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Chapter 22: 15RQ (page 1228)
What are the three sections of the cash budget?
Cash receipts, cash payments, and short-term financing are three sections of the cash budget.
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Patrick works for McGill’s Computer Repair, owned and operated by Frank McGill. As a computer technician, Patrick has grown accustomed to friends and family members asking for assistance with their personal computers. In an effort to increase his income, Patrick started a personal computer repair business that he operates out of his home on a part-time basis, working evenings and weekends. Because Patrick is doing this “on the side” for friends and family, he does not want to charge as much as McGill’s charges its customers. When Frank McGill assigned Patrick the task of developing the budget for his department, Patrick increased the amount budgeted for computer parts. When the budget was approved, Patrick purchased as many parts as the budget allowed, even when they were not needed. He then took the extra parts home to use in his personal business in an effort to keep his costs down and profits up. So far, no one at McGill’s has asked about the parts expense because Patrick has not allowed the actual amount spent to exceed the budgeted amount.
Requirements
1. Why would Patrick’s actions be considered fraudulent?
2. What can a company do to protect against this kind of business risk?
: Completing a comprehensive budgeting problem—merchandising company
Belton Printing Company of Baltimore has applied for a loan. Its bank has requested a budgeted income statement for the month of April 2018 and a balance sheet at April 30, 2018. The March 31, 2018, balance sheet follows:
As Belton Printing’s controller, you have assembled the following additional information:
a. April dividends of \(7,000 were declared and paid.
b. April capital expenditures of \)17,000 budgeted for cash purchase of equipment.
c. April depreciation expense, \(800.
d. Cost of goods sold, 55% of sales.
e. Desired ending inventory for April is \)24,800.
f. April selling and administrative expenses includes salaries of \(29,000, 20% of which will be paid in cash and the remainder paid next month.
g. Additional April selling and administrative expenses also include miscellaneous expenses of 10% of sales, all paid in April.
h. April budgeted sales, \)86,000, 80% collected in April and 20% in May.
i. April cash payments of March 31 liabilities incurred for March purchases of inventory, \(8,300.
j. April purchases of inventory, \)22,900 for cash and $37,200 on account. Half the credit purchases will be paid in April and half in May
Requirements
1. Prepare the sales budget for April.
2. Prepare the inventory, purchases, and cost of goods sold budget for April.
3. Prepare the selling and administrative expense budget for April.
4. Prepare the schedule of cash receipts from customers for April.
5. Prepare the schedule of cash payments for selling and administrative expenses for April.
6. Prepare the cash budget for April. Assume the company does not use short-term financing to maintain a minimum cash balance.
7. Prepare the budgeted income statement for April.
8. Prepare the budgeted balance sheet at April 30, 2018.
Match the following statements to the appropriate budgeting objective or benefit: developing strategies, planning, directing, controlling, coordinating and communicating, and benchmarking.
1. Managers are required to think about future business activities.
2. Managers use feedback to identify corrective action.
3. Managers use results to evaluate employees’ performance.
4. Managers work with managers in other divisions.
What is the formula used to determine the number of units to be produced?
Southeast Suites operates a regional hotel chain. Each hotel is operated by a manager and an assistant manager/controller. Many of the staff who run the front desk, clean the rooms, and prepare the breakfast buffet work part-time or have a second job, so employee turnover is high.
Assistant Manager/Controller Terry Dunn asked the new bookkeeper to help prepare the hotel’s master budget. The master budget is prepared once a year and is submitted to company headquarters for approval. Once approved, the master budget is used to evaluate the hotel’s performance. These performance evaluations affect hotel managers’ bonuses, and they also affect company decisions on which hotels deserve extra funds for capital improvements.
When the budget was almost complete, Dunn asked the bookkeeper to increase the amounts budgeted for labor and supplies by 15%. When asked why, Dunn responded that hotel manager Clay Murry told her to do this when she began working at the hotel. Murry explained that this budgetary cushion gave him flexibility in running the hotel. For example, because company headquarters tightly control capital improvement funds, Murry can use the extra money budgeted for labor and supplies to replace broken televisions or pay “bonuses” to keep valued employees. Dunn initially accepted this explanation because she had observed similar behavior at the hotel where she worked previously.
Requirements Put yourself in Dunn’s position. In deciding how to deal with the situation, answer the following questions:
1. What is the ethical issue?
2. What are the options?
3. What are the possible consequences?
4. What should you do?
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