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Chapter 22: Q2RQ (page 1228)
Question: One benefit of budgeting is coordination and communication. Explain what this means.
Answer
The budget encourages managers to communicate to ensure that the company can achieve its goals.
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Budgeting types Consider the following budgets and budget types.
Cash Cost of Goods Sold
Flexible Master
Operational Sales
Static Strategic
Which budget or budget type should be used to meet the following needs?
a. Upper management is planning for the next five years.
b. A store manager wants to plan for different levels of sales.
c. The accountant wants to determine if the company will have sufficient funds to pay expenses.
d. The CEO wants to make companywide plans for the next year.
Preparing a financial budget
This problem continues the Piedmont Computer Company situation from Chapter 21. Assume Piedmont Computer began January with \(15,000 cash. Management forecasts that cash receipts from credit customers will be \)48,000 in January and \(51,000 in February. Projected cash payments include equipment purchases (\)20,000 in January and \(41,000 in February) and selling and administrative expenses (\)2,000 each month).
Piedmont Computer Company’s bank requires a \(26,000 minimum balance in the firm’s checking account. At the end of any month when the account balance falls below \)26,000, the bank automatically extends credit to the firm in multiples of \(5,000. Piedmont Computer Company borrows as little as possible and pays back loans each month in \)1,000 increments, plus 12% interest on the entire unpaid principal. The first payment occurs one month after the loan.
Requirements
1. Prepare Piedmont Computer Company’s cash budget for January and February 2020.
2. How much cash will Piedmont Computer Company borrow in February if cash receipts from customers that month total \(41,000 instead of \)51,000?
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?
Preparing a financial budget—budgeted income statement and balance sheet Ball Company has the following post-closing trial balance on December 31, 2018:
The company’s accounting department has gathered the following budgeting information for the first quarter of 2019:
Budgeted total sales, all on account $ 121,800 Budgeted purchases of merchandise inventory, all on account 60,400 Budgeted cost of goods sold 60,900 Budgeted selling and administrative expenses:
Commissions expense 6,090 Salaries expense 7,000 Rent expense 4,100 Depreciation expense 600 Insurance expense 400 Budgeted cash receipts from customers 125,840 Budgeted cash payments for merchandise inventory 67,775 Budgeted cash payments for salaries and commissions 14,822 Budgeted income tax expense 5,400 Additional information: Rent and income tax expenses are paid as incurred. Insurance expense is an expiration of the prepaid amount.
Requirements
Question: Meeks Company has the following sales for the first quarter of 2019:
January February March Cash sales \( 5,000 \) 5,500 \( 5,250 Sales on account 15,000 14,000 14,500 Total sales \) 20,000 \( 19,500 \) 19,750 Sales on account are collected the month after the sale. The Accounts Receivable balance on January 1 is $12,500, the amount of December’s sales on account. Calculate the cash receipts from customers for the first three months of 2019.
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