Fundamental Managerial Accounting

Concepts 9th Edition Edmonds

Solutions Manual
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ATC 7-1

a.

Budgeted
Financial Statements
Income Statement Amounts Computations
Sales Revenue $300,000 12 x $25,000
Cost of Goods Sold (264,000) 12 x $22,000
Depreciation Expense (3,000) ($18,000 – $6,000) ÷ 4
Other Expense (4,000) $22,000 – $18,000
Operating Income 29,000
Interest Expense (850) $17,000 x .05
Net Income $28,150

Statement of Cash Flows

Operating Activities:
Inflows from sales $300,000 12 x $25,000
Outflows for:
Purchase of food, etc. (264,000) 12 x $22,000
Other initial expenses (4,000) $22,000 – $18,000
Interest Expense (850) $17,000 x .05
NCF Operating Activities 31,150

Investing Activities:
Outflow for purchase of
cart (18,000) given

Financing Activities:
Inflows from:
Contribution by owners 5,000 given
Loan from parents 17,000 given
Financing Act. 22,000
Net Change in Cash 35,150
Plus beginning cash 0
Ending cash balance $35,150

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ATC 7-1 continued

Budgeted
Financial Statements
continued
Balance Sheet Amounts Computations
Cash $35,150 from SCF
Food cart 18,000 given
Acc. Depreciation (3,000) ($18,000 – $6,000) ÷ 4
Total Assets $50,150

Note Payable $17,000 given

Contributed Capital 5,000 given

Retained Earn. 28,150 from Inc. Statement
Total Liab. & Equity $50,150

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 $4,000 ($22,000 -
$18,000) 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.

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 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

Oct. Nov. Dec.
Budgeted cost of goods sold $72,000 $79,200 $87,120
Plus: Desired ending inventory 14,400 15,840 17,424
Inventory needed 86,400 95,040 104,544
Less: Beginning inventory 40,000 14,400 15,840
Required purchases (on account) $46,400 $80,640 $88,704
Pro Forma
Data
$238,320 Cost of Goods Sold
17,424 Ending Inventory
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

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ATC 7-2 (continued)

a. Task 3
Pro Forma
Oct. Nov. Dec. Data
Sales commissions $ 7,200 $ 7,920 $ 8,712 $ 8,712 Commissions pay.
Supplies expense 1,800 1,980 2,178
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
Miscellaneous 1,000 1,000 1,000
Total S&A expenses $53,800 $54,700 $55,690 $164,190 S&A Exp.

b. Financial Statements

Income Statement
Sales revenue $595,800
Cost of goods sold (238,320)
Gross margin 357,480
Operating expenses (164,190)
Operating income 193,290
Interest expense (2,530)
Net income $190,760

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ATC 7-2 (continued)

b.
Balance Sheet
Assets
Cash $ 9,760
Accounts receivable 169,400
Inventory 17,424
Store equipment $200,000
Accumulated depreciation store equipment (81,600)
Book value of store equipment 118,400
Total assets $314,984
Liabilities
Accounts payable $ 22,176
Utilities payable 2,200
Sales commissions payable 8,712
Line of credit 23,936
Equity
Common stock 50,000
Retained earnings 207,960
Total liabilities and equity $314,984

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

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ATC 7-2 (continued)

c.
(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

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ATC 7-3
a. There was a budgeted surplus in 6 years of the 59 years from 1960 to
2018: 1960, 1969, 1998, 1999, 2000, 2001. Thus, a deficit was
reported in 53 years.

b. 2009 had a deficit of 9.8 % of GDP

2010 had a deficit of 8.7 % of GDP
2011 had a deficit of 8.5 % of GDP

2000 had the largest surplus, 2.3% of GDP

c. For 2009: Deficit $1,412,688

Receipts $2,104,989

= 67.1% of expenditures were paid for with borrowed funds, 32.9 %

were paid for with tax revenues.

d. The departments whose budgets changed the most from the Bush
years to the Obama years were:

Treasury 4.5% decrease

Health and Human Services 2.8% increase
Defense—Military 1.8% decrease
Social Security Administration (On-budget) 0.9% increase
Social Security Administration (Off-budget) 0.6% increase
Agriculture 0.6% increase

See the table on the following page for complete data.

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ATC 7-3 continued
Comparison of Average Budget Percentages by Department for 2002 - 2009 (Bush Years)
to 2010 – 2017 (Obama Years)
Average Average
for for
Bush Obama
Years Years Difference
Legislative Branch 0.2 0.1 -0.1
Judicial Branch 0.2 0.2 0.0
Department of Agriculture 3.3 3.9 0.6
Department of Commerce 0.3 0.3 0.0
Department of Defense--Military Programs 18.6 16.8 -1.8
Department of Education 2.5 2.0 -0.5
Department of Energy 0.8 0.8 0.0
Department of Health and Human Services 23.4 26.3 2.8
Department of Homeland Security 1.5 1.3 -0.2
Department of Housing and Urban Development 1.7 1.3 -0.4
Department of the Interior 0.4 0.3 0.0
Department of Justice 1.0 0.8 -0.1
Department of Labor 2.5 2.4 -0.1
Department of State 0.5 0.8 0.2
Department of Transportation 2.4 2.1 -0.3
Department of the Treasury 17.8 13.3 -4.5
Department of Veterans Affairs 2.7 3.9 1.3
Corps of Engineers--Civil Works 0.2 0.2 0.0
Other Defense Civil Programs 1.7 1.7 0.0
Environmental Protection Agency 0.3 0.3 -0.1
Executive Office of the President 0.2 0.0 -0.2
General Services Administration 0.0 0.1 0.1
International Assistance Programs 0.5 0.6 0.0
National Aeronautics and Space Administration 0.6 0.5 -0.1
National Science Foundation 0.2 0.2 0.0
Office of Personnel Management 2.4 2.3 -0.1
Small Business Administration 0.1 0.2 0.0
Social Security Administration (On-Budget) 2.1 3.0 0.9
Social Security Administration (Off-Budget) 20.5 21.2 0.6
Other Independent Agencies (On-Budget) 0.8 0.4 -0.4
Other Independent Agencies (Off-Budget) 0.0 0.0 0.1
Allowances 0.0 -0.1 -0.1
Undistributed Offsetting Receipts -9.2 -6.9 2.3
(On-budget) -5.0 -3.6 1.4
(Off-budget) -4.2 -3.3 0.9
Total outlays 100.0 100.0 0.0

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ATC 7-4

The memorandum written by students should identify some of the

following potential challenges.

• The USOC does not have a typical twelve month business cycle like
most businesses, so results from one quarter of the year, or even one
whole year, may not provide much guidance regarding how to
budget for the next quarter or the next year.
• Revenue and expenses vary greatly depending on whether there is an
Olympic competition to be held in a given year.
• Many of the USOC’s revenues are not correlated with activities that
cause it to incur expenses, as is the case with business enterprises.
Thus, just because revenues are down it does not mean that
expenses will also decline.
• Much of the USOC’s revenues come from private contributions, and it
is difficult to forecast the many factors that can affect contributions.
Some examples: a weak economy may hurt contributions, even if
athletes are performing well; if U.S. athletes are very successful at a
given Olympics, it probably encourages contributions, and the USOC
has limited control of athletic success; if there is a scandal regarding
the USOC or its athletes, this may hurt contributions, even if the
USOC had little ability to control the event.
• Any grants from government sources may be affected by politics.
Games may be disrupted by international events over which the
USOC has no control over the event or the ability to predict the
event. These events can reduce revenue unexpectedly.

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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.

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ATC 7-6

Screen capture of cell values:

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ATC 7-6 (continued)

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ATC 7-7

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ATC 7-7

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ATC 7-7

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