Chapter 07 - Planning For Profit and Cost Control

Chapter 07 - Planning for Profit and Cost Control
Answers to Questions
1. Budgets are useful for large companies with complex activities as

well as small companies. Budgets act as a vehicle for
communication by formalizing management’s plans in a document
that communicates company objectives. The benefits associated
with this kind of planning apply to all sizes of companies operating
at all levels of complexity.
2. The budget represents the companywide plans stated in financial

terms as to how to coordinate operating activities to accomplish
goals and objectives. Accordingly, its success depends upon the
combined effort of all of the parties involved. A committee that
includes representatives from all pertinent departments is
necessary to formulate the master budget.
3. The three levels of planning are as follows:

(1) Strategic planning – the long-run planning activities that
address issues such as overall company goals and objectives.
(2) Capital budgeting – the intermediate financial planning
activities of the entire company that concern investments,
product selection, and desired profitability.
(3) Operations budgeting – the short-run financial planning for the
company’s different departments that culminates in the
formation of a master budget.
4. The span of time is the primary factor that distinguishes the three
levels of planning from each other. Strategic planning involves
long-range decisions; capital budgeting is associated with
intermediate-range plans; and operational budgeting is concerned
with short-range plans.
5. The perpetual budget has the advantage of keeping management

involved in the budget process. Too often budgets are prepared
and forgotten. The perpetual budget forces management to
maintain a constant focus on the company’s goals and objectives.
7-1
The primary advantages associated with budgeting are as follows:

Planning – formalizes management’s plans in a document that
communicates company objectives.
Coordination – forces departments to coordinate their activities in a
manner that ensures the attainment of the objectives of
the whole company.
Performance measurement – represents specific, quantitative
standards that can be used to evaluate performance.
Corrective action – acts as an early warning system that promotes
corrective action.
6. Budgeted amounts represent management’s expectations regarding
how the firm as a whole and individual departments within the firm
should perform. By comparing actual performance with the
expected performance (the budgeted amounts), managers can be
effectively evaluated.
7. Mr. Shilov’s failure with budgets seems to stem from his
misunderstanding of the human element. He states that “he made
budgets.” Experience shows that, in general, employees are more
willing to accept budget standards if they participate in the
budgeting process. Further, Mr. Shilov appears to have used the
budget as a tool for punishment – a basis for reprimanding
employees. As a result, employees would resent the budget and
would be unmotivated to accomplish budget standards.
8. A master budget consists of a series of detailed schedules and
budgets that describe the overall financial plans for the forthcoming
accounting period.
9. The sales forecast normally functions as the starting point for the
development of the master budget. Clearly, production and other
related activities depend upon the level of sales.
7-2
10. The desired level of ending inventory must be added to projected

sales in order to determine the amount of goods that are needed
during the period. The beginning inventory is subtracted from the
amount of goods needed in order to determine the amount of goods
to be produced. Managing inventory is important because an
inventory shortage can result in customer dissatisfaction and loss
of sales. Conversely, excess inventory ties up capital investment,
creates unnecessary storage cost, and is subject to obsolescence
or spoilage. Finding the balance between too much and too little
inventory is essential to the profitability of a company.
11. The cash budget is composed of three major components:
(1) Cash receipts – expected cash inflows from sales, sale of

investments, and borrowing activities, etc.
(2) Cash payments – expected cash outflows for inventory

purchases, selling and administrative expenses, and purchases
of investments, etc.
(3) Financing activities – expected borrowing and repayment

activities.
12. Determining the amount of the cash balance to include on the

budgeted balance sheet is an insignificant reason for preparing a
cash budget. The real purpose of preparing a cash budget is to
enable a company to effectively manage its financing and investing
activities. If the company can foresee a cash surplus then
investment opportunities can be investigated to earn interest or
debt can be repaid to reduce interest. If the company anticipates a
cash shortage, appropriate sources of financing can be investigated
to avoid possible bankruptcy. When dealing with large amounts of
money, investing, borrowing, and repayment activities that involve
interest can be critical to profitability.
7-3
13. The pro forma income statement provides information about the
expected profitability of the company. The completion of this
statement is dependent on the departmental operating budgets. For
example, the sales budget provides information about projected
sales revenues, the purchases budget provides information as to
projected cost of goods sold, the selling and administrative
expenses budget provides information about projected operating
expenses, and the cash budget provides information as to expected
interest revenue and expense.
14. The cash budget, like the pro forma statement of cash flows,
provides information as to expected cash receipts and cash
payments, but in addition it shows how a firm plans to effectively
manage its cash through financing and investing activities.
Exercise 7-1A
Ms. Huffman appears to be a person with an attitude problem. She does

not understand how to involve her colleagues in the budgeting process.
She degrades their input and uses the budget as a tool for criticism. In
so doing, Ms. Huffman has failed to gain the support of upper-level
management. The attitudes of upper-level management will have a
significant impact on the effectiveness of the budget. Subordinates
develop a keen awareness of management's expectations. If upper-level
managers degrade, make fun of, or ignore the budget, subordinates will
rapidly follow suit. If budgets are used to humiliate or embarrass
subordinates, they will resent the treatment and the budgeting process
that enables it. To be effective, upper-level management must accept and
portray the budget as a sincere effort to express realistic goals that
employees will be expected to accomplish. The proper atmosphere is
essential to budgeting success. Once a negative pattern has been
established, it is difficult to change. Perhaps the most effective solution
in this case is to replace Ms. Huffman.
7-4
Exercise 7-2A
a.
Sales Budget
January February March
Cash sales $ 40,000 $ 44,000 $ 48,400
Sales on account 100,000 110,000 121,000
Total budgeted sales $140,000 $154,000 $169,400
b. The amount of sales revenue appearing on the 1st quarter income

statement is the sum of the monthly amounts ($140,000 + $154,000 +
$169,400 = $463,400).
Exercise 7-3A
a.
Schedule of Cash Receipts July August September
Current cash sales $ 70,000 $ 75,000 $ 80,000
Plus collections from accounts receivable 300,000 90,000 108,000
Total budgeted collections $370,000 $165,000 $188,000
b. The current month’s sales on account will be collected in the following

month. Accordingly, the amount of accounts receivable at the end of
September is equal to September’s sales on account ($129,600).
Exercise 7-4A
a.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
East Div. $100,000 $104,000 $108,160 $112,486
West Div. 300,000 306,000 312,120 318,362
South Div. 200,000 212,000 224,720 238,203
Total $600,000 $622,000 $645,000 $669,051
b.
Total $600,000 $622,000 $645,000 $669,051
7-5
Exercise 7-5A
a. Sales for January are expected to be $392,000 ( $560,000 x 0.70)
Beginning accounts receivable balance $ 96,400

January sales on account 392,000
Available for collection 488,400
Less: Ending accounts receivable balance (73,600)
Cash collected $414,800
b. It is reasonable to assume that sales will decline in January.

Customers tend to buy merchandise in December for Christmas gifts
and to cut back on buying in January immediately after Christmas.
Exercise 7-6A
Sales would likely be highest in late January or early February because of

Valentine’s Day sales. October may also produce higher sales due to
buying for Halloween. Other holiday seasons are also likely to boost
sales. Accordingly, sales would be high in April for Easter, and
November and December for Christmas and Hanukah. Months that would
be lower would be May and June. Summer months may pick up due to
children being out of school and in the malls. Similarly, sales would be
expected to drop off in August and September when school reopens.
Exercise 7-7A
a.
Inventory Purchases Budget

Budgeted cost of goods sold $50,000 $ 54,000 $60,000
Plus: Desired ending inventory 5,400 6,000 7,500
Total inventory needed 55,400 60,000 67,500
Less: Beginning inventory 5,000 5,400 6,000
Required purchases (on account) $50,400 $ 54,600 $61,500
7-6
Exercise 7-7A (continued)
b. The amount of cost of goods sold appearing on the first quarter pro
forma income statement is the sum of the monthly amounts
($50,000 + $54,000 + $60,000 = $164,000).
c. Since the quarter ends on March 31, the ending inventory for March is
also the ending inventory for the quarter, $7,500.
Exercise 7-8A
a.
Schedule of Cash Payments for Inventory Purchases

April May June
Payment for current accounts payable $90,000 $108,000 $118,800
Payment for previous accounts payable 8,000 10,000 12,000
Total budgeted payments for inventory $98,000 $118,000 $130,800
b. Since 90% of the current purchases on account are paid in cash

during the month of purchase, 10% will remain payable at the end of
the month, $13,200 ($132,000 x 0.10).
Exercise 7-9A
a. Budgeted cost goods sold for July is $315,000 ($300,000 x 1.05)
Ending inventory balance $ 29,000

Budgeted cost of goods sold 315,000
Total inventory needed 344,000
Less: Beginning inventory balance (28,000)
Budgeted purchases $316,000
b.
June’s payables balance paid in July $ 35,000
Cash paid for July purchases ($316,000 x 0.70) 221,200
Projected cash payments for July $256,200
7-7
Exercise 7-10A
a.
Schedule of Cash Payments for S&A Expenses
Oct. Nov. Dec.
Equipment lease expense $6,000 $ 6,000 $ 6,000
Prior month's salary expense, 100% 0 6,100 6,600
Cleaning supplies 2,800 2,730 3,066
Insurance premium 7,200 0 0
Rent 1,700 1,700 1,700
Miscellaneous expenses 700 700 700
Total payments for S&A expenses $18,400 $17,230 $18,066
Depreciation is a noncash charge.
b. Since salaries expense is paid in the month following the month it is

incurred, the amount payable at the end of December will be the
amount of salary expense incurred in December, $7,000.
c. Since the insurance premium is prepaid for 6 months on October 1,

the amount of prepaid insurance at the end of December will be $3,600
[$7,200 – ($1,200 x 3)].
7-8
Exercise 7-11A
a. An inventory purchases budget prepared with the sales manager's
estimate:
Sales $380,000 $310,000 $280,000 $480,000
Cost of goods sold $228,000 $186,000 $168,000 $288,000
Plus: Desired ending inventory 18,600 16,800 28,800 30,000
Total inventory needed 246,600 202,800 196,800 318,000
Less: Beginning inventory 29,000 18,600 16,800 28,800
Required purchases $217,600 $184,200 $180,000 $289,200
b. An inventory purchases budget prepared with the marketing consultant's

estimate:
Sales $520,000 $460,000 $410,000 $650,000
Cost of goods sold $312,000 $276,000 $246,000 390,000
Plus: Desired ending inventory 27,600 24,600 39,000 30,000
Total inventory needed 339,600 300,600 285,000 420,000
Less: Beginning inventory 29,000 27,600 24,600 39,000
Exercise 7-12A
a. Budgeted payments for January:
Sales commissions $25,000
Rent 16,000
Miscellaneous 2,000
Total* $43,000
*The amount of utilities is not included because the cash payment will be made in February. The
amount of depreciation is not included because the depreciation does not require a cash payment.
Recall that cash is paid at the time of purchase rather than when the depreciation is recognized.
b. The full $5,000 balance for the utilities charge will remain payable at the
end of January.
c. The problem implies that the monthly charge for depreciation is $4,000.
Accordingly, the amount of depreciation to be recognized on an annual
income statement would be $48,000 ($4,000 x 12).
7-9
Exercise 7-13A
a.
Cash Budget July August September

Section 1: Cash receipts
Beginning cash balance $ 42,500 $ 14,000 $ 14,000
Add cash receipts 180,000 200,000 240,600
Total cash available (a) 222,500 214,000 254,600
Sections 2: Cash Payments
For inventory purchases 165,526 140,230 174,152
For S&A expenses 54,500 60,560 61,432
For interest exp at 2% per month 0 2311 2512
Total budgeted disbursements (b) 220,026 201,021 235,835
Sections 3: Financing Activities
Cash surplus (shortage) (a – b=c) 2,474 12,979 18,765
Borrowing (repayment) (d–c) 11,526 1,021 (4,765)
Ending cash balance (d) $ 14,000 $ 14,000 $ 14,000
1
11,526 x 2% = 231 (rounded)
2
(11,526+1,021) x 2% = 251 (rounded). Note that $4,765 is repaid at the end of month in addition to
interest that still has to be paid in September.
b. Cash flow from operating activities is equal to total (i.e., sum of the
monthly amounts) cash receipts from customers minus the total (i.e.,
sum of the monthly amounts) of cash payments for inventory, S&A
expense, and interest [i.e., $620,600 – ($220,026 + $201,021 + $235,835)
= ($36,282) net cash outflow.]
c. Cash flow from financing activities is the amount borrowed less

repayments (i.e., $11,526 + $1,021 – $4,765 = $7,782 net cash inflow.)
7-10
Exercise 7-14A
a.
Cash Collections
Collections from May’s receivables balance $ 60,000
Collections from June’s credit sales ($600,000 x .80) 480,000
Cash sales from June 150,000
Total cash receipts $690,000
Desired cash balance 30,000
Cash disbursements 700,000
Total cash needs 730,000
Cash shortage (amount needed to be borrowed) $40,000
b. The interest expense for June is $0 because the loan is taken at the
end of June.
c. The interest expense for July is $300 ($40,000 x 9% ÷ 12).
7-11
Exercise 7-15A
a. Pro forma income statement prepared with Mr. Wing’s estimate:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

Sales revenue $187,000 $220,000 $231,000 $286,000 $924,000
Cost of goods sold 112,200 132,000 138,600 171,600 554,400
Gross profit 74,800 88,000 92,400 114,400 369,600
S. & Adm. expenses 18,700 22,000 23,100 28,600 92,400
Net income $ 56,100 $ 66,000 $ 69,300 $ 85,800 $277,200
b. Pro forma income statement prepared with Ms. Sullivan's estimate:

Sales revenue $178,500 $210,000 $220,500 $273,000 $882,000
Gross Profit 71,400 84,000 88,200 109,200 352,800
S & A expenses 17,850 21,000 22,050 27,300 88,200
Net income $ 53,550 $ 63,000 $ 66,150 $ 81,900 $264,600
c. Forecasting is not likely to be 100% accurate. Therefore, different

executive officers within the same company may have different
estimates about the future. In addition to legitimate differences
caused by honest opinions, self-interest may also contribute to
differences. For example, Glenda Sullivan may want to establish low
budgetary figures for sales because these figures will become the
standards for the evaluation of Sarah's future performance. With low
standards, she would have a better chance of reaching the standards.
7-12
Problem 7-16A
a.
Sales Budget January February March Total
Sales on account $200,000 $220,000 $242,000 $662,000
b. Sales revenue for the quarter is equal to the sum of the monthly
amounts ($200,000 + $220,000 + $242,000 = $662,000).
c.
Schedule of Cash Receipts January February March
Receipts from January sales $140,000
Receipts from January sales $ 40,000
Receipts from February sales 154,000
Receipts from March sales 169,400
Total $140,000 $194,000 $233,400
d.
Schedule of Cash Receipts January February March April May
Receipts from February sales $22,000
Receipts from March sales $24,200
Total $140,000 $194,000 $233,400 $70,400 $24,200
The accounts receivable as of March 31, 2012 is equal to the amount

due to be collected in April and May from the first quarter sales,
$94,600 ($70,400 + $24,200).
7-13
Problem 7-17A
a.
Inventory Purchases Budget April May June

Budgeted cost of goods sold $60,000 $70,000 $80,000
Plus desired ending inventory 7,000 8,000 8,600
Inventory needed 67,000 78,000 88,600
Less beginning inventory 3,600 7,000 8,000
Required purchases (on account) $63,400 $71,000 $80,600
b. Since the quarter ends on June 30, the ending inventory for June is
also the ending inventory for the quarter (i.e., $8,600).
c.
Schedule of Cash Payments April May June

Payment of current accounts payable $38,040 $42,600 $48,360
Payment of previous accounts payable 14,800 25,360 28,400
d. Since 60% of the current purchases on account are paid in cash

during the month of purchase, 40% will remain payable at the end of
the month (i.e., $80,600 x .40 = $32,240).
7-14
Problem 7-18A
This is a typical problem for what-if analysis. Students can use a

computerized spreadsheet to try different possible scenarios.
a.
The budgeted net income for the next year: $340,000x115%= $391,000
Assume x = Desired sales
Sales – Cost of goods sold – S&A = NI
X – 0.7 X – ($60,000 + .10 X) = $391,000
.20 X – $60,000 = $391,000
X = $2,255,000
Alternatively, you can use the contribution margin ratio to determine

sales.
Contribution margin ratio = Sales (100%) – Variable costs (80%) = 20%

(Net income + Fixed cost) ÷ CM ratio
= ($391,000+$60,000) ÷ 20% = $2,255,000
Pro Forma Income

Statement
Sales revenue $2,255,000
Cost of goods sold 1,578,500
Gross profit 676,500
Selling & admin. expenses 285,500*
Net income $ 391,000
*($2,255,000 x 10% + $60,000) = $285,500
% increase required: ($2,255,000 – $2,000,000) ÷ $2,000,000 = 12.75%
7-15
Problem 7-18A (continued)
b.
Budgeted cost of goods sold with a 2% cut: $1,400,000 x 98% = $1,372,000

Budgeted gross profit: $2,000,000 – $1,372,000= $628,000
The budgeted level of selling and administrative expenses:

$628,000– $391,000 = $237,000
Pro Forma Income Statement

*The figure means that management has to cut the selling and
administrative expenses by $23,000 ($237,000 – $260,000) in order to reach
the president’s goal.
c.
Projected sales revenue to increase by 15%:
$2,000,000 x 115%= $2,300,000
Projected cost of goods sold: $2,300,000 x 70% = $1,610,000

Selling & admin. expenses 340,000
Since the projected net income under the given scenario will be only
$350,000, which is short of the original $391,000, the company cannot reach
its goal.
7-16
Problem 7-19A
a.

July August September
Salary expense $18,000 $18,000 $18,000
Prior month's sales commissions, 100% 0 1,700 1,700
Supplies expense 360 390 420
Prior month's utilities, 100% 0 1,100 1,100
Rent 6,600 6,600 6,600
Miscellaneous 690 690 690
b. Since utilities are paid in the month following the month they are
incurred, the amount payable at the end of September will be the
amount of utilities expense incurred in September which is $1,100.
c. Since sales commissions are paid in the month following the month
they are incurred, the amount payable at the end of September will be
the amount of sales commissions expense incurred in September
which is $1,700.
7-17
Problem 7-20A
Cash Budget January February March

Cash available (a) 108,000 111,600 131,000
Less cash payments
For S&A expenses 31,000 32,000 27,000
Interest exp at 1% per month 4001 5902 5703
Total budgeted payments (b) 121,400 104,590 112,570
Payments minus receipts
Surplus (Shortage) (a – b) (13,400) 7,010 18,430
Financing Activity
Borrowing (repayment) (c) 19,000 (2,010) (13,430)
Ending cash balance (a – b + c) $ 5,600 $ 5,000 $ 5,000
1
($40,000) x 1% = $400
2
($40,000 + $19,000) x 1% = $590
3
($40,000 + $19,000 – $2,010) x 1% = $570 (rounded).
7-18
Problem 7-21A
a.

Peaches $231,000 $252,000 $315,000 $252,000 $1,050,000
Oranges 440,000 495,000 627,000 418,000 1,980,000
Total $671,000 $747,000 $942,000 $670,000 $3,030,000
b. Budgeted cost of goods sold: $3,030,000 x 60% = $1,818,000

Budgeted Annual Income Statement
Gross profit 1,212,000
Net income $512,000
c. Inventory purchases budget for peaches

Sales $231,000 $252,000 $315,000 $252,000
Plus: desired ending inventory 30,240 37,800 30,240 34,000
Inventory needed 168,840 189,000 219,240 185,200
Less: beginning inventory 27,720 30,240 37,800 30,240
Required purchases $ 141,120 $158,760 $181,440 $154,960
Inventory purchases budget for oranges

Sales $440,000 $495,000 $627,000 $418,000
7-19
Problem 7-22A
(Note: All computations are rounded to the nearest whole dollar.)
a. & b.
Sales Budget Pro Forma
Oct. Nov. Dec. Data
Cash sales $ 48,000 $ 60,000 $ 75,000
Sales on account 72,000 90,000 112,500 $112,500(a)
Total budgeted sales $120,000 $150,000 $187,500 457,500(b)
Schedule of Cash Receipts Oct. Nov. Dec.
Current cash sales $48,000 $ 60,000 $ 75,000
Plus collections from A/R 0 72,000 90,000
Total collections $48,000 $132,000 $165,000 $345,000 (c)
(a) Ending accounts receivable balance appearing on balance sheet.
(b) Sales revenue appearing on income statement (sum of monthly amounts).
(c) Cash receipts from customers on statement of cash flows (sum of monthly amounts).
c. and d.
Pro Forma
Oct. Nov. Dec. Data
Budgeted cost of goods sold $72,000 $ 90,000 $112,500 $274,500(a)
Plus: Desired ending inventory 9,000 11,250 12,000 12,000(b)
Less: Beginning inventory 0 9,000 11,250
Required purchases (on account) $81,000 $ 92,250 $113,250 33,975(c)
Schedule of Cash Payments Budget for Inventory Purchases
Pmt. of current month's accts. pay. $56,700 $64,575 $ 79,275
Pmt. for prior month's accts. pay. 0 24,300 27,675
Total budgeted pmts. for inventory $56,700 $88,875 $106,950 $252,525(d)
(a) Cost of goods sold appearing on pro forma income statement (sum of monthly amounts).
(b) Ending inventory balance appearing on pro forma balance sheet.
(c) Ending accounts payable balance appearing on pro forma balance sheet ($113,250 -$79,275).
(d) Cash payments for inventory purchases (sum of monthly amounts).
7-20
e. and f.
Selling and Administrative Expense Budget

Pro Forma
Oct. Nov. Dec. Data
Salary expense $18,000 $18,000 $18,000
Sales commissions, 5% of sales 6,000 7,500 9,375 $ 9,375(a)
Supplies expense, 2% of sales 2,400 3,000 3,750
Utilities 1,400 1,400 1,400 1,400(b)
Depreciation on store fixtures 4,000 4,000 4,000 12,000(c)
Rent 4,800 4,800 4,800
Miscellaneous 1,200 1,200 1,200
Total S&A expenses $37,800 $39,900 $42,525 120,225(d)

Salary expense $18,000 $18,000 $18,000
Prior month's sales comm., 100% 0 6,000 7,500
Supplies expense 2,400 3,000 3,750
Prior month's utilities, 100% 0 1,400 1,400
Depreciation on store fixtures 0 0 0
Rent 4,800 4,800 4,800
Total payments for S&A expenses $26,400 $34,400 $36,650 $97,450 (e)
(a) Ending sales commissions payable account balance shown on pro forma balance sheet.
(b) Ending utilities payable account balance shown on pro forma balance sheet.
(c) Accumulated depreciation appears on the pro forma balance sheet (sum of monthly amounts).
(d) S&A expense appearing on pro forma income statement (sum of monthly amounts).
(e) Total cash payments for S&A expenses on pro forma statement of cash flows (sum of monthly
amounts).
7-21
g.
Cash Budget
Pro Forma
Oct. Nov. Dec. Data
Beginning cash balance $ 0 $ 12,900 $ 12,000
Add cash receipts 48,000 132,000 165,000 $345,000(a)
Cash available (w) 48,000 144,900 177,000
Less payments
For inventory purchases 56,700 88,875 106,950 252,525(b)
For S&A expenses 26,400 34,400 36,650 97,450(c)
Purchase of store fixtures 164,000 0 0 164,000(d)
Interest expense* 0 2,120 2,045 4,165 (f)
Total budgeted payments (x) 247,100 125,395 145,645
Surplus (shortage) (w – x) (199,100) 19,505 31,355
Financing activity
Borrowing (repayment) (y) 212,000 (7,505) (19,355) 185,140(e)
Ending cash balance (w – x+ y) $ 12,900 $ 12,000 $ 12,000 12,000(g)
*October ($0 x 0.01); November ( $212,000 x 0.01); December [( $212,000 – $7,505) x 0.01]
(a) Operating activities section of pro forma Statement of Cash Flows (sum of monthly amounts).
(b) Operating activities section of pro forma Statement of Cash Flows (sum of monthly amounts).
(c) Operating activities section of pro forma Statement of Cash Flows (sum of monthly amounts).
(d) Investing activities section of pro forma Statement of Cash Flows. The investment in store fixtures
also appears on the pro forma balance sheet.
(e) Financing activities section of pro forma Statement of Cash Flows (sum of monthly amounts).
(f) Operating activities section of pro forma Statement of Cash Flows (sum of monthly amounts).
(g) The ending cash balance appears on the pro forma balance sheet and as the last item on the pro
forma statement of cash flows.
7-22
h.
Patel Company
For the Quarter Ended December 31, 2012
Sales revenue $457,500
Cost of goods sold (274,500)
Gross margin 183,000
S&A expenses (120,225)
Operating income 62,775
Interest expense (4,165)
Net income $ 58,610
i.
Patel Company
Pro Forma Balance Sheet
December 31, 2012
Assets
Cash $ 12,000
Accounts receivable 112,500
Inventory 12,000
Store fixtures $164,000
Accumulated depreciation (12,000)
Book value of fixtures 152,000
Total assets $288,500
Liabilities
Accounts payable $ 33,975
Utilities payable 1,400
Sales commissions payable 9,375
Line of credit liability 185,140
Equity
Retained earnings 58,610
Total liabilities and equity $288,500
7-23
j.
Patel Company
Pro Forma Statement of Cash Flows
For the Quarter Ended December 31, 2012
Cash flows from operating activities

Cash receipts from customers $ 345,000
Cash payments for inventory (252,525)
Cash payments for S&A expenses (97,450)
Cash payments for interest expense (4,165)
Net cash flows from operating activities $ (9,140)
Cash flows from investing activities

Cash payment for store fixtures (164,000)
Cash flow from financing activities

Net Inflow from line of credit 185,140
Net increase in cash 12,000
Plus: Beginning cash balance 0
Ending cash balance $ 12,000
Problem 7-23A
a. Pro forma income statement assuming 5% growth:
Budget
Selling & administrative expenses 945,000
7-24
b. Pro forma income statement with 10% growth:
Actual Result
Selling & administrative expenses 990,000
Excess of actual net income over budget:

$660,000 – $630,000 = $30,000
Bonus: $30,000 x 15% = $4,500
c. Pro forma income statement assuming 15% growth:
Budget
Selling & administrative expenses 1,035,000
d. Zero
e. The process of participative budgeting is recommended. This process

requires two-way communication between the president and divisional
vice presidents. Any disagreement about the budget assumptions
should be fully discussed and pros and cons well considered. If the
president believes that the divisional budget is unrealistic, he should tell
the vice president directly and explain the reasons. Participative
budgeting is more than just a budget proposal from a subordinate and a
review and final decision by the superior. The process described in the
problem is nothing but gamesmanship.
7-25
Exercise 7-1B
The primary deficiencies in Mullins’ budgeting process are the absence of

leadership and top management participation and the failure of the
controller and department managers to coordinate their efforts. As a result
of these flaws, department managers proposed budgets that would satisfy
their individual needs at the expense of the company’s best interests.
Ms. Morgar should have established general corporate goals early in the
budgeting process. She needn’t dictate company goals based on her
personal ambitions; rather, she could have created a high-level committee
to evaluate the company’s long-term competitive position in the market and
to advise her regarding possible alternative future company goals. Once
top management establishes company goals, individual departments should
propose department-level goals and budgets to support the company’s
general goals.
Mr. Judson should have coordinated the budgeting process among the
different departments to ensure that they would propose individual budgets
in support of the company’s overall goals.
Exercise 7-2B
a.
Revenues Budget July August September
Food sales $40,000 $42,000 $44,100
Beverage and liquor sales 24,000 25,200 26,460
Total budgeted revenues $64,000 $67,200 $70,560
b. The total revenue Gardner’s will report on the 3rd quarter pro
forma income statement is the sum of the monthly amounts,
$64,000 + $67,200 + $70,560 = $201,760.
7-26
Exercise 7-3B
a.
Schedule of Cash Receipts April May June
Current cash sales $120,000 $140,000 $150,000
Plus: Collections from accounts receivable 310,000 480,000 568,000
b. Since the current month’s sales on account will be collected in the

following month, the amount of accounts receivable at the end of
June is equal to June’s credit sales of $500,000.
Exercise 7-4B
a.
This Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Moore $160,000 $166,400 $173,056 $179,978 $187,177
Pickrell 200,000 202,000 204,020 206,060 208,121
Rice 320,000 329,600 339,488 349,673 360,163
Total $680,000 $698,000 $716,564 $735,711 $755,461
b.
Budgeted 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Annual
Income $698,000 $716,564 $735,712 $755,461 $2,905,736
Exercise 7-5B
a. The expected cash collections in July are 50% of that month’s

expected sales revenues. The computation follows:
$300,000 x 50% = $150,000
b. The expected cash collections in August are the sum of 50% of July’s
expected revenues and 50% of August’s expected revenues. The
computation follows:
$300,000 x 50% + $280,000 x 50% = $290,000
7-27
Exercise 7-6B
Sales would likely be high in February because of Valentine’s Day sales,
in May because of Mother’s Day sales, in June because of Father’s Day
sales, and in December because of Christmas sales. Sales should be
relatively stable in other months since birthdays and other personal
events occur in a normal distribution pattern.
Exercise 7-7B
a.
Plus desired ending inventory 8,960 9,600 10,080
b. The amount of cost of goods sold reported on the first quarter income
statement is the sum of the monthly amounts, $80,000 + $56,000 +
$60,000 = $196,000.
c. Since the quarter ends on March 31, the ending inventory for March is
also the ending inventory for the quarter, $10,080.
Exercise 7-8B
a.
Schedule of Cash Payments for Inventory Purchases
Oct. Nov. Dec.
Payment for current accounts payable $28,000 $21,000 $25,200
Payment for previous accounts payable 9,000 12,000 9,000
b. Since 70% of current accounts payable are paid in cash in the

month of purchase, 30% will remain payable at the end of any
month,$10,800 ($36,000 x .30) at the end of December.
7-28
Exercise 7-9B
a. Budgeted cost goods sold for February is $328,000 ($320,000 x 1.025).
Desired February ending inventory balance $ 30,000
Budgeted cost of goods sold 328,000
Inventory needed in February 358,000
Less: beginning inventory balance (January) (25,000)
Budgeted February purchases $333,000
b.
January’s payables balance paid in February $ 30,000
Cash paid for February purchases ($333,000 x 0.60) 199,800
Projected cash payments for February $229,800
Exercise 7-10B
a.
Schedule of Cash Payments for Selling and Administrative Expenses
Equipment depreciation* $ 0 $ 0 $ 0
Prior month's salary expense, 100% 0 3,400 3,200
Cleaning supplies 1,000 940 1,100
Insurance premium 7,200 0 0
Equipment maintenance expense 500 500 500
Leases expense 1,600 1,600 1,600
Miscellaneous expenses 400 400 400
*Depreciation is a noncash charge.
b. Since salary expense is paid in the month following the month it is

incurred, the amount payable at the end of March will be the amount
of salary expense incurred in March, $3,600.
c. Since the annual insurance premium is prepaid on January 1, the
amount of prepaid insurance at the end of March will be $5,400 [$7,200
– ($600 x 3)].
7-29
Exercise 7-11B
a. An inventory purchases budget prepared with Rachel’s estimate:
Sales $360,000 $400,000 $300,000 $420,000
Plus: ending inventory 36,000 27,000 37,800 35,000
b. An inventory purchases budget prepared with David's estimate:

Sales $300,000 $320,000 $340,000 $480,000
Plus: ending inventory 28,800 30,600 43,200 35,000
Exercise 7-12B
a. Budgeted payments for January:
Office lease $4,000
Utilities 1,900
Office supplies 2,400
Miscellaneous 1,000
Total* $9,300
*The referral fees are not included because cash payment for them will be
made in February. The depreciation is not included because depreciation
does not require a cash payment. Cash for depreciable assets is paid
when the assets are purchased rather than when depreciation is
recognized.
b. The full $5,000 balance for the referral fees will remain payable at the end
of January.
c. Since the office lease is $4,000 each month, the annual lease expense will
be $48,000 ($4,000 x 12).
7-30
Exercise 7-13B
a.
Cash Budget July August September

Cash available (a) 196,000 196,000 212,000
Less disbursements
For S&A expenses 37,000 36,000 39,000
Interest expenses at 1% per month 0 301 0
Total budgeted disbursements (b) 195,000 189,030 210,000
Cash surplus (shortage) (a – b) 1,000 6,970 2,000
Financing activity
Borrowing (repayment) (c) 3,000 (2,970) 2,000
1
$3,000 x 1% = $30
2
($3,000 – $2,970) x 1% = $0 (rounded)
b. Net cash flows from operating activities equals total (sum of the monthly
amounts) cash receipts from customers minus total (sum of the monthly
amounts) cash payments for inventory, S&A expenses, and interest. The
computation follows:
($180,000 + $192,000 + $208,000) – ($195,000 + $189,030 + $210,000)

= $580,000 – $594,030
= $(14,030) net cash outflow
c. Net cash flows from financing activities is the amount borrowed less
repayments. The computation follows:
$3,000 – $2,970 + $2,000 = $2,030 net cash inflow
7-31
Exercise 7-14B
a.
Cash Collections
Collections from June 30 receivables balance $ 50,000
Collections from July’s credit sales ($320,000 x 0.75) 240,000
July cash sales 70,000
Total cash receipts in July $360,000
Desired cash balance 15,000
Cash disbursements in July 380,000
Total July cash needs 395,000
Cash shortage (amount to borrow) $ 35,000
b. There will be no interest reported on the July pro forma income statement
because the money was borrowed on the last date of the month.
c. Estimated interest expense for August is $350 [$35,000 x (12%  12)].
Exercise 7-15B
a. Pro forma income statement prepared with Mr. McFerrin’s estimate:
Sales revenue $252,000 $210,000 $226,800 $329,700 $1,018,500
Gross margin 126,000 105,000 113,400 164,850 509,250
S&A expenses 31,500 26,250 28,350 41,213* 127,313
Net income $ 94,500 $ 78,750 $ 85,050 $123,637 $ 381,937
*rounded
b. Pro forma income statement prepared with Ms. Dester’s estimate:
Sales revenue $259,200 $216,000 $233,280 $339,120 $1,047,600
Gross margin 129,600 108,000 116,640 169,560 523,800
S&A expenses 32,400 27,000 29,160 42,390 130,950
Net income $ 97,200 $ 81,000 $ 87,480 $127,170 $ 392,850
7-32
Exercise 7-15B (continued)
c. Forecasting is not likely to be 100% accurate. It is based on inexact

factors such as judgment and economic predictions. Different
executive officers in the same company will probably have different
future expectations. In addition to legitimate differences of opinion,
self-interest may also contribute to disagreement. For example,
Millard McFerrin, who deals with customers’ credit problems and
uncollectible accounts, may want stricter criteria for granting
customer credit, which would naturally result in lower sales growth.
On the other hand, Dorothy Dester, who deals with market potential
and sales commissions, may want looser criteria for customer credit,
which would result in greater sales growth.
Problem 7-16B
a.
Sales Budget January February Total
Sales on account $540,000 $594,000 $1,134,000
b. Sales revenue for January and February is equal to the sum of the
monthly amounts ($540,000 + $594,000 = $1,134,000).
c.
Schedule of Cash Receipts January February
Receipts from December sales $ 90,000
Receipts from January sales 432,000
Receipts from February sales
Total $522,000 $583,200
d. The accounts receivable as of February 28, 2012 is equal to the

amount due to be collected in March, $118,800 ($594,000 x 20%).
7-33
Problem 7-17B
a.
Inventory Purchases Budget Oct. Nov. Dec.

Plus desired ending inventory 112,500 135,000 120,000*
*$800,000 x .75 x .20 = 120,000
b. Since the quarter ends on December 31, the ending inventory for
December is also the ending inventory for the quarter (i.e., $120,000).
c.
Schedule of Cash Payments Oct. Nov. Dec.

Payment of current accounts payable $330,750 $409,500 $462,000
Payment of previous accounts payable 90,000 141,750 175,500
d. Since the quarter ends on December 31, the ending accounts payable
balance for December is the balance in accounts payable that will
appear on the end of quarter pro forma balance sheet. 70% of the
current purchases on account are paid in cash during the month of
purchase, therefore, 30% will remain payable at the end of the month
(i.e., $660,000 x .30 = $198,000).
7-34
Problem 7-18B
This is a typical problem for what-if analysis. Students can use a
computerized spreadsheet to try different possible scenarios.
Budgeted net income for the next year: $60,000 x 120%= $72,000
Budgeted cost of goods sold for the next year:
$350,000 ÷ $500,000 = 70% of sales
Budgeted selling and administrative expenses for the next year:
$68,000 +10% of sales.
a. The budgeted sales that meet the goal:

If sales = X
Sales – Cost of goods sold – S&A expenses = NI
1X – .70X – ($68,000 + .10X) = $72,000
.20X – $68,000 = $72,000
.20X = $140,000
X = $700,000
($700,000 – $500,000) ÷ $500,000 = 40% increase in sales
Cost of goods sold 490,000
Net income $ 72,000
*($700,000 x 10% + $68,000) = $138,000
b.
Budgeted cost of goods sold with a 3% cut:

$350,000 x 97% = $339,500
Budgeted gross profit: $500,000 – $339,500= $160,500
The budgeted level of selling and administrative expenses:
If X = S&A expenses
Gross Profit – X = $72,000
$160,500 – X = $72,000
X = $88,500
7-35
Problem 7-18B (continued)
Pro Forma Income

Statement
Net income $ 72,000
*The figure means that management has to cut the selling and
administrative expenses by $1,500 in order to reach Mr. Morris’ goal.
c.
Projected sales revenue to increase by 25%:

$500,000 x 125%= $625,000
Projected cost of goods sold: $625,000 x 70% = $437,500
Net income $ 37,500
Since the projected net income under the given scenario will be only
$37,500, which is far short of the original $60,000 and the desired $72,000,
the company cannot reach its goal.
7-36
Problem 7-19B
a.
Salary expense $ 9,000 $ 9,000 $ 9,000
Prior month's sales commissions 0 600 640
Prior month's advertising expense 0 500 500
Prior month's telephone expense 0 1,000 1,080
Rent 10,000 10,000 10,000
Miscellaneous 800 800 800
b. Since telephone expense is paid in the month following the month it is

incurred, the amount payable at the end of March will be the amount
of telephone expense incurred in March, $1,100.
c. Since sales commissions are paid in the month following the month
they are incurred, the amount payable at the end of February will be
the amount of sales commissions expense incurred in February, $640.
7-37
Problem 7-20B
Cash Budget April May June

Cash available (a) 356,000 530,000 684,090
Less cash payments
For S&A expenses 80,000 106,000 132,000
Interest exp at 1% per month 01 2,9102 3,7953
Total budgeted payments (b) 490,000 528,910 599,795
Surplus (shortage) (a–b) (134,000) 1,090 84,295
Financing Activity
Borrowing (repayment) (c) 194,000 59,000 (24,295)
1
$0 x 1.5% = $0
2
194,000 x 1.5% = $2,910
3
($194,000 + $59,000) x 1.5% = $3,795
Problem 7-21B
When necessary, all computations are rounded to the nearest dollar.
a.
Computer $550,000 $605,000 $682,000 $ 803,000 $2,640,000
Calculator 260,000 286,000 301,600 338,000 1,185,600
Total $810,000 $891,000 $983,600 $1,141,000 $3,825,600
7-38
b. Budgeted cost of goods sold: $3,825,600 x 75% = $2,869,200

Budgeted Annual Income Statement
c. Inventory purchases budget for palm-size computers:

Sales $550,000 $605,000 $682,000 $803,000
Inventory purchases budget for programmable calculators:

Sales $260,000 $286,000 $301,600 $338,000
Plus: desired ending 21,450 22,620 25,350 42,000
inventory
7-39
Problem 7-22B (Note: All computations are rounded to the nearest whole dollar.)
a. & b.
Sales Budget
Pro Forma
January February March Data
Cash sales $ 75,000 $ 82,500 $ 90,750
Sales on account 175,000 192,500 211,750 $211,750(a)
Total budgeted sales $250,000 $275,000 $302,500 827,500(b)
Schedule of Cash Receipts Pro Forma
Current cash sales $ 75,000 $ 82,500 $ 90,750
Plus: Collections from accts. rec. 0 175,000 192,500
Total collections $75,000 $257,500 $283,250 $615,750 (c)
(a) Ending accounts receivable balance appearing on balance sheet.
(b) Sales revenue appearing on income statement (sum of monthly amounts).
(c) Cash receipts from customers on statement of cash flows (sum of monthly amounts).
c. and d.
Pro Forma
Jan. Feb. Mar. Data
Budgeted cost of goods sold $125,000 $137,500 $151,250 $413,750(a)
Plus desired ending inventory 27,500 30,250 33,000 33,000(b)
Less beginning inventory 0 27,500 30,250
Required purchases (on Acct.) $152,500 $140,250 $154,000 61,600(c)
Schedule of Cash Payments Budget for Inventory Purchases Pro Forma
Pmt of current month's A/P $91,500 $ 84,150 $ 92,400
Pmt for prior month's A/P 0 61,000 56,100
Total budgeted pmts. for invent. $91,500 $145,150 $148,500 $385,150(d)
(a) Cost of goods sold appearing on pro forma income statement (sum of monthly amounts).
(b) Ending inventory balance appearing on pro forma balance sheet.
(c) Ending accounts payable balance appearing on pro forma balance sheet ($154,000 x 0 .40).
(d) Cash payments for inventory purchases on statement of cash flows (sum of monthly amounts).
7-40
e. and f.
Selling and Administrative Expense Budget
Pro Forma
Salary expense $25,000 $25,000 $25,000
Sales commissions, 8% sales 20,000 22,000 24,200 $24,200(a)
Supplies expense, 4% sales 10,000 11,000 12,100
Utilities 1,800 1,800 1,800 1,800(b)
Depreciation on store fixtures 5,000 5,000 5,000 15,000(c)
Rent 7,200 7,200 7,200
Total S&A expenses $71,000 $74,000 $77,300 222,300(d)

Salary expense $25,000 $25,000 $25,000
Prior month's sales comm., 100% 0 20,000 22,000
100% prior month's utilities, 100% 0 1,800 1,800
Depreciation on store fixtures 0 0 0
Rent 7,200 7,200 7,200
Total payments for S&A expenses $44,200 $67,000 $70,100 $181,300(e)
(a) Ending sales commissions payable account balance shown on pro forma balance sheet.
(b) Ending utilities payable account balance shown on pro forma balance sheet.
(c) Accumulated depreciation appears on the pro forma balance sheet (sum of monthly amounts).
(d) Total S&A expenses appearing on pro forma income statement (sum of monthly amounts).
(e) Total cash payments for S&A expenses on pro forma statement of cash flows (sum of monthly
amounts).
7-41
g.
Cash Budget
Pro Forma
Beginning cash balance $ 0 $ 50,300 $ 50,000
Add cash receipts 75,000 257,500 283,250 $615,750(a)
Cash available (w) 75,000 307,800 333,250
Less payments
For inventory purchases 91,500 145,150 148,500 385,150(b)
For S&A expenses 44,200 67,000 70,100 181,300(c)
Purchase of store fixtures 350,000 0 0 350,000(d)
Interest expense* 0 6,915 6,334 13,249(f)
Total budgeted payments (x) 485,700 219,065 224,934
Surplus (shortage) (w – x) (410,700) 88,735 108,316
Financing activity
Borrowing (repayment) (y) 461,000 (38,735) (58,316) 363,949(e)
Ending cash balance (w – x + y) $ 50,300 $ 50,000 $50,000 50,000(g)
*January ($0 x 0.015); February ($461,000 x 0.015); March [($461,000 – $38,735) x 0.015]
(a) Operating activities section of pro forma statement of cash flows (sum of monthly amounts).
(b) Operating activities section of pro forma statement of cash flows (sum of monthly amounts).
(c) Operating activities section of pro forma statement of cash flows (sum of monthly amounts).
(d) Investing activities section of pro forma statement of cash flows. The investment in store fixtures
also appears on the pro forma balance sheet.
(e) Financing activities section of pro forma statement of cash flows (sum of monthly amounts).
(f) Operating activities section of pro forma statement of cash flows (sum of monthly amounts).
(g) The ending cash balance appears on the pro forma balance sheet and as the last item on the
statement of cash flows.
7-42
h.
McGriff Gifts Corporation
For the Quarter Ended March 31, 2011
S&A expenses (222,300)
Net income $178,201
i.
Pro Forma Balance Sheet
March 31, 2011
Assets
Cash $ 50,000
Inventory 33,000
Store fixtures $350,000
Accumulated depreciation (15,000)
Book Value of fixtures 335,000
Liabilities
Line of credit liability 363,949
Equity
7-43
j.
Pro Forma Statement of Cash Flows
For the Quarter Ended March 31, 2011
Cash flows from operating activities

Cash receipts from customers $615,750
Cash payments for inventory (385,150)
Cash payments for S&A expenses (181,300)
Cash payments for interest expense (13,249)
Net cash flows from operating activities $ 36,051
Cash flows from investing activities

Cash payment for store fixtures (350,000)
Cash flows from financing activities

Net inflow from line-of-credit 363,949
Net increase in cash 50,000
Plus beginning cash balance 0
Ending cash balance $ 50,000
Problem 7-23B
a. Pro forma income statement assuming 4% growth:
Budget
Net income $1,996,800
7-44
b. Pro forma income statement assuming 8% rate:
Budget
Net income $2,073,600
c. Excess of actual net income over budget:
$2,073,600 – $1,996,800 = $76,800
Bonus: $76,800 x 10% = $7,680
d. The process of participative budgeting is recommended. This

process requires two-way communication between the president and
divisional directors. Any disagreement on budget assumptions
should be fully discussed and pros and cons well considered. If the
president believes that the divisional budget is unrealistic, he/she
should tell the vice president directly and explain the reasons.
Participative budgeting is more than just a submission of a budget
proposal from a subordinate and a review and final decision by the
superior. The process described in the problem is nothing but
gamesmanship.
It would be unethical if Ms. Rollin proposes only a 4% growth rate

because it not only reflects a dishonest estimate but also results in
Ms. Rollin’s personal gain at the expense of her employer. On the
other hand, the company's plan to use the excess of actual income
over budget as the basis for bonuses is an invitation for unethical
behavior.
7-45
ATC 7-1
a.
Budgeted
Financial Statements
Income Statement Amounts Computations
Sales revenue $240,000 12 x $20,000
Cost of goods sold (192,000) 12 x $16,000
Depreciation expense (2,000) ($15,000 – $5,000) ÷ 5
Other expense (5,000) $20,000 – $15,000
Interest expense (900) $15,000 x .06
Net income $40,100
Statement of Cash Flows

Operating Activities:
Inflows from sales $240,000 12 x $20,000
Outflows for:
Purchase of food, etc. (192,000) 12 x $16,000
Other initial expenses (5,000) $20,000 – $15,000
Interest payments (900) $15,000 x .06
Net Operating Activities 42,100
Investing Activities:
Outflow for purchase of
trailer cart (15,000) given
Financing Activities”
Inflows from:
Contribution by owners 5,000 given
Loan from parents 15,000 given
Net NCF Financing Activities 20,000
Net Change in Cash 47,100
Plus beginning cash 0
Ending cash balance $47,100
7-46
ATC 7-1 (continued)
Budgeted
Financial Statements
(continued)
Balance Sheet Amounts Computations
Cash $47,100 from SCF
Trailer cart 15,000 given
Acc. depreciation (2,000) ($15,000 – $5,000) ÷ 5
Note payable $15,000 given
Contributed capital 5,000 given

Retained earning 40,100 from Inc. Statement
Total liabilities & Equity $60,100
b. The budget financial statements above assume sales for each month
of the year will be approximately equal to sales for September and
October. Most likely, sales will be lower during periods between
semesters, during the colder months, and during the summer
session. On the plus side, some of the initial expenses of $5,000 may
not have to be incurred every year.
Also, the presentation above assumes the owners do not take any
money out of the business. Obviously, they would need to use some
of the earnings from the business to pay their living expenses.
7-47
ATC 7-2
a. Group Tasks
Task 1
Pro Forma
October November December Data
Cash sales $ 40,000 $ 44,000 $ 48,400
Sales on account 140,000 154,000 169,400 $169,400 Accounts Rec.
Total budgeted sales $180,000 $198,000 $217,800 595,800 Sales Rev.
Schedule of Cash Receipts

October November December
Cash sales $ 40,000 $ 44,000 $ 48,400
Collections from accounts receivable 60,000 140,000 154,000
Total cash collections $100,000 $184,000 $202,400
Task 2
Pro Forma
Oct. Nov. Dec. Data
Budgeted cost of goods sold $72,000 $79,200 $87,120 $238,320 Cost of Goods Sold
Plus: Desired ending inventory 14,400 15,840 17,424 17,424 Ending Inventory
Less: Beginning inventory 40,000 14,400 15,840
Required purchases (on account) $46,400 $80,640 $88,704 22,176 Accounts Payable
Schedule of Cash Payments Budget for Inventory Purchases

October November December
Pmt of current month's accts. pay. $34,800 $60,480 $66,528
Pmt for prior month's accts. pay. 72,000 11,600 20,160
Total budgeted pmts. for inventory $106,800 $72,080 $86,688
7-48
ATC 7-2 (continued)
Task 3
Pro Forma
Oct. Nov. Dec. Data
Sales commissions $ 7,200 $ 7,920 $ 8,712 $ 8,712 Commissions pay.
Utilities 2,200 2,200 2,200 2,200 Utility payable
Depreciation on store equipment 1,600 1,600 1,600 4,800 Accum. dep.
Salary expense 34,000 34,000 34,000
Rent 6,000 6,000 6,000
Total S&A expenses $53,800 $54,700 $55,690 $164,190 S&A Exp.
b. Financial Statements
Income Statement
Operating expenses (164,190)
Net income $190,760
7-49
ATC 7-2 (continued)
Balance Sheet
Assets
Cash $ 9,760
Inventory 17,424
Store equipment $200,000
Accumulated depreciation store equipment (81,600)
Book value of store equipment 118,400
Liabilities
Line of credit 23,936
Equity
Common stock 50,000
c. Havel will need to borrow money in October.
Cash Budget for October

Beginning cash balance $ 16,000
Add: Cash receipts 100,000 (1)
Cash available 116,000
Less: Payments
For inventory purchases 106,800 (2)
For S&A expenses 42,800 (3)
Total budgeted payments 149,600
Payments minus receipts = shortage $ 33,600
7-50
ATC 7-2 (continued)
(1) $40,000 cash sales + $60,000 collection on September accounts

receivable.
(2) $34,800 payment for Oct. Inventory + $72,000 payment on September
accounts payable.
(3) $53,800 October S&A expenses – $7,200 sales commissions – $2,200
utilities expense – $1,600 depreciation = $42,800
ATC 7-3
a. There was a budgeted surplus in 6 years and a deficit in the 51 years
from 1960 to 2010: 1960, 1969, 1998, 1999, 2000, 2001. Thus, a deficit
was reported in 45 years.
b. 2009 had a deficit of 12.9 % of GDP

2010 had a deficit of 8.5 % of GDP
1983 had a deficit of 6.0 % of GDP.
2000 had a surplus of 2.4 % of GDP.
c. For 2009: Deficit $1,841,188

Revenues $2,156,654
= 85.4%
d. The departments whose budgets changed the most from the Clinton
years to the Bush years were:
Health and Human Services 2.3 increase

Defense—Military 2.2 increase
Other Independent Agencies (On-budget) 0.9 increase
Treasury 3.9 decrease
Social Security Administration (Off-budget) 1.9 decrease
See the table below for complete data.
7-51
ATC 7-3 (continued)

Comparison of Average Budget Percentages by Department for 1994 - 2001
(Clinton Years) to 2002 – 2009 (Bush Years)
Average Average
for for
Clinton Bush
Years Years Difference
Legislative Branch 0.2 0.2 0.0
The Judiciary 0.2 0.2 0.0
Agriculture 3.7 3.2 -0.5
Commerce 0.3 0.3 0.0
Defense—Military 16.2 18.4 2.2
Education 1.9 2.5 0.6
Energy 1.0 0.8 -0.2
Health and Human Services 20.9 23.2 2.3
Homeland Security 0.7 1.5 0.8
Housing and Urban Development 1.8 1.7 -0.1
Interior 0.4 0.4 -0.1
Justice 0.8 1.0 0.2
Labor 2.1 2.4 0.3
State 0.4 0.5 0.1
Transportation 2.3 2.4 0.0
Treasury 22.4 18.5 -3.9
Veterans Affairs 2.5 2.6 0.1
Corps of Engineers 0.2 0.2 0.0
Other Defense—Civil Programs 1.9 1.7 -0.2
Environmental Protection Agency 0.4 0.3 -0.1
Executive Office of the President 0.2 0.2
General Services Administration 0.1 -0.1
International Assistance Programs 0.6 0.5 -0.1
National Aeronautics and Space
Administration 0.9 0.6 -0.2
National Science Foundation 0.2 0.2 0.0
Office of Personnel Management 2.7 2.3 -0.4
Small Business Administration 0.1 0.1 0.0
Social Security Administration (On-budget) 2.2 2.1 -0.1
Social Security Administration (Off-budget) 22.1 20.3 -1.8
Other Independent Agencies (On-budget) 0.3 1.1 0.8
Other Independent Agencies (Off-budget) 0.1 0.0 -0.1
Allowances 0.1 0.1
Undistributed offsetting receipts -9.4 -9.1 0.3
(On-budget) -6.2 -5.0 1.2
(Off-budget) -3.2 -4.1 -1.1
7-52
ATC 7-4
HON could use a technique known as perpetual or continuous budgeting.
This technique utilizes a twelve-month budgeting period. However, at the
completion of the current month, a new month is added to the end of the
budget period. The result is a continuous twelve-month budget. The
advantage of the perpetual budget is that it keeps management involved
in the budget process. The traditional approach often leads to a frenzied
stop-and-go mentality. The annual budget is prepared in a year-end rush,
and the assumptions underlying its formation are forgotten shortly
thereafter. Changing conditions are not likely to be discussed until the
next year-end review cycle. The perpetual budget overcomes these
shortcomings by keeping management involved with the budget. Each
month a new monthly budget is prepared to replace the budget of the
ending month. Management is thereby forced into a constant twelve-
month think-ahead process.
7-53
ATC 7-5
a. Mr. Cleaver’s behavior could be construed to be in violation of the
objectivity standards. The failure to disclose the lack of need for
computers to the Board of Education would violate (1) the standard to
communicate information fairly and objectively and (2) the standard to
disclose fully all relevant information that could reasonably be
expected to influence an intended user’s understanding of the reports,
comments, and recommendations presented. However, Mr. Cleaver
could have disclosed all information fairly to the board. He is correct
in his assessment that neither he nor Ms. Simmons has the right to
establish policy. Also, it should be noted that Mr. Cleaver may not be
a member of the Institute of Management Accountants and is
therefore not bound by the organization’s code of ethics.
b. Sarbanes-Oxley Act requires management of public companies to

report accurately the financial statements to external users such as
investors and creditors. This case does not involve external
reporting, and, consequently, the law is not applicable. However, with
recent school board scandals abound in the past ten years, many
principles of Sarbanes-Oxley have been adopted by school districts.
c. As its name implies, participative budgeting encourages participation

by subordinates as well as upper level managers in the budget
process. Information flows from the bottom up as well as from the top
down during the preparation of the budget. Accordingly, the Board of
Education members would be in a position to gain insight as to the
true needs of the schools and would thereby be more likely to allocate
funds where they would produce the greatest benefit.
7-54
ATC 7-6
Screen capture of cell values:
7-55
ATC 7-6 (continued)
Screen capture of cell formulas:
7-56
ATC 7-7
Screen capture of cell values:
7-57
ATC 7-7
Screen capture of cell formulas:
7-58
ATC 7-7
Screen capture of cell formulas (continued):
7-59
Chapter 7 Comprehensive Problem
Growth Rate of Sales 0.01

Sales Budget
Jan Feb Mar
Cash sales $10,000 $10,100 $10,201
Sales on account 50,000 50,500 51,005
Jan Feb Mar
Current cash sales $10,000 10,100 10,201
Plus: Collections from accts. rec. 48,000 50,000 50,500
Total budgeted collections $58,000 60,100 60,701

Sales Budget
Jan Feb Mar
Cash sales $10,000 $10,200 $10,404
Sales on account 50,000 51,000 52,020
Jan Feb Mar
Sales Budget
Jan Feb Mar
Cash sales $10,000 $10,400 $10,816
Sales on account 50,000 52,000 54,080
Jan Feb Mar
7-60

Chapter 07 - Planning For Profit and Cost Control

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 07 - Planning For Profit and Cost Control

Uploaded by

Copyright:

Available Formats

Chapter 07 - Planning for Profit and Cost Control

1. Budgets are useful for large companies with complex activities as

2. The budget represents the companywide plans stated in financial

3. The three levels of planning are as follows:

5. The perpetual budget has the advantage of keeping management

The primary advantages associated with budgeting are as follows:

10. The desired level of ending inventory must be added to projected

11. The cash budget is composed of three major components:

(1) Cash receipts – expected cash inflows from sales, sale of

(2) Cash payments – expected cash outflows for inventory

(3) Financing activities – expected borrowing and repayment

12. Determining the amount of the cash balance to include on the

Ms. Huffman appears to be a person with an attitude problem. She does

b. The amount of sales revenue appearing on the 1st quarter income

b. The current month’s sales on account will be collected in the following

a. Sales for January are expected to be $392,000 ( $560,000 x 0.70)

Beginning accounts receivable balance $ 96,400

b. It is reasonable to assume that sales will decline in January.

Sales would likely be highest in late January or early February because of

Inventory Purchases Budget

Exercise 7-7A (continued)

Schedule of Cash Payments for Inventory Purchases

b. Since 90% of the current purchases on account are paid in cash

a. Budgeted cost goods sold for July is $315,000 ($300,000 x 1.05)

Ending inventory balance $ 29,000

b. Since salaries expense is paid in the month following the month it is

c. Since the insurance premium is prepaid for 6 months on October 1,

b. An inventory purchases budget prepared with the marketing consultant's

Cash Budget July August September

c. Cash flow from financing activities is the amount borrowed less

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

b. Pro forma income statement prepared with Ms. Sullivan's estimate:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

c. Forecasting is not likely to be 100% accurate. Therefore, different

The accounts receivable as of March 31, 2012 is equal to the amount

Inventory Purchases Budget April May June

Schedule of Cash Payments April May June

d. Since 60% of the current purchases on account are paid in cash

This is a typical problem for what-if analysis. Students can use a

Alternatively, you can use the contribution margin ratio to determine

Contribution margin ratio = Sales (100%) – Variable costs (80%) = 20%

Pro Forma Income

% increase required: ($2,255,000 – $2,000,000) ÷ $2,000,000 = 12.75%

Problem 7-18A (continued)

Budgeted cost of goods sold with a 2% cut: $1,400,000 x 98% = $1,372,000

The budgeted level of selling and administrative expenses:

Pro Forma Income Statement

Pro Forma Income Statement

Schedule of Cash Payments for S&A Expenses

Cash Budget January February March

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

b. Budgeted cost of goods sold: $3,030,000 x 60% = $1,818,000

c. Inventory purchases budget for peaches

Inventory purchases budget for oranges

Problem 7-22A (continued)

Selling and Administrative Expense Budget

Schedule of Cash Payments for S&A Expenses

Problem 7-22A (continued)

Problem 7-22A (continued)

Problem 7-22A (continued)

Cash flows from operating activities

Cash flows from investing activities

Cash flow from financing activities