Chapter 7

Question 1

What is budgeting?

Answer 1

Expressing business plans in financial terms

Question 2

How does a company’s master budget come?

Answer 2

Results from combining numerous specific plans prepared by different departments

Question 3

What are the 3 levels of planning?

Answer 3

1. Strategic planning
2. Capital budgeting
3. Operations budgeting

Question 4

What is strategic planning?

Answer 4

Involves making long-term decisions such as defining the scope of the business, determining which products to develop or discontinue, identifying the most profitable markets

Question 5

What is capital budgeting?

Answer 5

Focuses on intermediate-range planning and involves decisions such as whether to buy/lease equipment, whether to stimulate sales, or whether to increase company assets

Question 6

What is operating budgeting?

Answer 6

Describes short-term objectives in specific amounts of sales targets, production goals and financing plans

Question 7

What is perpetual budget?

Answer 7

Covers a 12-month reporting period
Advantage of keeping management constantly focused

Question 8

What are advantages of budgeting?

Answer 8

Promotes planning
Enhances performance measurement
Enhances corrective actions
Promotes coordination

Question 9

What is a limit of budgeting?

Answer 9

They limit individual freedom in favor of an established plan
Many people find evaluation based on budget expectations stressful

Question 10

What is participative budgeting?

Answer 10

Invites participation in the budget process; fosters more cooperation and motivation

Question 11

What is master budget?

Answer 11

Group of detailed budgets and schedules representing the company’s operating and financial plans
Includes:
Operating budget
Capital budget
Pro-forma financial statements

Question 12

What is a sales budget?

Answer 12

Detailed schedule prepared by the marketing department showing:
Expected sales for the coming periods and expected collections on those sales

Question 13

How do you calculate the total inventory?

Answer 13

Amount of the cost of budgeted sales + desired ending inventory

Question 14

How do you calculate the required purchases?

Answer 14

Total inventory - beginning inventory

Question 15

What is the structure of the inventory purchases budget?

Answer 15

Cost of budgeted sales
+ Desired ending inventory
Total inventory needed
- Beginning inventory
Required purchases

Question 16

What does preparing a cash budget do?

Answer 16

Alerts management to anticipated cash shortages/excess cash balances
Divided into:
1. Cash receipts
2. Cash payments
3. Financing section

Question 17

What does the pro forma income statement do?

Answer 17

Gives management an estimate of the expected profitability

Question 18

What comes in the operating budget?

Answer 18

Sales budget - cash receipts
Inventory purchase budget - cash payment for inventory
SG&A budget - cash payment for SG&A expense
Cash budget

Question 19

How do you prepare a sales budget?

Answer 19

Projected sales:
Cash sales
Sales on account (A/R) (a)
Total budgeted sales (b)

Schedule of cash receipts:
Current cash sales
+ Collection of A/R
Total budgeted collections

a - last number A/R b.s.
b - Total = sales revenue on i.s.

Question 20

How do you prepare an inventory budget?

Answer 20

Projected purchases:
Cost of budgeted sales (a)
+ Desired ending inventory (b)
Total inventory
- Beginning inventory (c)
Required purchases

Schedule of cash payments for inventory purchases:
Current month’s A/P
Prior month’s A/P
Total budgeted disbursements for inventory

a - Total = COGS in i.s.
b - last number ending inventory b.s.
c - last number A/P b.s.

Question 21

How do you prepare an SG&A budget?

Answer 21

Projected SG&A Expenses:
Salary
Sales commissions (a)
Supplies expense
Rent
Miscellaneous
Utilities (b)
Depreciation (c)
Total SG&A expense before interest (d)

Schedule of cash payment for SG&A expense:
Salary expense
Sales commissions
Rent
Miscellaneous
Utilities
Total payments for SG&A expense

a - last number s.c/P b.s.
b - last number u/P b.s.
c - Total A/D b.s.
d - Total SG&A expense i.s.

Question 22

How do you calculate the cash receipts in the cash budget?

Answer 22

Beginning cash balance (prior month’s ending balance)
+ Cash receipts (schedule of cash receipts from sales budget)
Total cash available

Question 23

How do you calculate the cash payments in the cash budget?

Answer 23

For inventory purchases (schedule of cash payments for inventory purchases)
For SG&A expenses (schedule of cash payments for SG&A expense)
For interest expenses
To purchase equipment (a)
Total budgeted disbursements

a - investing activity in c.f.

Question 24

How do you calculate the financing activities in the cash budget?

Answer 24

Surplus (shortage) - calculate by doing total cash available - total budgeted disbursements
Borrowing (repayment) (a) - calculate whole number by keeping a minimum of ending cash balance
Ending cash balance (b)

a - total in financing activities in c.f.
b - last number in b.s. and c.f.