Week 10 - Budgeting

Question 1

Budget

Answer 1

plan expressed in terms of money - useful planning tool for companies and individuals

Question 2

One of the purposes of a cash budget is to:
Select one:
a. provide information regarding accounts payable balances with suppliers
b. determine the budgeted change in depreciation expense
c. determine estimated production levels for the next period
d. provide information on the company’s ability to repay loans

Answer 2

D

The cash budget will reveal, among other things, the company’s budgeted shortfall or surplus, which will reveal the company’s ability to repay loans.

Question 3

Hocus Cafe has a beginning wine inventory balance of $5,000. For the next month, the company has predicted that it will sell $9,000 worth of wine. It has also budgeted wine inventory at the end of the month should be $2,000. What is the budgeted amount of wine purchases for the month?
Select one:
a. $6,000
b. $2,000
c. $12,000
d. $9,000

Answer 3

a

Question 4

Which of the following would not be part of the operating budget?
Select one:
a. The purchases budget
b. The sales budget
c. The operating expenses budget
d. The budgeted cash flow statement

Answer 4

d

Question 5

Business Strategy

Answer 5

focuses on company resources and allows managers to create business plans that outline the financial and non-financial goals of the company

Question 6

Incremental Budgeting

Answer 6

involves creating a new budget based on gradual change from previous periods budget

Question 7

Incremental pros and cons

Answer 7

pros - easy to administer
- changes from prior year are easy to identify

Cons - problems previous budget was not done correctly

• does not provide incentives to reduce costs
• wasteful spending

Question 8

Zero-Based Budgeting

Answer 8

requires that managers justify their budget requests in detail from scratch, regardless of the amounts spent in previous years.

Question 9

Pros & Cons of Zero-based budgeting

Answer 9

Pro

• Ensures that past mistakes are not repeated
• Forces managers to perform a comprehensive analysis of all operations

Con

• Difficult and time-consuming to prepare
• Benefits some departments more than others

Question 10

2 different ways budgets are created

Answer 10

Top down or Bottom Up

Question 11

Top-down budget

Answer 11

all figures are determined by upper management

really should not be used

Question 12

Bottom-up budget

Answer 12

managers of levels fully co-operate and contribute to budget creation

Question 13

Budgetary slack

Answer 13

employees intentionally underestimating revenues and overestimate expenses in budgeting process

Question 14

1. Sales Budget

Answer 14

budgeted quantity and selling price of products sold for a given period

Question 15

2. Purchase Budget

Answer 15

how much inventory needs to be purchased in a given period

Question 16

3. Operating expenses

Answer 16

forecasts budgeted fixed and variable expenses for a given period

Question 17

4. Capital budget

Answer 17

forecasts changes in financial resources from the purchase and sale of long term assets

Question 18

5. Cash flow budget

Answer 18

monitors cash flow into and out of the bank account with no regard to profits or non-cash items.

Question 19

Jordan Gope expects $50,000 of total sales in February and $45,000 of total sales in March. Historically, Jordan collects 85% of total sales in the month of sale and 15% in the following month. How much cash should Jordan expect in the month of March?
Select one:
a. $49,250
b. $45,750
c. $6,750
d. $42,500

Answer 19

b

Collections from February’s sales amount to $7,500 ($50,000 x 0.15) and collection from the current month amounts to $38,250 ($45,000 x 0.85). Therefore, Jordan should expect a total of $45,750.

Question 20

Which of the following is an advantage of zero-based budgeting?
Select one:
a. It is difficult to perform
b. It forces managers to perform a comprehensive analysis of all operations
c. It is easy to administer
d. It uses past budgets

Answer 20

b