Chapter7 Budgets and Preparing The Maste

Introduction to Management Accounting, 15e (Horngren)
Chapter 7 Introduction to Budgets and Preparing the Master Budget
7.1 Questions
1) A major benefit of effective budgeting is that ________.

A) it compels managers to think ahead
B) it aids managers in communicating objectives to employees
C) it provides benchmarks to evaluate subsequent performance
D) all of the above
Answer: D
Diff: 1 Page Ref: 265
LO: 7-1
AACSB: None
2) A(n) ________ starts with the assumption that current activities in a company will not automatically
continue in the next period.
A) activity-based budget
B) strategic budget
C) master budget
D) zero-base budget
Answer: D
LO: 7-1
AACSB: None
3) The most effective budget processes facilitate communication from top management to ________ and
from lower level managers and employees to ________.
A) the SEC; the audit committee
B) stockholders; creditors
C) lower level managers and employees; top management
D) creditors; stockholders
Answer: C
LO: 7-1
AACSB: None
4) Potential problems that can limit the advantages of budgeting do NOT include ________.
A) low levels of employee participation in the budget process
B) incentives to lie and cheat in the budget process
C) difficulties in obtaining accurate sales forecasts
D) an emphasis on forecasting activities and the resources needed for the activities
Answer: D
LO: 7-1
AACSB: None
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Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
5) A major drawback of using historical results for judging current performance is that ________.
A) past results may be inaccurate
B) results may refer to a different manager
C) inefficiencies may be concealed in past results
D) managers may have cooked the books
Answer: C
LO: 7-1
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6) A budget is an example of an informal business plan.

Answer: FALSE
LO: 7-1
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7) A budget is a qualitative expression of a plan of action.

Answer: FALSE
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8) There are fewer benefits from budgeting in companies with uncertain or complicated environments.
Answer: FALSE
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9) Budgeting typically uses the future activities of the organization as a starting point for planning.
Answer: FALSE
LO: 7-1
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10) Budgeted performance goals generally provide a better basis for evaluating actual performance than
past performance.
Answer: TRUE
LO: 7-1
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11) A major drawback of using historical results for judging current performance is that inefficiencies
may be concealed in past performance.
Answer: TRUE
LO: 7-1
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12) A good budget process communicates from the top down, but not from the bottom up.
Answer: FALSE
LO: 7-1
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7.2 Questions
1) Misalignment between the ________ stressed in budgets and ________ used to reward employees and
managers can limit the advantages of budgeting.
A) performance goals; participative goals
B) performance goals; performance measures
C) bonuses; sales goals
D) bonuses; resource goals
Answer: B
LO: 7-2
AACSB: None
2) One way to reduce negative attitudes of managers toward budgets is by ________.

A) zero-based budgeting
B) activities-based budgeting
C) long range planning
D) participative budgeting
Answer: D
LO: 7-2
AACSB: None
3) ________ budgeting is when budgets are formulated with the active participation of all affected
employees.
A) Rolling
B) Team
C) Participative
D) Financial
Answer: C
LO: 7-2
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4) Budgets are generally more effective if they are ________.

A) created with the active participation of all affected employees
B) understood and accepted by affected managers
C) supported by top management
D) all of the above
Answer: D
LO: 7-2
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5) The effectiveness of any budgeting system depends directly on the attitudes of top management
toward the budgeting system.
Answer: TRUE
LO: 7-2
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6) Participative budgeting is the active participation of all affected employees in the formulation of the
budget.
Answer: TRUE
LO: 7-2
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7.3 Questions
1) Budgeting can result in incentives to lie and cheat that undermine ________.
A) the Securities and Exchange Commission
B) a company's ethical standards
C) a company's value chain
D) standards of confidentiality promulgated by the Institute of Management Accountants
Answer: B
LO: 7-3
AACSB: None
2) Managers may ________ their budgeted costs or ________ their budgeted revenues to create a budget
target that is easier to achieve.
A) understate; overstate
B) overstate; understate
C) understate; understate
D) overstate; overstate
Answer: B
LO: 7-3
AACSB: None
3) Which of the following is NOT a reason for budgetary slack?

A) to buffer managers from budget cuts imposed by top management
B) to provide protection against cost increases or revenue shortfalls due to unforeseen events
C) to facilitate attainment of performance goals
D) to impose a formal structure for planning purposes
Answer: D
LO: 7-3
AACSB: None
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4) Misuse of budgets can lead to incentives to cheat and lie. Cheating and lying may take the form of
________.
A) making short-run decisions to increase profits that are not in the company's best long-run interests
B) budgetary slack
C) decreasing profits when actual profits significantly exceed the profit target
D) all of the above
Answer: D
Diff: 2 Page Ref: 269-270
LO: 7-3
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5) How can a company avoid lying by employees when preparing a budget?

A) reward good budget forecasts
B) reward good performance against the budget
C) reward good budget forecasts and reward good performance against the budget
D) reward good recipes for cooking the books
Answer: C
LO: 7-3
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6) Managers may lie to increase the resources allocated to their departments.

Answer: TRUE
LO: 7-3
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7) Budgetary slack helps buffer managers from budget cuts imposed by higher-level management.
Answer: TRUE
LO: 7-3
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8) "Cooking the books" refers to recording fictitious sales or omitting costs.

Answer: TRUE
LO: 7-3
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9) Cheating in the context of the budget process does not include making short-run decisions to increase
profits that are not in the company's best long-run interests.
Answer: FALSE
LO: 7-3
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7.4 Questions
1) You may have various forecasts of sales corresponding to different levels of advertising. The ________
for the one level of advertising you decide to implement becomes the ________.
A) sales forecast; sales budget
B) sales budget; sales forecast
C) sales forecast; sales goal
D) sales goal; sales forecast
Answer: A
LO: 7-4
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2) A sales forecast is ________.

A) a prediction of sales under a given set of conditions
B) the sales budget
C) based on input from the board of directors
D) based on input from the audit committee
Answer: A
LO: 7-4
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3) A ________ gives the expected sales under a given set of conditions.

A) sales goal
B) sales budget
C) sales forecast
D) master budget
Answer: C
LO: 7-4
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4) Important factors used to forecast sales for a company include all of the following items EXCEPT
________.
A) past patterns of sales
B) market research studies
C) competitors' actions
D) estimates made by the production staff
Answer: D
LO: 7-4
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5) When forecasting sales for a company, ________ is NOT an important factor to be considered.
A) estimates made by the sales staff
B) changes in product mix
C) advertising plans
D) new production equipment
Answer: D
LO: 7-4
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6) Decisions made during long-range planning include ________.

A) addition or deletion of product line
B) location of new plant
C) purchase of equipment
D) all of the above
Answer: D
LO: 7-4
AACSB: None
7) No matter how many technical experts a company uses in forecasting, the sales budget should
ultimately be the responsibility of the ________.
A) staff function
B) audit committee
C) line management
D) board of directors
Answer: C
LO: 7-4
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8) Which of the following statements is FALSE about a strategic plan?

A) A strategic plan does not deal with a specific time period.
B) A strategic plan does not produce forecasted financial statements.
C) A strategic plan guides day-to-day operations.
D) A strategic plan provides an overall framework for a long-range plan.
Answer: C
LO: 7-4
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9) A sales budget is a prediction of sales under a given set of conditions.

Answer: FALSE
LO: 7-4
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10) Accurate sales forecasting is essential to effective budgeting.
Answer: TRUE
LO: 7-4
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11) Sales forecasts are usually prepared under the direction of the top sales executive.
Answer: TRUE
LO: 7-4
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12) The sales budget should be the responsibility of line management.

Answer: TRUE
LO: 7-4
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7.5 Questions
1) Which of the following statements about long-range plans is FALSE?

A) Long-range plans provide forecasted financial statements for five to ten year periods.
B) Long-range plans guide day-to-day operations.
C) Companies coordinate long-range plans with capital budgets.
D) A decision made during long-range planning is the acquisition of a plant building.
Answer: B
LO: 7-5
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2) Short-term budgets help managers manage ________. Long-term budgets reinforce a company's
________.
A) day-to-day operations; ethical standards
B) day-to-day operations; long-term goals
C) short-term capital budgeting problems; operational goals
D) short-term financing needs; operational goals
Answer: B
LO: 7-5
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3) The master budget is a detailed and comprehensive analysis of the ________ of the ________ plan.
A) first year; activity-based strategic
B) first year; strategic
C) first year; continuous
D) first year; long-range
Answer: D
LO: 7-5
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4) The master budget quantifies forecasts for all of the following EXCEPT ________.
A) cash disbursements
B) purchases of merchandise
C) operating expenses
D) cost of Securities and Exchange Commission to a firm
Answer: D
LO: 7-5
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5) ________ set the overall goals and objectives of the organization.

A) Capital budgets
B) Cash budgets
C) Master budgets
D) Strategic plans
Answer: D
LO: 7-5
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6) ________ detail the planned expenditures for facilities, equipment, new products and other long-term
investments.
A) Cash budgets
B) Capital budgets
C) Operating budgets
D) Purchases budgets
Answer: B
LO: 7-5
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7) ________ are sometimes called rolling budgets.
A) Strategic plans
B) Capital budgets
C) Master budgets
D) Continuous budgets
Answer: D
LO: 7-5
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8) The two main components of the master budget are the ________.
A) cash budget and the capital budget
B) purchases budget and the budgeted income statement
C) budgeted income statement and the budgeted balance sheet
D) operating budget and the financial budget
Answer: D
LO: 7-5
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9) The ________ budget focuses on the income statement and the supporting schedules.
A) financial
B) operating
C) cash
D) capital
Answer: B
LO: 7-5
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10) Which of the following is NOT a component of the operating budget?

A) sales budget
B) operating expense budget
C) cash budget
D) budgeted income statement
Answer: C
LO: 7-5
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11) Which of the following is NOT a component of the operating budget?

A) capital budget
B) purchases budget
C) budgeted income statement
D) operating expense budget
Answer: A
LO: 7-5
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12) Which of the following is NOT a component of the financial budget?
A) capital budget
B) cash budget
C) budgeted balance sheet
D) budgeted income statement
Answer: D
LO: 7-5
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13) Which of the following is a component of the financial budget?

A) budgeted balance sheet
B) budgeted income statement
C) sales budget
D) purchases budget
Answer: A
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14) What is the final result of the operating budget process?

C) budgeted cash flow statement
D) cash budget
Answer: B
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15) The financial budget process ends with the ________.

C) budgeted cash flow statement
D) budgeted statement of stockholders' equity
Answer: A
LO: 7-5
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16) The financial budget focuses on the effects that the ________ and other plans will have on ________.
A) master budget; resources
B) continuous budget; resources
C) long-range plan; activities
D) operating budget; cash balances
Answer: D
LO: 7-5
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17) The financial budget includes ________.
A) the capital budget and the sales budget
B) the capital budget and the budgeted income statement
C) the capital budget, the cash budget and the budgeted balance sheet
D) the cash budget and the purchases budget
Answer: C
LO: 7-5
AACSB: None
18) A cash budget is a business plan that includes a set of schedules and financial statements.
Answer: FALSE
LO: 7-5
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19) The most forward-looking and least detailed budget is the strategic plan.
Answer: TRUE
LO: 7-5
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20) A decision made during long-range planning includes whether to delete a product from a company's
product line.
Answer: TRUE
LO: 7-5
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21) The elements of a financial budget for a merchandising firm include the capital budget, the cash
budget and the budgeted balance sheet.
Answer: TRUE
LO: 7-5
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22) An operating budget is the major part of the master budget that focuses on the balance sheet and
supporting schedules.
Answer: FALSE
LO: 7-5
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7.6 Questions
1) What is the sequence of steps in preparing the master budget?

A) Output from the financial budget is used to prepare the operating budget.
B) Output from the operating budget is used to prepare the financial budget.
C) Output from the financial budget is used to prepare the income statement.
D) Output from the financial budget is used to prepare the operating expense budget.
Answer: B
LO: 7-6
AACSB: None
7.7 Questions
1) The first step in preparing the master budget is the ________.

A) cash budget
B) capital budget
C) operating expense budget
D) sales budget
Answer: D
LO: 7-7
AACSB: None
2) The first step in preparing the operating budget is the ________.

A) cash budget
B) capital budget
C) operating expense budget
D) sales budget
Answer: D
LO: 7-7
AACSB: None
3) Happy Hotels operates a 100-room property in Palm Harbor, Florida. Occupancy rates average 97% in
March and 90% in April. The average room rental rate is $150 per night. Expected revenues for April are
________.
A) $405,000
B) $418,500
C) $436,500
D) $450,000
Answer: A
LO: 7-7
AACSB: Analytic Skills
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4) Full Hotels operates a 100-room property in Naples, Florida. Occupancy rates average 95% in March
and 80% in April. The average room rental rate is $150 per night. Expected revenues for March are
________.
A) $372,000
B) $418,500
C) $427,500
D) $441,750
Answer: D
LO: 7-7
5) For next year, Dunphy Company has budgeted sales of 30,000 units, target ending inventory of 1,000
units and a beginning inventory of 800 units. How many units should be purchased?
A) 29,800
B) 30,000
C) 30,200
D) 31,800
Answer: C
LO: 7-7
6) For next year, Dummie Company has budgeted sales of 7,000 units, target ending inventory of 1,000
units and a beginning inventory of 300 units. How many units should be purchased?
A) 5,700
B) 6,300
C) 7,700
D) 8,300
Answer: C
LO: 7-7
7) Haggle Company has a sales budget for next month of $400,000. Cost of goods sold is expected to be
35% of sales. All units are paid for in the month following purchase. The beginning inventory is $10,000
and an ending inventory of $12,000 is desired. Beginning accounts payable is $76,000. The cost of goods
sold for next month is ________.
A) $140,000
B) $162,000
C) $172,000
D) $220,000
Answer: A
LO: 7-7
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8) Yesterday Company has a sales budget for next month of $300,000. Cost of goods sold is expected to be
40% of sales. All units are paid for in the month following purchase. The beginning inventory is $10,000
and an ending inventory of $12,000 is desired. Beginning accounts payable is $76,000. The purchases for
next month are ________.
A) $78,000
B) $118,000
C) $120,000
D) $122,000
Answer: D
LO: 7-7
9) Pinto Company has the following data:
Month Budgeted Sales

January $108,000
February 132,000
March 144,000
April 120,000
Cost of goods sold average 60% of sales. The inventory at December 31 was $19,440. Desired ending
inventory levels are 30% of next month's sales at cost. What is the desired ending inventory value at
February 28?
A) $23,760
B) $25,920
C) $39,600
D) $43,200
Answer: B
LO: 7-7
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10) Diamond Company has the following sales budget for the last six months of 2010:
July $100,000
August 80,000
September 110,000
October 90,000
November 100,000
December 94,000
Historically, the cash collection of sales has been as follows:

65% of sales collected in month of sale
25% of sales collected in month following sale
8% of sales collected in second month following sale
2% of sales uncollectible
What is the expected cash collection of sales in October?

A) $58,500
B) $86,000
C) $92,400
D) $99,500
Answer: C
LO: 7-7
11) Taurus Company has the following data:

January $108,000
February 132,000
March 144,000
April 120,000
The gross profit rate is 40% of sales and ending inventory at December 31 was $19,440. Desired ending
inventory levels are 30% of next month's sales at cost. What are the expected total purchases for
February?
A) $79,200
B) $81,360
C) $102,960
D) $105,120
Answer: B
LO: 7-7
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12) Caravan Company has the following data:

April $40,000
May 46,000
June 50,000
July 52,000
August 48,000
The cost of goods sold percentage is 70% of sales and the desired ending inventory level is 25% of next
month's sales at cost. ________ was the beginning inventory on May 1.
A) $7,000
B) $8,050
C) $8,750
D) $12,075
Answer: B
LO: 7-7
13) Voyager Company has the following data:

May $46,000
June 50,000
July 52,000
August 48,000
month's sales at cost. What is the beginning inventory on August 1?
A) $4,200
B) $8,450
C) $9,600
D) $38,400
Answer: C
LO: 7-7
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14) Jaggers Company has the following data:

May $46,000
June 50,000
July 52,000
August 48,000
month's sales at cost. What are the expected total purchases for June?
A) $17,500
B) $32,500
C) $32,825
D) $40,950
Answer: C
LO: 7-7
15) Jaeger Company has the following data:

May $46,000
June 50,000
July 52,000
August 48,000
The cost of goods sold percentage is 65% of sales and the desired ending inventory is 25% of next month's
sales at cost. What are the total purchases budgeted for July?
A) $33,150
B) $33,800
C) $41,600
D) $42,250
Answer: A
LO: 7-7
16) San Francisco Company expects August sales to be $32,000. Approximately 40% of sales are cash
sales. Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two
months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in
August from August sales.
A) $8,000
B) $12,000
C) $16,000
D) $22,400
Answer: D
LO: 7-7
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17) Atlanta Company expects June sales to be $20,000. Of these sales, credit sales are expected to be
$12,000. Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5%
two months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in
June from June sales.
A) $9,200
B) $14,000
C) $17,200
D) $20,000
Answer: B
LO: 7-7
18) Falcons Company expects May sales to be $10,000. Approximately 40% of sales are cash sales.
Collection of credit sales are 50% in the month of sale, 40% in the month following sale and 5% two
months following sale. The remaining 5% is uncollectible. ________ is the expected cash collection in
May from May sales.
A) $4,000
B) $5,000
C) $7,000
D) $10,000
Answer: C
LO: 7-7
19) The following sales budget has been prepared:
Month Cash Sales Credit Sales

September $167,000 $123,000
October 225,000 180,000
November 330,000 210,000
December 135,000 190,000
Collections of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two
months following sale. No uncollectible accounts are expected. What are the estimated cash collections
in December?
A) $135,000
B) $197,000
C) $325,000
D) $332,000
Answer: D
LO: 7-7
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September $100,000 $200,000
October 125,000 180,000
November 207,000 199,000
December 67,000 144,000
Collection of credit sales are 50% in the month of sale, 40% in the month following sale, and 10% two
months following sale. No uncollectible accounts are expected. What is the expected balance of Accounts
Receivable at October 31?
A) $72,500
B) $110,000
C) $118,000
D) $180,000
Answer: B
LO: 7-7

September $100,000 $200,000
October 125,000 180,000
November 130,000 210,000
December 135,000 190,000
in November?
A) $130,000
B) $197,000
C) $327,000
D) $340,000
Answer: C
LO: 7-7
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September $99,000 $250,000
October 225,000 180,000
November 310,000 210,000
December 94,000 170,000
months following sale. No uncollectible accounts are expected. What is the expected balance in Accounts
Receivable at November 30?
A) $77,500
B) $105,000
C) $123,000
D) $210,000
Answer: C
LO: 7-7

September $123,000 $210,000
October 140,000 180,000
November 167,000 260,000
December 189,000 190,000
in October from October sales?
A) $125,000
B) $140,000
C) $230,000
D) $310,000
Answer: C
LO: 7-7
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September $100,000 $200,000
October 125,000 180,000
November 130,000 210,000
December 135,000 190,000
months following sale. No uncollectible accounts are expected. What is the expected balance in Accounts
Receivable at December 31?
A) $95,000
B) $116,000
C) $190,000
D) $210,000
Answer: B
LO: 7-7

September $100,000 $200,000
October 125,000 180,000
November 130,000 210,000
December 135,000 190,000
in September from September sales?
A) $100,000
B) $200,000
C) $272,000
D) $300,000
Answer: B
LO: 7-7
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26) Denver Company has the following information:

January $76,000
February 85,000
March 92,000
April 79,000
Budgeted Expenses Per Month

Wages $15,000
Advertising 12,000
Depreciation 3,000
Other expenses 4% of sales
All cash expenses are paid as incurred. What are the total expenses budgeted for the month of January?
A) $30,000
B) $30,040
C) $31,200
D) $33,040
Answer: D
LO: 7-7
27) Broncos Company has the following information:

January $76,000
February 85,000
March 92,000
April 79,000

Wages $15,000
Advertising 12,000
Depreciation 3,000
All cash expenses are paid as incurred. What are the total expenses budgeted for the month of April?
A) $3,160
B) $30,000
C) $33,160
D) $33,680
Answer: C
LO: 7-7
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28) Jackson Company has the following information:

January $76,000
February 85,000
March 92,000
April 79,000

Wages $15,000
Advertising 12,000
Depreciation 3,000
All cash expenses are paid as incurred. What are the budgeted total cash disbursements for expenses in
March?
A) $3,680
B) $30,000
C) $30,680
D) $33,680
Answer: C
LO: 7-7
29) Denison Company has the following information:

January $76,000
February 85,000
March 92,000
April 79,000

Wages $15,000
Advertising 12,000
Depreciation 3,000
All cash expenses are paid as incurred. What are the total cash disbursements budgeted for the month of
January?
A) $28,200
B) $30,000
C) $30,040
D) $33,040
Answer: C
LO: 7-7
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30) Pease Company's expected sales for April are $27,600. Other information follows:
Budgeted Operating Expenses Amount

Wages $2,000
Advertising 1,680
Depreciation 1,440
Rent 2,560
What are the total expected operating expenses for April?

A) $6,240
B) $7,620
C) $7,680
D) $9,060
Answer: D
LO: 7-7
31) Moran Company's expected sales for April are $27,600. Other information follows:

Wages $2,000
Advertising 1,680
Depreciation 1,440
Rent 2,560
All cash expenses are paid as incurred. What are the expected total cash disbursements for operating
expenses for April?
A) $6,240
B) $7,620
C) $7,680
D) $9,060
Answer: B
LO: 7-7
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32) Peter Company's expected sales for April are $27,600. Other information follows:

Wages $2,000
Advertising 1,680
Depreciation 1,440
Rent 2,560
Which operating expense is a noncash expense?

A) Advertising
B) Rent
C) Depreciation
D) Wages
Answer: C
LO: 7-7
33) Donald Company has the following information:
Month Budgeted Purchases

January $30,000
February 29,000
March 30,520
April 29,480
May 27,680
Purchases are paid as follows:

10% in the month of purchase
50% one month after purchase
40% two months after purchase
What is the estimated cash disbursement in March from January purchases?

A) $3,052
B) $12,000
C) $12,208
D) $13,400
Answer: B
LO: 7-7
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34) Duck Company has the following information:

January $26,800
February 29,000
March 30,520
April 29,480
May 27,680

What is the expected balance in Accounts Payable at March 31?

A) $2,900
B) $18,312
C) $30,520
D) $39,068
Answer: D
LO: 7-7
35) Villa Company has the following information:

January $56,800
February 49,000
March 30,520
April 35,480
May 27,680

What is the estimated cash disbursement in May from April purchases?

A) $11,072
B) $11,792
C) $13,840
D) $17,740
Answer: D
LO: 7-7
27
36) Hightower Company has the following information:
January $33,000
February 37,000
March 31,000
April 30,000
May 27,680

What is the expected balance in Accounts Payable on April 30?

A) 0
B) $7,500
C) $20,250
D) $30,000
Answer: B
LO: 7-7
37) Peach Company has the following information:

January $25,000
February 19,000
March 33,000
April 27,000
May 27,680

What is the estimated cash disbursement for purchases in March?

A) $22,500
B) $24,750
C) $29,500
D) $39,000
Answer: C
LO: 7-7
28
38) Twilight Company has the following information:

January $26,800
February 29,000
March 30,520
April 29,480
May 27,680

What is the expected balance in Accounts Payable on May 31?

A) $2,948
B) $11,792
C) $24,912
D) $36,704
Answer: D
LO: 7-7
39) Duke Company has the following information:

January $26,800
February 29,000
March 30,520
April 29,480
May 27,680

What is the estimated cash disbursement for purchases in May?

A) $13,840
B) $25,632
C) $27,680
D) $29,716
Answer: D
LO: 7-7
29
40) ________ expense is driven by sales volume.
A) Rent
B) Insurance
C) Depreciation
D) Sales commission
Answer: D
LO: 7-7
AACSB: None
41) The Happy Company is preparing a budgeted income statement. The dollar amount for Sales comes
from ________.
A) the sales forecast
B) the sales manager
C) the sales budget
D) the sales from competitors
Answer: C
LO: 7-7
42) The Unhappy Company is preparing a budgeted income statement. The dollar amount of Cost of
Goods Sold comes from ________.
A) the sales budget
B) the sales forecast
C) the purchases budget
D) the operating expense budget
Answer: C
LO: 7-7
43) The Smiley Company is preparing a budgeted income statement. The dollar amount of Wages
Expense can be found on the ________.
A) purchases budget
B) sales budget
C) schedule of cash collections from customers
D) operating expense budget
Answer: D
LO: 7-7
30
44) The Sad Company is preparing a budgeted income statement. The dollar amount of Operating
Expenses comes from ________.
A) the purchases budget
B) the cash disbursements for purchases budget
C) the operating expense budget
D) the sales budget
Answer: C
LO: 7-7
45) Cash collections from customers in any given month include the current month's cash sales and
expected collections on credit sales.
Answer: TRUE
LO: 7-7
AACSB: None
46) The first step in preparing the master budget is the preparation of the budgeted income statement.
Answer: FALSE
LO: 7-7
AACSB: None
47) Examples of expenses driven by sales volume include rent and insurance.
Answer: FALSE
LO: 7-7
AACSB: None
31
48) The Drew Company has the following information available:

March $150,000
April 153,000
May 151,000
June 254,500
July 252,500
The gross profit rate is 40% and the desired ending inventory level is 20% of the next month's cost of
sales.
Required:
Prepare a purchases budget for April, May and June.
Answer: April May June
Budg. cost of goods sold $91,800 $90,600 $152,700
Plus: Ending inventory 18,120 30,540 30,300
Total merchandise needed 109,920 121,140 183,000
Less: Beginning inventory 18,360 18,120 30,540
Purchases $91,560 $103,020 $152,460
LO: 7-7
49) The Depp Company has the following information available:

June $68,000
July 72,000
August 74,000
September 76,000
October 78,000
The cost of goods sold rate is 65% and the desired ending inventory level is 25% of the next month's cost
of sales.
Required:
Prepare a purchases budget for July, August and September.
Answer: July August September
Budg. cost of goods sold $46,800 $48,100 $49,400
Plus: Ending inventory 12,025 12,350 12,675
Total merchandise needed 58,825 60,450 62,075
Less: Beginning inventory 11,700 12,025 12,350
Purchases $47,125 $48,425 $49,725
LO: 7-7
32
50) Bates Corporation has the following sales budget:

May $84,000
June 100,000
July 92,000
August 116,000
September 98,000
Credit sales are 80% of total sales. Collections of credit sales are 80% in the month of sale, 15% in the
month after sale and 5% are never collected.
Required:
Prepare a schedule of cash collections for June, July and August.
Answer: June July August
Cash sales $20,000 $18,400 $23,200
Collections of credit sales:
Current month 64,000 58,880 74,240
Previous month 10,080 12,000 11,040
Total collections $94,080 $89,280 $108,480
LO: 7-7
51) Dubuque Company has the following sales budget:

February $14,000 $28,000
March 12,800 29,200
April 10,800 26,400
Collections of credit sales are 40% in the month of sale, 50% in the month after sale and 10% two months
after sale. No uncollectible accounts are expected.
Required:
Prepare a schedule of cash collections for April.
Answer:
Cash sales $10,800
Credit sales:
Current month 10,560
Previous month 14,600
Two months ago 2,800
Total collections $38,760
LO: 7-7
33
52) Spark Company has the following data:

January $230,000
February 190,000
March 200,000
April 220,000
May 210,000

Required:
Prepare a schedule of cash disbursements for purchases for March, April and May.
Answer: March April May
January $23,000
February 152,000 $19,000
March 20,000 160,000 $20,000
April 22,000 176,000
May ______ ______ 21,000
Total $195,000 $201,000 $217,000
LO: 7-7
34
53) Johnson Company has the following data:

April $154,000
May 160,000
June 142,000
July 136,000
Budgeted Operating Expenses Per Month

Wages $28,600
Advertising 27,200
Depreciation 19,000
Rent 20,400
Freight-out 20% of sales
Other 8% of sales
Required:
Prepare a schedule of cash disbursements for operating expenses for April, May and June. All cash
expenses are paid when incurred.
Answer: April May June
Wages $28,600 $28,600 $28,600
Advertising 27,200 27,200 27,200
Rent 20,400 20,400 20,400
Freight-out 30,800 32,000 28,400
Other 12,320 12,800 11,360
Total disbursements $119,320 $121,000 $115,960
LO: 7-7
7.8 Questions
1) A company is preparing the cash budget. To find the ending cash balance for a month, they should
take the beginning cash balance and add ________.
A) net cash receipts and disbursements and cash increase or decrease from financing
B) minimum cash balance and cash increase or decrease from financing
C) excess of cash before financing
D) excess of cash before financing and net cash receipts and disbursements
Answer: A
LO: 7-8
35
2) The total amount of cash collections from customers appears on the ________.
A) sales budget
B) operating expense budget
C) cash budget
D) budgeted balance sheet
Answer: C
LO: 7-8
AACSB: None
3) Godwin Company is preparing a cash budget for the month of June. The following information is
available:
Cash Balance, May 31, 2010 $10,000

Cash collections from customers in June 46,000
Cash paid for merchandise in June 42,000
Paid operating expenses in June 12,000
Purchase furniture for cash in June 3,000
Depreciation expense in June 1,000
Amortization expense in June 1,000
The minimum cash balance desired is $10,000. What are the net cash receipts and disbursements for the
month of June?
A) $(8,000)
B) $(9,000)
C) $(11,000)
D) $(13,000)
Answer: C
LO: 7-8
36
4) Goldberg Company is preparing a cash budget for the month of June. The following information is
available:

Paid operating expenses in June 12,000
The minimum cash balance desired is $10,000. What amount of money must be borrowed at June 30,
2010 to meet the minimum cash balance?
A) $9,000
B) $10,000
C) $11,000
D) $13,000
Answer: C
LO: 7-8
5) Goss Company is preparing a cash budget for the month of June. The following information is
available:

Cash paid for operating expenses in June 12,000
The minimum cash balance desired is $10,000. What is the cash balance on June 30, 2010?
A) $10,000
B) $11,000
C) $20,000
D) $21,000
Answer: A
LO: 7-8
37
6) Arnold Company is preparing a cash budget for the month of June. The following information is
available:
Cash dividend paid in June 5,000
The minimum cash balance desired is $5,000. What are the net cash receipts and disbursements for the
month of June?
A) $(2,000)
B) $(3,000)
C) $2,000
D) $3,000
Answer: A
LO: 7-8
7) Schlichting Company is preparing a cash budget for the month of June. The following information is
available:

Cash dividend paid in June 5,000
The minimum cash balance desired is $5,000. What amount should be borrowed at June 30, 2010?
A) $0
B) $2,000
C) $3,000
D) $4,000
Answer: A
LO: 7-8
38
8) Silent Company is preparing a cash budget for the month of June. The following information is
available:

Paid cash dividend in June 5,000
The minimum cash balance desired is $5,000. What is the cash balance on June 30, 2010?
A) $8,000
B) $9,000
C) $10,000
D) $13,000
Answer: B
LO: 7-8
9) A company is preparing a budgeted balance sheet. The Ending Balance of Cash comes from the
________.
A) the cash disbursements budget
B) the cash collections budget
C) the cash budget
D) the purchases budget
Answer: C
LO: 7-8
AACSB: None
10) ________ usually prepare and use the operating budget. ________ focus on the financial budget.
A) Sales managers; The board of directors
B) Financial managers; Line operating managers
C) Line operating managers; Financial managers
D) The audit committee; The board of directors
Answer: C
LO: 7-8
AACSB: None
39
11) Budgets that focus on the budgeted cost of activities required to produce and sell products are called
________.
A) strategic budgets
B) master budgets
C) activity-based budgets
D) rolling budgets
Answer: C
LO: 7-8
AACSB: None
12) The activity-based budgeting system emphasizes ________.

A) the resources needed by a company
B) the preparation of budgets by function
C) the attainment of long-range goals
D) activities and their consumption of resources
Answer: D
LO: 7-8
AACSB: None
13) ________ models are mathematical models of the master budget that can react to any set of
assumptions about sales, costs and product mix.
A) Strategic
B) Long-range
C) Financial planning
D) Operating budget
Answer: C
LO: 7-8
AACSB: None
14) Financial planning models ________.

A) focus on the budgeted balance sheet
B) focus on the budgeted income statement
C) allow managers to assess the predicted impacts of various alternatives before final decisions are
selected
D) allow managers to assess the predicted impacts of the master budget
Answer: C
LO: 7-8
AACSB: None
15) The beginning available cash balance equals the beginning cash balance plus the minimum cash
balance desired.
Answer: TRUE
LO: 7-8
AACSB: None
40
16) The cash budget begins with the ending cash balance from the previous period.
Answer: TRUE
LO: 7-8
AACSB: None
17) Depreciation expense is usually a disbursement listed on the cash budget.

Answer: FALSE
LO: 7-8
AACSB: None
18) The following rule applies when preparing the cash budget. If available cash plus net cash receipts
and disbursements is negative, then borrowing is necessary.
Answer: TRUE
LO: 7-8
AACSB: None
19) The working capital cycle moves from cash to inventory to receivables and back to cash.
Answer: TRUE
LO: 7-8
AACSB: None
20) Line operating managers usually prepare and use the operating budget.
Answer: TRUE
LO: 7-8
AACSB: None
21) The operating budget is a better measure of a company's overall performance than the financial
budget.
Answer: TRUE
LO: 7-8
AACSB: None
22) Activity-based budgets are an example of functional budgeting.

Answer: FALSE
LO: 7-8
AACSB: None
23) The master budgeting process summarizes the key decisions regarding all aspects of a company's
value chain.
Answer: TRUE
LO: 7-8
AACSB: None
41
24) Financial planning models enable managers to get answers to "what-if" questions.
Answer: TRUE
LO: 7-8
AACSB: None
25) Daily Company has the following information:
Cash Balance, May 31 $45,000

Dividends paid in June 12,000
Cash collections on sales in June 89,000
Merchandise purchases paid in June 56,200
Purchase equipment for cash in June $17,500
Daily Company wants to keep a minimum cash balance of $10,000.
Required:
Prepare a cash budget for June.
Answer:
Beginning cash balance $45,000
Minimum cash balance desired 10,000
Available cash balance $35,000
Cash receipts and disbursements:

Collections from customers $89,000
Payments for merchandise (56,200)
Payments for operating expenses (36,800)
Dividends paid (12,000)
Purchase equipment for cash (17,500)
Net cash receipts and disbursements (33,500)
Excess of cash before financing $1,500
Borrowing 000
Total cash increase from financing 000
Ending cash balance $11,500
LO: 7-8
42
26) Leno Company has the following information:
Cash Balance, June 30 $80,000

Dividends paid in July 55,000
Cash paid for operating expenses in July 185,500
Depreciation expense in July 12,000
Cash collections on sales in July 510,000
Merchandise purchases paid in July 180,000
Purchase equipment for cash in July 94,500
Leno Company wants to maintain a minimum cash balance of $80,000.
Required:
Prepare a cash budget for July.
Answer:
Beginning cash balance $80,000
Minimum cash balance desired 80,000
Available cash balance $0
Cash receipts and disbursements:

Collections from customers $510,000
Payments for merchandise (180,000)
Payments for operating expenses (185,500)
Dividends paid (55,000)
Purchase equipment for cash (94,500)
Net cash receipts and disbursements (5,000)
Deficiency of cash before financing $(5,000)
Borrowing 5,000
Total cash increase from financing 5,000
Ending cash balance $80,000
LO: 7-8
7.9 Questions
1) Systematically varying budget data input to determine the effects of each change on the budget is
called ________ analysis.
A) operating budget
B) financial budget
C) sensitivity
D) master budget
Answer: C
LO: 7-9
AACSB: None
43
2) A spreadsheet can be used to prepare ________.
A) the operating budget
B) the financial budget
C) schedules from the master budget
D) all of the above
Answer: D
LO: 7-9
AACSB: None
3) Preparing a master budget using a spreadsheet is a quick and easy task the first time it is carried out.
Answer: FALSE
LO: 7-9
AACSB: None
44

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Introduction to Management Accounting, 15e (Horngren)

Chapter 7 Introduction to Budgets and Preparing the Master Budget

1) A major benefit of effective budgeting is that ________.

6) A budget is an example of an informal business plan.

7) A budget is a qualitative expression of a plan of action.

2) One way to reduce negative attitudes of managers toward budgets is by ________.

4) Budgets are generally more effective if they are ________.

3) Which of the following is NOT a reason for budgetary slack?

5) How can a company avoid lying by employees when preparing a budget?

6) Managers may lie to increase the resources allocated to their departments.

8) "Cooking the books" refers to recording fictitious sales or omitting costs.

2) A sales forecast is ________.

3) A ________ gives the expected sales under a given set of conditions.

6) Decisions made during long-range planning include ________.

8) Which of the following statements is FALSE about a strategic plan?

9) A sales budget is a prediction of sales under a given set of conditions.

12) The sales budget should be the responsibility of line management.

1) Which of the following statements about long-range plans is FALSE?

5) ________ set the overall goals and objectives of the organization.

10) Which of the following is NOT a component of the operating budget?

11) Which of the following is NOT a component of the operating budget?

13) Which of the following is a component of the financial budget?

14) What is the final result of the operating budget process?

15) The financial budget process ends with the ________.

1) What is the sequence of steps in preparing the master budget?

1) The first step in preparing the master budget is the ________.

2) The first step in preparing the operating budget is the ________.

9) Pinto Company has the following data:

Month Budgeted Sales

Historically, the cash collection of sales has been as follows:

What is the expected cash collection of sales in October?

11) Taurus Company has the following data:

Month Budgeted Sales

13) Voyager Company has the following data:

Month Budgeted Sales

Month Budgeted Sales

15) Jaeger Company has the following data:

19) The following sales budget has been prepared:

Month Cash Sales Credit Sales

Month Cash Sales Credit Sales

21) The following sales budget has been prepared:

Month Cash Sales Credit Sales

Month Cash Sales Credit Sales

23) The following sales budget has been prepared:

Month Cash Sales Credit Sales

Month Cash Sales Credit Sales

25) The following sales budget has been prepared:

Month Cash Sales Credit Sales

Month Budgeted Sales

Budgeted Expenses Per Month

27) Broncos Company has the following information:

Month Budgeted Sales

Budgeted Expenses Per Month

Month Budgeted Sales

Budgeted Expenses Per Month

29) Denison Company has the following information:

Month Budgeted Sales

Budgeted Expenses Per Month

Budgeted Operating Expenses Amount