Mass production industry
~Service industry
a.

Yes

No

b.

No

No

c.

Yes

Yes

d.

No

Yes

 

Choice "c" is correct. Manufacturing industries such as mass production are typical areas where standard cost systems are used. However, service industries may also use a standard cost system.

Choices "a", "b", and "d" are incorrect based on the above explanation.

13

The basic difference between a master budget and a flexible budget is that a master budget is:

a.

Only used before and during the budget period and a flexible budget is only used after the budget period.

b.

For an entire production facility whereas a flexible budget is applicable to single departments only.

c.

Based on a fixed standard, whereas a flexible budget allows management latitude in meeting goals.

d.

Based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range.

Choice "d" is correct. The master budget is based on one production level and a flexible budget is designed to reflect any production level within a relevant range of production activities.

Choice "a" is incorrect. The flexible budget is used before and during the budget period.

Choice "c" is incorrect. The flexible budget is based on fixed standards which are appropriately developed for the relevant range of production activity.

Choice "b" is incorrect. The flexible budget is developed for single departments and for the production facility as a whole.

14

When production levels are expected to increase within a relevant range, and a flexible budget is used, what effect would be anticipated with respect to each of the following costs?

~Fixed costs per unit
~Variable costs per unit
a.

Decrease

No change

b.

No change

No change

c.

Decrease

Decrease

d.

No change

Decrease

15

Which one of the following statements regarding the difference between a flexible budget and a static budget is correct?

a.

A flexible budget includes only variable costs whereas a static budget includes only fixed costs.

b.

A flexible budget is established by operating management while a static budget is determined by top management.

c.

A flexible budget provides cost allowances for different levels of activity whereas a static budget provides costs for one level of activity.

d.

A flexible budget primarily is prepared for planning purposes while a static budget is prepared for performance evaluation.

Choice "c" is correct. A flexible budget provides cost allowances (adjustments) for different levels of activity. A static budget provides costs for one level of activity.

Choice "d" is incorrect. Both types of budgets are used for planning. A flexible budget is better than a static budget for performance evaluation since it can be adjusted to the actual production level.

Choice "a" is incorrect. Both flexible and static budgets include both variable and fixed costs.

Choice "b" is incorrect. Both flexible and static budgets can be prepared at any level of management.

16

The information contained in a cost of goods manufactured budget would most directly relate to the:

a.

Materials used, direct labor, overhead applied, and finished goods inventories budgets.

b.

Materials used, direct labor, overhead applied, and work-in-process inventories budgets.

c.

Materials used, direct labor, overhead applied, unit production, and raw materials inventories budgets.

d.

Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods inventories budgets.

Choice "b" is correct. Materials, labor, and overhead applied are all "inputs" to the cost of goods manufactured. Work-in-process affects both inputs (for beginning W-I-P) and outputs (for ending W-I-P).

Choice "d" is incorrect. Finished goods inventory is not necessary for the determination of cost of goods manufactured.

Choice "a" is incorrect. Finished goods inventory is not necessary for the determination of cost of goods manufactured. WIP inventory is necessary to calculate cost of goods manufactured.

Choice "c" is incorrect. Raw materials inventory is not sufficient information to assist in the calculatation cost of goods manufactured, nor is units of production. WIP inventory is necessary.

17

Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is:

a.

Statement of cost of goods sold.

b.

Statement of cash flows.

c.

Capital expenditure plan.

d.

Income statement.

Choice "b" is correct. The statement of cash flows is usually the last pro forma statement prepared. This is because everything affects cash. Only when everything else has been estimated can cash flow be projected.

Choices "c", "d", and "a" are incorrect, based on the above explanation.

18

When preparing the series of annual operating budgets, management usually starts the process with the:

a.

Production budget.

b.

Capital budget.

c.

Sales budget.

d.

Balance sheet.

Choice "c" is correct. The budgeting process usually begins with the sales budget.

Choices "d", "b", and "a" are incorrect, based on the master budget flow chart:

19

Which of the following budgets provides information for preparation of the owner's equity section of a budgeted balance sheet?

a.

Budgeted income statement.

b.

Cash budget.

c.

Sales budget.

d.

Capital expenditures budget.

 

Choice "a" is correct. The budgeted income statement produces anticipated accrual basis net income or loss and is added to beginning owner's equity to generate the owner's equity section of the budgeted balance sheet.

Choice "c" is incorrect. The sales budget is the starting point for all operating and cash flow budgets but does not directly provide information for preparation of the owner's equity section of the budgeted balance sheet.

Choice "b" is incorrect. The cash budget reconciles the budgeted income statement to the change in cash and displays cash flow requirements but does not directly provide information for preparation of the owner's equity section of the budgeted balance sheet.

Choice "d" is incorrect. The capital expenditures budget describes the amounts that will be paid for long-lived assets but does not directly provide information for preparation of the owner's equity section of the budgeted balance sheet.

20

There are various budgets within the master budget cycle. One of these budgets is the production budget. Which one of the following best describes the production budget?

a.

It includes required material purchases.

b.

It aggregates the monetary details of the operating budget.

c.

It includes required direct labor hours.

d.

It is calculated from the desired ending inventory and the sales forecast.

 

Choice "d" is correct. The production budget is based on the sales budget (or forecast), with modification for increases or decreases in inventory levels.

Choice "c" is incorrect. The production budget does include direct labor hours, but it also includes much more.

Choice "a" is incorrect. The production budget does include the cost of materials used in production, but it also includes much more.

Choice "b" is incorrect. The operating budget includes all budgets (except capital purchases and cash) and includes the pro forma income statement; it goes beyond the production budget.

21

Which one of the following items is the last schedule to be prepared in the normal budget preparation process?

a.

Cost of goods sold budget.

b.

Selling expense budget.

c.

Cash budget.

d.

Manufacturing overhead budget.

 

Choice "c" is correct. When preparing a budget, the last schedule to be prepared is the cash budget. Sometimes, pro forma accrual financial statements are prepared after this last schedule.

Choices "a", "d", and "b" are incorrect. The cost of good sold budget, direct labor budget, manufacturing overhead budget, and selling expense budget are all intermediate steps in the budgeting process

22

Which one of the following items should be done first when developing a comprehensive budget for a manufacturing company?

a.

Development of a sales budget.

b.

Determination of equipment acquisitions.

c.

Preparation of a pro forma income statement.

d.

Determination of the advertising budget.

 

Explanation

Choice "a" is correct. The first step in developing a comprehensive budget is development of a sales budget.

Choice "d" is incorrect. An advertising budget is usually based on sales.

Choice "b" is incorrect. Determination of equipment acquisitions is part of the capital budget.

Choice "c" is incorrect. Preparation of a pro forma income statement is one of the last steps in a comprehensive budget.

23

The goals and objectives upon which an annual profit plan is most effectively based are:

a.

A combination of financial, quantitative, and qualitative measures.

b.

Qualitative measures of organizational activity such as product innovation leadership, product quality levels, and product safety.

c.

Quantitative measures such as growth in unit sales, number of employees, and manufacturing capacity.

d.

Financial and quantitative measures.

Choice "a" is correct. The goals and objectives upon which an annual profit plan (also known as budgeted, targeted or estimated financial statements) is most effectively based are a combination of financial, quantitative (number of units), and qualitative (e.g., to be the best) measures. Not all goals and objectives can be quantified.

Choice "c" is incorrect. Qualitative measures are an important dimension of annual profit planning. To focus exclusively on efficiency and profitability at the expense of such issues as quality and customer satisfaction could ultimately hurt the business.

Choice "b" is incorrect. Qualitative measures are important, but financial and quantitative measures gauge the effectiveness of qualitative achievements such as customer success, employee morale, etc.

Choice "d" is incorrect. Qualitative measures should not be ignored.

24

Which of the following is a characteristic of a flexible budget?

a.

Provides budgeted numbers for various activity levels.

b.

Can be utilized by several product divisions.

c.

Allows for modification during the budgeted period.

d.

Isolates the impact of variable costs on the overall budget.

 

Choice "a" is correct. A flexible budget adjusts the budget amounts for different levels of activity. The flexible budget identifies volume components of variances from planned activity.

Choice "c" is incorrect. The primary feature of flexible budgets is their ability to adjust to actual volume based upon established relationships between revenue and variable costs. They are not simply flexible in the sense that amounts or selected line items can be adjusted or modified during the budget period.

Choice "d" is incorrect. The flexible budget isolates the impact of changes in volume on sales and variable costs, not variable costs only.

Choice "b" is incorrect. Although a flexible budget can be used for several products or divisions, their primary feature is the adjustment of those budgets for different activity levels.

25

Which of the following is a disadvantage of participative budgeting?

a.

It decreases motivation.

b.

It decreases acceptance.

c.

It is more time consuming.

d.

It is less accurate.

Choice "c" is correct. Participative budgeting requires input from multiple stakeholders and spreads the decision-making process over multiple layers of managers and individuals. Implementing this approach effectively is time consuming. Authoritative (top down) budgeting is faster.

Choice "a" is incorrect. Participative budgeting promotes empowerment of a wide range of individuals in the organization, and motivation will likely increase, not decrease.

Choice "b" is incorrect. Participative budgeting requires buy-in by a wide range of individuals in the organization, and acceptance will likely increase, not decrease.

Choice "d" is incorrect. Participative budgeting requires input from the individuals most responsible for the details of the operation. Thus, it tends to be more accurate.

26

Organic Enterprises cultivates potted plants and hybrids. Management conducted a careful engineering study of product requirements and has developed standards to control production. Standards of this type are also referred to as:

a.

Attainable standards.

b.

Participative standards.

c.

Ideal standards.

d.

Authoritative standards.

 

Choice "d" is correct. Standards imposed by management without employee input are referred to as authoritative standards.

Choice "b" is incorrect. Standards imposed by management without employee input are referred to as authoritative standards. Standards developed in collaboration with employees involved with the work are referred to as participative standards.

Choice "c" is incorrect. Ideal standards are based on optimum conditions. The question gives no indication whether the assumptions used by the engineering group were based on optimal, normal, or less than optimal conditions.

Choice "a" is incorrect. Attainable standards represent per unit budgets that assume normal conditions. The question gives no indication whether the assumptions used by the engineering group were based on optimal, normal, or less than optimal conditions.

27

Fargo, Mfg., a small business, is developing a budget for next year. Which of the following steps should Fargo perform first?

a.

Compute the dollar amount of Fargo's forecasted sales.

b.

Identify costs of Fargo's forecasted sales volume.

c.

Determine the price of Fargo's products.

d.

Forecast Fargo's sales volume.

Choice "d" is correct. Forecast of sales volume is the first step in the budget development process. Sales volumes will drive product supply requirements and, by extension, purchasing and inventory requirements.

Choice "c" is incorrect. Product pricing will serve as a basis for projecting sales revenue based on sales volume. Pricing will generally be set at a rate to cover costs that were forecast based upon sales volume amounts that were projected first.

Choice "b" is incorrect. Identifying the costs of goods manufactured to sustain sales volume would be computed based upon the forecast of sales volume. Sales volume is forecasted first.

Choice "a" is incorrect. The dollar volume of Fargo's forecasted sales is projected as price times sales volume. Price is generally set at a level to cover cost of goods sold, an amount dependent upon sales volume. Sales volume is forecasted first.

28

Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes?

a.

Accounts payable.

b.

Bonds payable.

c.

Common stock.

d.

Mortgages payable.

Choice "a" is correct. Of the items listed, accounts payable would be the most impacted by the use of the percentage of sales forecasting method for budgeting purposes. If sales increased or decreased, purchases would presumably increase or decrease, by whatever percentage was being used in the budgeting process. If purchases increased or decreased, accounts payable would presumably increase or decrease by approximately the same percentage. The other items listed have no relationship at all to sales and would thus not be affected by the method used to forecast sales.

Choice "d" is incorrect. Mortgages have no relationship to sales and mortgages payable would not be affected by the method used to forecast sales.

Choice "b" is incorrect. Bonds have no relationship to sales and bonds payable would not be affected by the method used to forecast sales. Mortgages and bonds are just alternate forms of debt.

Choice "c" is incorrect. Common stock has no relationship to sales and would not be affected by the method used to forecast sales.

29

All of the following are considered operating/financial budgets, except the:

a.

Cash budget.

b.

Production budget.

c.

Sales budget.

d.

Capital budget.

 

Choice "d" is correct. Operating budgets describe the plan for revenue and expenses and the supporting schedules that go with them. Examples include sales, materials, labor, overhead, production, purchases and the forecasting of cash that will be necessary to pay for them. Capital budgets plan for the purchase of capital assets, which will only affect the operating budget through their subsequent effect on expense via depreciation.

Choices "a", "c", and "b" are incorrect, based on the above explanation.

30

The cash budget is a useful tool in the planning process. Which of the following is not a true statement relating to the preparation of a cash budget?

a.

The cash budget is typically done before all other budgets.

b.

The cash budget is usually broken down into monthly periods.

c.

The cash budget alerts management to periods when there will be excess cash available for investment.

d.

The cash budget shows itemized cash receipts and disbursements during the period, including the financing activities and the beginning and ending cash balances.

Choice "a" is correct. The cash budget is done after all budgets have been prepared.

Choices "b", "d", and "c" are incorrect. They are all true.

31

Which one of the following statements regarding selling and administrative budgets is most accurate?

a.

Selling and administrative budgets need to be detailed in order that the key assumptions can be better understood.

b.

Selling and administrative budgets should be a certain percentage of sales, and should be developed using a bottom-up approach.

c.

Selling and administrative budgets are fixed in nature.

d.

Selling and administrative budgets are difficult to allocate by month and are best presented as one number for the entire year.

Choice "a" is correct. Selling and administrative budgets, like any budgets, need to be detailed in order that the key assumptions are better understood.

Choice "c" is incorrect. Selling and administrative budgets are not fixed in nature; they generally are related to sales volume.

Choice "d" is incorrect. Selling and administrative budgets are usually based on sales and easy to allocate by month.

Choice "b" is incorrect. Selling and administrative budgets are often, but not always, a percentage of sales. When a fixed percentage is used, it is usually determined by top management.

32

The financial budget process includes:

a.

All of the answer choices are correct.

b.

The budgeted statement of cash flows.

c.

The cash budget.

d.

The budgeted balance sheet.

Choice "a" is correct. All of the answer choices are correct.

The financial budget process includes:

Cash and capital purchases budgets.

Balance sheet and statement of cash flows.

The operating budget process includes:

All budgets except cash and capital purchases.

The pro forma income statement.

Choices "c", "b", and "d" are incorrect, based on the above explanation.

33

After the goals of the company have been established and communicated, the next step in the planning process would be the development of the:

a.

Capital expenditure budget.

b.

Selling and administrative budget.

c.

Production budget.

d.

Sales budget.

 

Choice "d" is correct. The sales budget is usually the first budget prepared.

Choice "c" is incorrect. The production budget is based on the sales budget, with adjustment for any changes in planned inventory levels.

Choice "a" is incorrect. The capital expenditure budget is developed independently but must take into account the cash available.

Choice "b" is incorrect. The selling and administrative budget is based on the sales budget.

34