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Introduction to Management Accounting, 16e, Global Edition (Horngren)

Chapter 7 Introduction to Budgets and Preparing the Master Budget

7.1 Questions

1) Which of the following statements about budgets and budgeting is FALSE?


A) Budgets help coordinate financial and operational activities.
B) The vast majority of managers use budgeting as an effective cost management tool.
C) Budgeting is the process of formulating an organization's plans.
D) Managers do not use budgets for performance evaluation.
Answer: D
Diff: 2
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

2) In practice, when developing a budget, two extremes used for guidance are ________ and ________.
A) participative budget; zero-base budget
B) strategic budget; long-range budget
C) financial planning budget; strategic budget
D) zero-base budget; activities of current or prior period
Answer: D
Diff: 2
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

3) A major benefit of effective budgeting is that ________.


A) it compels managers to think ahead
B) it aids managers in communicating objectives to employees
C) it provides benchmarks to evaluate subsequent performance
D) all of the above
Answer: D
Diff: 1
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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4) A(n) ________ starts with the assumption that current activities in a company will not automatically continue
in the next period.
A) activity-based budget
B) strategic budget
C) master budget
D) zero-base budget
Answer: D
Diff: 2
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

5) The most effective budget processes facilitate communication from top management to ________ and from
lower level managers and employees to ________.
A) the SEC; the audit committee
B) stockholders; creditors
C) lower level managers and employees; top management
D) creditors; stockholders
Answer: C
Diff: 1
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

6) Potential problems that can limit the benefits of budgeting do NOT include ________.
A) low levels of employee participation in the budget process
B) incentives to lie and cheat in the budget process
C) difficulties in obtaining accurate sales forecasts
D) an emphasis on functional budgeting
Answer: D
Diff: 1
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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7) A major drawback of using historical results for judging current performance is that ________.
A) past results may be inaccurate
B) results may refer to a different manager
C) inefficiencies may be concealed in past results
D) managers may have cooked the books
Answer: C
Diff: 2
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

8) A budget is an example of an informal business plan.


Answer: FALSE
Diff: 1
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

9) A budget is a qualitative expression of a plan of action.


Answer: FALSE
Diff: 1
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

10) There are fewer benefits from budgeting in companies with uncertain or complicated environments.
Answer: FALSE
Diff: 2
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

11) Budgeted performance goals generally provide a better basis for evaluating actual performance than past
performance.
Answer: TRUE
Diff: 2
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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12) A major drawback of using historical results for judging current performance is that inefficiencies may be
concealed in past performance.
Answer: TRUE
Diff: 2
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

13) An effective budget process communicates from the top down, but not from the bottom up.
Answer: FALSE
Diff: 2
LO: 7-1
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7.2 Questions

1) Factors that affect employee acceptance of budgets include ________.


A) perceived attitude of top management towards budgeting
B) level of participation by employees in budget process
C) degree of alignment between budget and employees' performance goals
D) all of the above
Answer: D
Diff: 1
LO: 7-2
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

2) Misalignment between the ________ stressed in budgets and ________ used to reward employees and
managers can limit the advantages of budgeting.
A) performance goals; participative goals
B) performance goals; performance measures
C) sales goals; bonuses
D) resource goals; bonuses
Answer: B
Diff: 1
LO: 7-2
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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3) One way to reduce negative attitudes of managers toward budgets is by ________.
A) zero-based budgeting
B) activities-based budgeting
C) long range planning
D) participative budgeting
Answer: D
Diff: 1
LO: 7-2
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

4) ________ budgeting is when budgets are formulated with the active involvement of all affected employees.
A) Rolling
B) Team
C) Participative
D) Zero-based
Answer: C
Diff: 1
LO: 7-2
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

5) The effectiveness of any budgeting system depends directly on the attitudes of top management toward the
budgeting system.
Answer: TRUE
Diff: 2
LO: 7-2
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

6) Participative budgeting is the active participation of all affected employees in the formulation of the budget.
Answer: TRUE
Diff: 1
LO: 7-2
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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7.3 Questions

1) Budgeting can result in incentives to lie and cheat that undermine ________.
A) a company's ethical standards
B) a company's value chain
C) standard of objectivity promulgated by the Institute of Management Accountants
D) none of the above
Answer: A
Diff: 1
LO: 7-3
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

2) Managers may ________ their budgeted costs or ________ their budgeted revenue to create a budget target
that is easier to achieve.
A) understate; overstate
B) overstate; understate
C) understate; understate
D) overstate; overstate
Answer: B
Diff: 1
LO: 7-3
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

3) Which of the following is NOT a reason for budgetary slack?


A) to buffer managers from budget cuts imposed by top management
B) to provide protection against cost increases or revenue shortfalls due to unforeseen events
C) to facilitate attainment of performance goals
D) to impose a formal structure for planning purposes
Answer: D
Diff: 1
LO: 7-3
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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4) Misuse of budgets can lead to incentives to cheat and lie. Cheating and lying may take the form of ________.
A) making short-run decisions to increase profits that are not in the company's best long-run interests
B) budgetary slack
C) decreasing profits when actual profits significantly exceed the profit target
D) all of the above
Answer: D
Diff: 2
LO: 7-3
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

5) How can a company avoid lying by employees when preparing a budget?


A) reward good budget forecasts
B) reward good performance against the budget
C) reward good budget forecasts and reward good performance against the budget
D) reward good recipes for cooking the books
Answer: C
Diff: 1
LO: 7-3
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

6) Managers may lie to increase the resources allocated to their departments.


Answer: TRUE
Diff: 2
LO: 7-3
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7) Budgetary slack helps buffer managers from budget cuts imposed by higher-level management.
Answer: TRUE
Diff: 2
LO: 7-3
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

8) "Cooking the books" refers to recording fictitious sales or omitting costs.


Answer: TRUE
Diff: 2
LO: 7-3
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7.4 Questions

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1) Where does a company find forecasted financial statements for a five to ten year period?
A) strategic plan
B) master budget
C) rolling budget
D) long-range plan
Answer: D
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

2) A company identifies the following goals and objectives:

Increase sales 10 percent each year.


Increase profits 5 percent each year.
Increase total plant assets 5 percent each year.

Which of the following budgets identifies the overall goals and objectives of an organization?
A) sales budget
B) master budget
C) strategic plan
D) financial planning model
Answer: C
Diff: 2
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

3) A manager has several forecasts of sales corresponding to different levels of advertising. The manager
decides to implement $1 million of advertising in the next fiscal year. At this level of advertising, the manager
uses the ________ in the ________.
A) sales goal; sales forecast
B) sales budget; sales forecast
C) sales forecast; sales goal
D) sales forecast; sales budget
Answer: D
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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4) Which schedule gives the expected sales under a given set of conditions?
A) sales goal
B) sales budget
C) sales forecast
D) master budget
Answer: C
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

5) Important factors used to forecast sales for a company include all of the following items EXCEPT ________.
A) changes in firm's prices
B) general economic conditions
C) changes in product mix
D) layout of production equipment
Answer: D
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

6) Decisions made during long-range planning include ________.


A) addition or deletion of product line
B) location of new plant
C) purchase of equipment
D) all of the above
Answer: D
Diff: 2
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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7) No matter how many technical experts a company uses in forecasting, the sales budget should ultimately be
the responsibility of the ________.
A) economists
B) CEO
C) line managers
D) market research staff
Answer: C
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

8) Which of the following statements is FALSE about a strategic plan?


A) A strategic plan does not deal with a specific time period.
B) A strategic plan does not produce forecasted financial statements.
C) A strategic plan guides day-to-day operations.
D) A strategic plan provides an overall framework for a long-range plan.
Answer: C
Diff: 2
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

9) Which of the following statements about long-range plans is FALSE?


A) Long-range plans provide forecasted financial statements for five to ten year periods.
B) Long-range plans guide day-to-day operations.
C) Companies coordinate long-range plans with capital budgets.
D) A decision made during long-range planning is the acquisition of a plant building.
Answer: B
Diff: 2
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

10) Which of the following budgets identifies the overall goals and objectives of the organization?
A) capital budget
B) cash budget
C) master budget
D) strategic plan
Answer: D
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

11) When examining a master budget, where does a company find the planned expenditures for facilities and
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equipment?
A) operating expense budget
B) capital budget
C) operating budget
D) purchases budget
Answer: B
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

12) A sales budget is a prediction of sales under a given set of conditions.


Answer: FALSE
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

13) Accurate sales forecasting is essential to effective budgeting.


Answer: TRUE
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

14) Sales forecasts are usually prepared under the direction of the top sales executive.
Answer: TRUE
Diff: 1
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

15) The sales budget should be the responsibility of line management.


Answer: TRUE
Diff: 2
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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16) The most forward-looking and least detailed budget is the strategic plan.
Answer: TRUE
Diff: 2
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

17) A decision made during long-range planning includes whether to delete a product from a company's product
line.
Answer: TRUE
Diff: 2
LO: 7-4
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7.5 Questions

1) Which budget guides day-to-day operations in a business?


A) sales budget
B) strategic plan
C) master budget
D) long-range plan
Answer: C
Diff: 1
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

2) In a master budget, the schedule of cash disbursements for operating expenses is used to prepare the
________.
A) capital budget
B) purchases and cost of goods sold budget
C) sales budget
D) cash budget
Answer: D
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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3) In a master budget, the schedule of cash disbursements for purchases of inventory is used to prepare the
________.
A) operating expense budget
B) purchases budget
C) capital budget
D) cash budget
Answer: D
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

4) In a master budget, a capital budget is used to prepare the ________.


A) sales budget
B) budgeted income statement
C) purchases and cost of goods sold budget
D) cash budget
Answer: D
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

5) The master budget is a detailed and comprehensive analysis of the ________ of the ________ plan.
A) first month; activity-based strategic
B) first month; strategic
C) first year; continuous
D) first year; long-range
Answer: D
Diff: 1
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

6) The two main components of the master budget are the ________.
A) cash budget and the capital budget
B) purchases budget and the budgeted income statement
C) budgeted income statement and the budgeted balance sheet
D) operating budget and the financial budget
Answer: D
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7) The ________ budget focuses on the budgeted income statement and the supporting schedules.
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A) financial
B) operating
C) operating expense
D) purchases and cost of goods sold
Answer: B
Diff: 1
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

8) Which of the following is NOT a component of the operating budget?


A) sales budget
B) operating expense budget
C) capital budget
D) budgeted income statement
Answer: C
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

9) Which of the following is NOT a component of the operating budget?


A) capital budget
B) purchases and cost of goods sold budget
C) budgeted income statement
D) operating expense budget
Answer: A
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

10) Which of the following is NOT a component of the financial budget?


A) capital budget
B) cash budget
C) budgeted balance sheet
D) budgeted income statement
Answer: D
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

11) Which of the following is a component of the financial budget?


A) budgeted balance sheet
B) budgeted income statement
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Copyright © 2014 Pearson Education
C) sales budget
D) purchases budget
Answer: A
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

12) The financial budget includes ________.


A) the capital budget and the sales budget only
B) the capital budget and the budgeted income statement only
C) the capital budget, the cash budget and the budgeted balance sheet
D) the cash budget and the purchases budget only
Answer: C
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

13) A cash budget is a business plan that includes a set of schedules and financial statements.
Answer: FALSE
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

14) The elements of a financial budget for a merchandising firm include the capital budget, the cash budget and
the budgeted balance sheet.
Answer: TRUE
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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15) An operating budget is the major part of the master budget that focuses on the balance sheet and supporting
schedules.
Answer: FALSE
Diff: 2
LO: 7-5
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7.6 Questions

1) The final output of the operating budget is ________.


A) budgeted statement of stockholders' equity
B) budgeted balance sheet
C) budgeted income statement
D) budgeted statement of cash flows
Answer: C
Diff: 2
LO: 7-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

2) The final output of the financial budget is ________.


A) budgeted statement of stockholders' equity
B) budgeted balance sheet
C) budgeted income statement
D) budgeted statement of cash flows
Answer: B
Diff: 2
LO: 7-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

3) What is the sequence of steps(order of preparation) for the operating budget?


A) sales budget, operating expense budget, purchases and cost of goods sold budget
B) sales budget, capital budget, operating expense budget
C) sales budget, purchases and cost of goods sold budget, schedule of cash collections from customers,
operating expense budget
D) sales budget, schedule of cash collections from customers, purchases and cost of goods sold budget,
schedule of cash disbursements for purchases, operating expense budget
Answer: D
Diff: 2
LO: 7-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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4) What is the sequence of steps(order of preparation) for the financial budget?
A) sales budget, capital budget, cash budget, budgeted income statement
B) sales budget, operating expense budget, purchases and cost of goods sold budget
C) capital budget, cash budget, budgeted balance sheet
D) disbursements for purchases, disbursements for operating expenses, cash budget
Answer: C
Diff: 2
LO: 7-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

5) What is the sequence of steps in preparing the master budget?


A) Output from the financial budget is used to prepare the operating budget.
B) Output from the operating budget is used to prepare the financial budget.
C) Output from the financial budget is used to prepare the budgeted income statement.
D) Output from the financial budget is used to prepare the operating expense budget.
Answer: B
Diff: 2
LO: 7-6
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7.7 Questions

1) Which budget is used to develop the schedule of cash disbursements for operating expenses?
A) purchases and cost of goods sold budget
B) cash disbursements budget
C) operating expense budget
D) cash budget
Answer: C
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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2) What item is NOT a line item on the purchases and cost of goods sold budget?
A) purchases of inventory
B) sales
C) beginning inventory
D) desired ending inventory
Answer: B
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

3) The schedule of cash disbursements for purchases uses the ________.


A) sales budget
B) operating expense budget
C) schedule of cash disbursements for operating expenses
D) purchases and cost of goods sold budget
Answer: D
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

4) The schedule of cash collections from customers has ________.


A) cash sales only
B) collections on credit sales only
C) A and B
D) budgeted purchases
Answer: C
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

5) The schedule of cash disbursements for operating expenses does NOT have ________.
A) rent expense
B) insurance expense
C) wages expense
D) amortization expense on patents
Answer: D
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

6) When preparing the budgeted income statement, which of the following is the source for the amount of Cost
of Goods Sold?
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A) sales budget
B) operating expense budget
C) schedule of disbursements for operating expense
D) purchases and cost of goods sold budget
Answer: D
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7) When preparing the budgeted income statement, which of the following is the source for the amount of
operating expenses?
A) schedule of disbursements for operating expenses
B) purchases budget
C) schedule of disbursements for purchases
D) operating expense budget
Answer: D
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

8) When preparing the budgeted income statement, which of the following is the source for the amount of sales?
A) sales budget
B) purchases budget
C) operating expense budget
D) schedule of cash collections from customers
Answer: A
Diff: 1
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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9) The first step in preparing the master budget is the ________.
A) cash budget
B) capital budget
C) operating expense budget
D) sales budget
Answer: D
Diff: 1
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

10) The first step in preparing the financial budget is the ________.
A) cash budget
B) capital budget
C) operating expense budget
D) sales budget
Answer: B
Diff: 1
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

11) For next year, David Company has budgeted sales of 8,000 units, target ending inventory of 1,000 units and
a beginning inventory of 300 units. How many units should be purchased?
A) 5,700
B) 6,300
C) 7,700
D) 8,700
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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12) Matthew Company has a sales budget for next month of $400,000. Cost of goods sold is expected to be 40%
of sales. All units are paid for in the month following purchase. The beginning inventory is $5,000 and an
ending inventory of $12,000 is desired. Beginning accounts payable is $76,000. The cost of goods sold for next
month is ________.
A) $140,000
B) $160,000
C) $172,000
D) $220,000
Answer: B
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

13) Michael Company has a sales budget for next month of $300,000. Cost of goods sold is expected to be 50%
of sales. All units are paid for in the month following purchase. The beginning inventory is $10,000 and an
ending inventory of $12,000 is desired. Beginning accounts payable is $76,000. The purchases for next month
are ________.
A) $138,000
B) $140,000
C) $150,000
D) $152,000
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

21
Copyright © 2014 Pearson Education
14) Benjamin Company has the following data:

Month Budgeted Sales


January $108,000
February 132,000
March 144,000
April 120,000

Cost of goods sold average 60% of sales. The inventory at December 31 was $19,440. Desired ending inventory
levels are 20% of next month's sales at cost. What is the desired ending inventory value at February 28?
A) $15,840
B) $17,280
C) $26,400
D) $28,800
Answer: B
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

15) Downstairs Company has the following sales budget for the last six months of 2010:

July $100,000
August 80,000
September 110,000
October 80,000
November 100,000
December 94,000

Historically, the cash collection of sales has been as follows:


65% of sales collected in month of sale
25% of sales collected in month following sale
8% of sales collected in second month following sale
2% of sales uncollectible

What are the expected cash collections of sales in October?


A) $79,500
B) $85,900
C) $92,400
D) $99,500
Answer: B
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

16) Upstairs Company has the following data:

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Copyright © 2014 Pearson Education
Month Budgeted Sales
January $108,000
February 132,000
March 144,000
April 120,000

The gross profit rate is 40% of sales and ending inventory at December 31 was $19,440. Desired ending
inventory levels are 30% of next month's sales at cost. What are the expected total purchases for February?
A) $79,200
B) $81,360
C) $102,960
D) $105,120
Answer: B
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

17) Sebring Company has the following data:

Month Budgeted Sales


April $40,000
May 44,000
June 50,000
July 52,000
August 48,000

The cost of goods sold percentage is 70% of sales and the desired ending inventory level is 25% of next month's
sales at cost. ________ was the beginning inventory on May 1.
A) $3,300
B) $7,700
C) $8,750
D) $11,000
Answer: B
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

23
Copyright © 2014 Pearson Education
18) Segal Company has the following data:

Month Budgeted Sales


May $46,000
June 50,000
July 52,000
August 49,000

The cost of goods sold percentage is 80% of sales and the desired ending inventory level is 25% of next month's
sales at cost. What is the beginning inventory on August 1?
A) $4,200
B) $8,450
C) $9,800
D) $10,400
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

19) Bronkov Company has the following data:

Month Budgeted Sales


May $46,000
June 50,000
July 52,000
August 48,000

The cost of goods sold percentage is 65% of sales and the desired ending inventory level is 25% of next month's
sales at cost. What are the expected total purchases for June?
A) $17,500
B) $32,500
C) $32,825
D) $40,950
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

24
Copyright © 2014 Pearson Education
20) Audrey Company has the following data:

Month Budgeted Sales


May $46,000
June 50,000
July 52,000
August 48,000

The cost of goods sold percentage is 65% of sales and the desired ending inventory is 25% of next month's sales
at cost. What are the total purchases budgeted for July?
A) $33,150
B) $33,800
C) $41,600
D) $42,250
Answer: A
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

21) Santelle Company expects August sales to be $30,000. Approximately 40% of sales are cash sales.
Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months
following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in August from
August sales.
A) $9,000
B) $12,000
C) $21,000
D) $36,000
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

25
Copyright © 2014 Pearson Education
22) Hoover Company expects June sales to be $30,000. Of these sales, credit sales are expected to be $12,000.
Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months
following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in June from June
sales.
A) $9,200
B) $14,000
C) $17,200
D) $24,000
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

23) Bush Company expects May sales to be $20,000. Approximately 40% of sales are cash sales. Collection of
credit sales are 50% in the month of sale, 40% in the month following sale and 5% two months following sale.
The remaining 5% is uncollectible. ________ is the expected cash collection in May from May sales.
A) $4,000
B) $6,000
C) $8,000
D) $14,000
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

26
Copyright © 2014 Pearson Education
24) The following sales budget has been prepared:

Month Cash Sales Credit Sales


September $167,000 $123,000
October 225,000 180,000
November 330,000 210,000
December 135,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months
following sale. No uncollectible accounts are expected. What are the estimated cash collections in December?
A) $135,000
B) $197,000
C) $325,000
D) $332,000
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

25) Stickel Company has the following sales budget:

Month Cash Sales Credit Sales


September $100,000 $200,000
October 125,000 190,000
November 207,000 199,000
December 67,000 144,000

Collection of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months
following sale. No uncollectible accounts are expected. What is the expected balance of Accounts Receivable at
October 31?
A) $95,000
B) $110,000
C) $115,000
D) $180,000
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

27
Copyright © 2014 Pearson Education
26) Slowinski Company has the following sales budget:

Month Cash Sales Credit Sales


September $100,000 $300,000
October 125,000 180,000
November 130,000 210,000
December 135,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months
following sale. No uncollectible accounts are expected. What are the estimated cash collections in November?
A) $130,000
B) $197,000
C) $327,000
D) $337,000
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

27) Corbin Company has prepared the following sales budget:

Month Cash Sales Credit Sales


September $99,000 $250,000
October 225,000 180,000
November 310,000 210,000
December 94,000 170,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months
following sale. No uncollectible accounts are expected. What is the expected balance in Accounts Receivable at
November 30?
A) $77,500
B) $105,000
C) $123,000
D) $210,000
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

28
Copyright © 2014 Pearson Education
28) Dooley Company has prepared the following sales budget:

Month Cash Sales Credit Sales


September $123,000 $210,000
October 140,000 200,000
November 167,000 260,000
December 189,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months
following sale. No uncollectible accounts are expected. What are the estimated cash collections in October from
October sales?
A) $125,000
B) $140,000
C) $230,000
D) $240,000
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

29) John Company has the following sales budget:

Month Cash Sales Credit Sales


September $100,000 $200,000
October 125,000 180,000
November 130,000 210,000
December 135,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months
following sale. No uncollectible accounts are expected. What is the expected balance in Accounts Receivable at
December 31?
A) $95,000
B) $116,000
C) $190,000
D) $210,000
Answer: B
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

29
Copyright © 2014 Pearson Education
30) Rodney Company has the following sales budget:

Month Cash Sales Credit Sales


September $100,000 $250,000
October 125,000 180,000
November 130,000 210,000
December 135,000 190,000

Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two months
following sale. No uncollectible accounts are expected. What are the estimated cash collections in September
from September sales?
A) $100,000
B) $200,000
C) $225,000
D) $250,000
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

31) Donnie Company has the following information:

Month Budgeted Sales


January $80,000
February 85,000
March 92,000
April 79,000

Budgeted Operating Expenses Per Month


Wages $15,000
Advertising 12,000
Depreciation 3,000
Other expenses 4% of sales

All cash expenses are paid as incurred. What are the total operating expenses budgeted for the month of
January?
A) $30,000
B) $30,040
C) $31,200
D) $33,200
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

30
Copyright © 2014 Pearson Education
32) Atkinson Company has the following information:

Month Budgeted Sales


January $76,000
February 85,000
March 92,000
April 80,000

Budgeted Operating Expenses Per Month


Wages $15,000
Advertising 12,000
Depreciation 3,000
Other expenses 4% of sales

All cash expenses are paid as incurred. What are the total operating expenses budgeted for the month of April?
A) $3,160
B) $30,000
C) $33,200
D) $33,680
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

31
Copyright © 2014 Pearson Education
33) Jupiter Company has the following information:

Month Budgeted Sales


January $76,000
February 85,000
March 100,000
April 79,000

Budgeted Operating Expenses Per Month


Wages $15,000
Advertising 12,000
Depreciation 3,000
Sales Commissions 4% of sales

All cash expenses are paid as incurred. What are the budgeted total cash disbursements for operating expenses
in March?
A) $3,680
B) $30,000
C) $31,000
D) $34,000
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

32
Copyright © 2014 Pearson Education
34) Venus Company has the following information:

Month Budgeted Sales


January $90,000
February 85,000
March 92,000
April 79,000

Budgeted Operating Expenses Per Month


Wages $15,000
Advertising 12,000
Depreciation 3,000
Sales Commission 4% of sales

All cash expenses are paid as incurred. What are the total cash disbursements budgeted for operating expenses
for the month of January?
A) $28,200
B) $30,000
C) $30,600
D) $33,600
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

35) Paulson Company's expected sales for April are $29,000. Other information follows:

Budgeted Operating Expenses Amount


Wages $4,000
Advertising 1,680
Depreciation 1,440
Rent 2,560
Promotion 5% of sales

What are the total expected operating expenses for April?


A) $6,240
B) $9,680
C) $9,690
D) $11,130
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

36) Potter Company's expected sales for April are $29,000. Other information follows:

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Copyright © 2014 Pearson Education
Budgeted Operating Expenses Amount
Wages $4,000
Advertising 1,680
Depreciation 1,440
Rent 2,560
Promotion 5% of sales

All cash expenses are paid as incurred. What are the expected total cash disbursements for operating expenses
for April?
A) $6,240
B) $9,680
C) $9,690
D) $11,130
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

37) Paul Company's expected sales for April are $27,600. Other information follows:

Budgeted Operating Expenses Amount


Wages $2,000
Advertising 1,680
Patent amortization 1,440
Rent 2,560
Marketing 5% of sales

Which of the following operating expenses is a noncash expense?


A) Advertising
B) Rent
C) Patent amortization
D) Wages
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

34
Copyright © 2014 Pearson Education
38) Mark Company has the following information:

Month Budgeted Purchases


January $40,000
February 29,000
March 30,520
April 29,480
May 27,680

Purchases are paid as follows:


10% in the month of purchase
50% one month after purchase
40% two months after purchase

What is the estimated cash disbursement in March from January purchases?


A) $3,052
B) $12,000
C) $14,500
D) $16,000
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

35
Copyright © 2014 Pearson Education
39) Christian Company has the following information:

Month Budgeted Purchases


January $26,800
February 29,000
March 30,520
April 29,480
May 27,680

Purchases are paid as follows:


10% in the month of purchase
50% one month after purchase
40% two months after purchase

What is the expected balance in Accounts Payable at March 31?


A) $2,900
B) $18,312
C) $30,520
D) $39,068
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

36
Copyright © 2014 Pearson Education
40) Healing Company has the following information:

Month Budgeted Purchases


January $56,800
February 49,000
March 30,520
April 35,480
May 27,680

Purchases are paid as follows:


10% in the month of purchase
50% one month after purchase
40% two months after purchase

What is the estimated cash disbursement in May from April purchases?


A) $11,072
B) $11,792
C) $13,840
D) $17,740
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

37
Copyright © 2014 Pearson Education
41) May Company has the following information:

Month Budgeted Purchases


January $33,000
February 37,000
March 31,000
April 30,000
May 27,680

Purchases are paid as follows:


75% in the month of purchase
25% one month after purchase

What is the expected balance in Accounts Payable on April 30?


A) 0
B) $7,500
C) $20,250
D) $30,000
Answer: B
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

38
Copyright © 2014 Pearson Education
42) Marjorie Company has the following information:

Month Budgeted Purchases


January $25,000
February 19,000
March 33,000
April 27,000
May 27,680

Purchases are paid as follows:


75% in the month of purchase
25% one month after purchase

What are the estimated cash disbursements in March?


A) $22,500
B) $24,750
C) $29,500
D) $39,000
Answer: C
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

39
Copyright © 2014 Pearson Education
43) Margaret Company has the following information:

Month Budgeted Purchases


January $26,800
February 29,000
March 30,520
April 29,480
May 27,680

Purchases are paid as follows:


10% in the month of purchase
50% one month after purchase
40% two months after purchase

What is the expected balance in Accounts Payable on May 31?


A) $2,948
B) $11,792
C) $24,912
D) $36,704
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

40
Copyright © 2014 Pearson Education
44) Mary Company has the following information:

Month Budgeted Purchases


January $26,800
February 29,000
March 30,520
April 29,480
May 27,680

Purchases are paid as follows:


10% in the month of purchase
50% one month after purchase
40% two months after purchase

A) $14,740
B) $17,508
C) $26,948
D) $29,716
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

45) ________ expense is driven by sales volume.


A) Rent
B) Insurance
C) Depreciation
D) Sales commission
Answer: D
Diff: 1
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

41
Copyright © 2014 Pearson Education
46) The Wehr Company is preparing a budgeted income statement. The dollar amount of Wages Expense put on
the income statement can be found on the ________.
A) purchases budget
B) sales budget
C) schedule of cash disbursements for purchases
D) operating expense budget
Answer: D
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

47) Cash collections from customers in any given month include the current month's cash sales and expected
collections on credit sales.
Answer: TRUE
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

48) The first step in preparing the master budget is the preparation of the budgeted income statement.
Answer: FALSE
Diff: 2
LO: 7-7
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

42
Copyright © 2014 Pearson Education
49) The Pinsky Company has the following information available:

Month Budgeted Sales


March $150,000
April 153,000
May 151,000
June 254,500
July 252,500

The gross profit rate is 40% and the desired ending inventory level is 20% of the next month's cost of sales.

Required:
Prepare a purchases and cost of goods sold budget for April, May and June.
Answer: April May June
Budg. cost of goods sold $91,800 $90,600 $152,700
Plus: Ending inventory 18,120 30,540 30,300
Total merchandise needed 109,920 121,140 183,000
Less: Beginning inventory (18,360) (18,120) (30,540)
Purchases $91,560 $103,020 $152,460
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

43
Copyright © 2014 Pearson Education
50) The McGraw Company has the following information available:

Month Budgeted Sales


June $68,000
July 72,000
August 74,000
September 76,000
October 78,000

The cost of goods sold rate is 65% and the desired ending inventory level is 25% of the next month's cost of
sales.

Required:
Prepare a purchases and cost of goods sold budget for July, August and September.
Answer: July August September
Budg. cost of goods sold $46,800 $48,100 $49,400
Plus: Ending inventory 12,025 12,350 12,675
Total merchandise needed 58,825 60,450 62,075
Less: Beginning inventory (11,700) (12,025) (12,350)
Purchases $47,125 $48,425 $49,725
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

44
Copyright © 2014 Pearson Education
51) Phillip Corporation has the following sales budget:

Month Budgeted Sales


May $84,000
June 100,000
July 92,000
August 110,000
September 90,000

Credit sales are 80% of total sales. Collections of credit sales are 80% in the month of sale, 15% in the month
after sale and 5% are never collected.

Required:
Prepare a schedule of cash collections for June, July and August.
Answer: June July August
Cash sales $20,000 $18,400 $22,000
Collections of credit sales:
Current month 64,000 58,880 70,400
Previous month 10,080 12,000 11,040
Total collections $94,080 $89,280 $103,440
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

45
Copyright © 2014 Pearson Education
52) Marvin Company has the following sales budget:

Month Cash Sales Credit Sales


February $14,000 $30,000
March 12,800 32,000
April 10,800 28,000

Collections of credit sales are 40% in the month of sale, 50% in the month after sale and 10% two months after
sale. No uncollectible accounts are expected.

Required:
Prepare a schedule of cash collections for April.
Answer: Cash sales $10,800
Credit sales:
Current month 11,200
Previous month 16,000
Two months ago 3,000
Total collections $41,000
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

46
Copyright © 2014 Pearson Education
53) Olson Company has the following data:

Month Budgeted Purchases


January $225,000
February 190,000
March 200,000
April 220,000
May 150,000

Purchases are paid as follows:


10% in the month of purchase
80% one month after purchase
10% two months after purchase

Required:
Prepare a schedule of cash disbursements for purchases for March, April and May.
Answer: March April May
January $22,500
February 152,000 $19,000
March 20,000 160,000 $20,000
April 22,000 176,000
May ______ ______ 15,000
Total $194,500 $201,000 $211,000
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

47
Copyright © 2014 Pearson Education
54) Jorgensen Company has the following data:

Month Budgeted Sales


April $154,000
May 160,000
June 142,000
July 136,000

Budgeted Operating Expenses Per Month


Wages $12,600
Advertising 27,200
Depreciation 19,000
Rent 20,400
Freight-out 20% of sales
Sales commission 5% of sales

Required:
Prepare a schedule of cash disbursements for operating expenses for April, May and June. All cash expenses are
paid when incurred.
Answer: April May June
Wages $12,600 $12,600 $12,600
Advertising 27,200 27,200 27,200
Rent 20,400 20,400 20,400
Freight-out 30,800 32,000 28,400
Sales commission 7,700 8,000 7,100
Total disbursements $98,700 $100,200 $95,700
Diff: 2
LO: 7-7
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7.8 Questions

1) Which of the following budget(s) has(have) the disbursement for a planned purchase of equipment?
A) operating expense budget
B) purchases and cost of goods sold budget
C) cash budget only
D) cash budget and capital budget
Answer: D
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

48
Copyright © 2014 Pearson Education
2) On the cash budget, how do we obtain the available cash balance?
A) beginning cash balance
B) minimum cash balance desired
C) total cash increase from financing plus net cash receipts and disbursements
D) beginning cash balance minus minimum cash balance desired
Answer: D
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

3) On a cash budget, if available cash balance plus net cash receipts and disbursements is negative, ________.
A) repayment of loan is suggested
B) repayment of loan is required
C) borrowing is necessary
D) borrowing is not necessary
Answer: C
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

4) When preparing a budgeted balance sheet, the balance for the inventory account is found on the ________.
A) sales budget
B) cash budget
C) operating expense budget
D) purchases and cost of goods sold budget
Answer: D
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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5) When preparing a budgeted balance sheet, the balance in the cash account is found on the ________.
A) sales budget
B) cash budget
C) operating expense budget
D) capital budget
Answer: B
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

6) When preparing a budgeted balance sheet, the balance in the equipment account is derived from information
in the ________.
A) operating expense budget
B) capital budget
C) purchases and cost of goods sold budget
D) schedule of cash disbursements for operating expenses
Answer: B
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

7) The financial budget is used by managers to ________.


A) manage financial affairs
B) manage employee hiring patterns
C) manage the cash balance
D) plan for future stock dividends
Answer: C
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

8) The total amount of cash collections from customers by month appears on the ________.
A) sales budget
B) operating expense budget
C) cash budget
D) budgeted balance sheet
Answer: C
Diff: 1
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

9) Jensen Company is preparing a cash budget for the month of June. The following information is available:
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Cash Balance, May 31, 2015 $10,000
Cash collections from customers in June 76,000
Cash paid for merchandise in June 42,000
Paid operating expenses in June 17,000
Purchase furniture for cash in June 5,000
Depreciation expense in June 2,000
Amortization expense in June 3,000

The minimum cash balance desired is $10,000. What are the net cash receipts and disbursements for the month
of June?
A) $7,000
B) $10,000
C) $12,000
D) $17,000
Answer: C
Diff: 3
LO: 7-8
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

10) Wininger Company is preparing a cash budget for the month of June. The following information is
available:

Cash Balance, May 31, 2015 $20,000


Cash collections from customers in June 46,000
Cash paid for merchandise in June 42,000
Paid operating expenses in June 12,000
Purchase furniture for cash in June 3,000
Depreciation expense in June 2,000
Amortization expense in June 4,000

The minimum cash balance desired is $10,000. What is the deficiency of cash before financing at June 30,
2015?
A) $(1,000)
B) $(3,000)
C) $(7,000)
D) $(11,000)
Answer: A
Diff: 3
LO: 7-8
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

11) Goller Company is preparing a cash budget for the month of June. The following information is available:

Cash Balance, May 31, 2015 $10,000


Cash collections from customers in June 66,000
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Cash paid for merchandise in June 42,000
Cash paid for operating expenses in June 12,000
Purchase furniture for cash in June 3,000
Depreciation expense in June 5,000
Amortization expense in June 5,000

The minimum cash balance desired is $10,000. What is the cash balance on June 30, 2015?
A) $9,000
B) $10,000
C) $11,000
D) $19,000
Answer: D
Diff: 3
LO: 7-8
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

12) Cornish Company is preparing a cash budget for the month of June. The following information is available:

Cash Balance, May 31, 2015 $11,000


Cash collections from customers in June 43,000
Depreciation expense in June 10,000
Cash paid for equipment in June 20,000
Cash paid for merchandise in June 20,000
Cash paid for operating expenses in June 20,000
Cash dividend paid in June 5,000

The minimum cash balance desired is $5,000. What are the net cash receipts and disbursements for the month of
June?
A) $(2,000)
B) $(3,000)
C) $(22,000)
D) $(32,000)
Answer: C
Diff: 3
LO: 7-8
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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13) Cornell Company is preparing a cash budget for the month of June. The following information is available:

Cash Balance, May 31, 2014 $11,000


Cash collections from customers in June 43,000
Cash paid for land in June 10,000
Patent amortization expense in June 5,000
Cash paid for merchandise in June 20,000
Cash paid for operating expenses in June 20,000
Cash dividend paid in June 5,000

The minimum cash balance desired is $5,000. What is the deficiency of cash before financing at June 30, 2014?
A) $(5,000)
B) $(6,000)
C) $(11,000)
D) $(12,000)
Answer: B
Diff: 3
LO: 7-8
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

14) Warbel Company is preparing a cash budget for the month of June. The following information is available:

Cash Balance, May 31, 2015 $11,000


Cash collections from customers in June 43,000
Cash paid for merchandise in June 20,000
Cash paid for operating expenses in June 20,000
Paid cash dividend in June 5,000

The minimum cash balance desired is $5,000. What is the cash balance on June 30, 2015?
A) $8,000
B) $9,000
C) $10,000
D) $13,000
Answer: B
Diff: 3
LO: 7-8
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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15) ________ usually prepare and use the operating budget. ________ focus on the financial budget.
A) Sales managers; the board of directors
B) Controllers and treasurers; line operating managers
C) Line operating managers; controllers and treasurers
D) The audit committee; the board of directors
Answer: C
Diff: 1
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

16) Budgets that focus on the budgeted cost of activities required to produce and sell products are called
________.
A) strategic budgets
B) master budgets
C) activity-based budgets
D) rolling budgets
Answer: C
Diff: 1
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

17) The activity-based budgeting system emphasizes ________.


A) the resources needed by a company
B) the preparation of budgets by function
C) the attainment of long-range goals
D) activities and their consumption of resources
Answer: D
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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18) ________ models are mathematical models that can react to any set of assumptions about sales, costs and
product mix.
A) Strategic
B) Long-range
C) Financial planning
D) Operating budget
Answer: C
Diff: 1
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

19) The beginning available cash balance equals the beginning cash balance plus the minimum cash balance
desired.
Answer: TRUE
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

20) The cash budget begins with the ending cash balance from the previous period.
Answer: TRUE
Diff: 1
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

21) Depreciation expense is usually a disbursement listed on the cash budget.


Answer: FALSE
Diff: 1
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

22) The following rule applies when preparing the cash budget. If available cash plus net cash receipts and
disbursements is negative, then borrowing is necessary.
Answer: TRUE
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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23) Line operating managers usually prepare and use the operating budget.
Answer: TRUE
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

24) The operating budget is a better measure of a company's long-term performance than the financial budget.
Answer: TRUE
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

25) Activity-based budgets are an example of functional budgeting.


Answer: FALSE
Diff: 2
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

26) Financial planning models enable managers to get answers to "what-if" questions.
Answer: TRUE
Diff: 1
LO: 7-8
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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Copyright © 2014 Pearson Education
27) Donald Company has the following information:

Cash Balance, May 31 $45,000


Dividends paid in June 12,000
Cash paid for operating expenses in June 36,800
Equipment depreciation expense in June 4,500
Patent amortization expense in June 2,000
Cash collections on sales in June 99,000
Merchandise purchases paid in June 56,200
Purchase equipment for cash in June 17,500

Donald Company wants to keep a minimum cash balance of $10,000. Assume that borrowing occurs at the
beginning of the month and repayments occur at the end of the month. Interest of 1% is paid in cash at the end
of each month when debt is outstanding. Borrowing and repayments are carried out in multiples of $1,000.

Required:
Prepare a cash budget for June.
Answer: Beginning cash balance $45,000
Minimum cash balance desired 10,000
Available cash balance $35,000

Cash receipts and disbursements:


Collections from customers $99,000
Payments for merchandise (56,200)
Payments for operating expenses (36,800)
Dividends paid (12,000)
Purchase equipment for cash (17,500)
Net cash receipts and disbursements (23,500)
Excess of cash before financing $11,500
Borrowing 0
Total cash increase from financing 0
Ending cash balance $21,500
Diff: 3
LO: 7-8
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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28) O'Brien Company has the following information:

Cash Balance, June 30 $50,000


Dividends paid in July 60,000
Cash paid for operating expenses in July 185,500
Depreciation expense in July 12,000
Cash collections on sales in July 510,000
Merchandise purchases paid in July 180,000
Purchase equipment for cash in July 94,500

O'Brien Company wants to maintain a minimum cash balance of $50,000. Assume that borrowing occurs at the
beginning of the month and repayments occur at the end of the month. Interest of 1% per month is paid in cash
at the end of each month debt is outstanding. Borrowing and repayment is carried out in multiples of $1,000.

Required:
Prepare a cash budget for July.
Answer: Beginning cash balance $50,000
Minimum cash balance desired 50,000
Available cash balance $0

Cash receipts and disbursements:


Collections from customers $510,000
Payments for merchandise (180,000)
Payments for operating expenses (185,500)
Dividends paid (60,000)
Purchase equipment for cash (94,500)
Net cash receipts and disbursements (10,000)
Deficiency of cash before financing $(10,000)
Borrowing(at beginning of month) 11,000
Interest Payment($11,000 x 1%) (110)
Total cash increase from financing 10,890
Ending cash balance $50,890
Diff: 3
LO: 7-8
AACSB: Analytic skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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7.9 Questions

1) Systematically varying budget data input to determine the effects of each change on the budget is called
________ analysis.
A) operating budget
B) financial budget
C) sensitivity
D) master budget
Answer: C
Diff: 1
LO: 7-9
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

2) A spreadsheet can be used to prepare ________.


A) the operating budget
B) the financial budget
C) schedules from the master budget
D) all of the above
Answer: D
Diff: 2
LO: 7-9
AACSB: Reflective thinking skills
Learning Outcome: Discuss basic budgeting concepts and identify and prepare the budgets that comprise the
master budget

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