14.4 The Capital Budget and Projecting Cash Collections

Question 1

Which one of the following is the best characteristic concerning the capital budget? The capital budget is a(n)

A. Plan to ensure that there are sufficient funds available for the operating needs of the company.
B. Plan that assesses the long-term needs of the company for plant and equipment purchases.
C. Exercise that sets the long-range goals of the company including the consideration of external influences caused by others in the market.
D. Plan that results in the cash requirements during the operating cycle.

Answer 1

B. Plan that assesses the long-term needs of the company for plant and equipment purchases.

Question 2

The cash receipts budget includes

A. Loan proceeds
B. Extinguishment of debt
C. Operating supplies
D. Funded depreciation

Answer 2

A. Loan proceeds.

Question 3

Birch Corporation has the following historical pattern on its credit sales:
* 70% collected in month of sale
* 15% collected in the first month after sale
* 10% collected in the second month after sale
* 4% collected in the third month after sale
* 1% uncollectible

The sales on open account have been budgeted for the first 6 months of the year as follows:
January: $ 70,000
February: 90,000
March: 100,000
April: 120,000
May: 100,000
June: 90,000

Birch’s estimated total cash collections during April from accounts receivable are

A. $110,800
B. $108,000
C. $118,800
D. $84,000

Answer 3

A. $110,800

The estimated April collections are $110,800.
70% of April sales of $120,000
=$ 84,000
15% of March sales of $100,000
=15,000
10% of February sales of $90,000
=9,000
4% of January sales of $70,000
=2,800
Total collections
$110,800