Budgeting

MODULE 8 - BUDGETING D. It provides organizational independence.

THEORIES: 4. Which of the following is least likely a reason why a company prepares its budget?
Basic Concepts A. To provide a basis for comparison of actual performance
1. The concept of “management by exception” refers to management’s consideration of B. To communicate the company’s plans throughout the entire business organization
A. only those items that vary materially from expectations. C. To control income and expenditure in a particular period.
B. only rare events. D. To make sure the company expands its operations.
C. samples selected at random.
D. only significant unfavorable deviations. 5. Which of the following does not contribute to an effective budgeting?
A. Top management is involved in budgeting.
8. A formal written statement of management’s plans for the future, packaged in financial B. To give each manager a free hand in the preparation of the budget, the data within the
terms, is a: master budget are flexible.
A. Responsibility report. C. Cost of production report. C. The organization is divided into responsibility units.
B. Performance report. D. Budget. D. There is communication of results.

2. Budgets are related to which of the following management functions? 6. The budgets that are based on a very high levels of performance, like expected costs using
A. Planning C. Control ideal standards,
B. Performance evaluation D. all of these A. assist in planning the operations of the company
B. stimulate people to perform better than they ordinarily would
22. Budgeting supports the planning process by encouraging all of the following activities C. are helpful in evaluating the performance of managers
except: D. can lead to low levels of performance
A. Requiring all organizational units to establish their goals for the coming period.
B. Increasing the motivation of managers and employees by providing agreed-upon 7. Which of the following statements is incorrect?
expectations. A. An imposed budget is the same as a participative budget.
C. Improving overall decision making by considering all viewpoints, options, and cost B. Preparation of the budget would be the responsibility of each responsibility unit.
control programs. C. Top management’s support is necessary to promote budget participation.
D. Directing and coordinating operations during the period. D. The top management should review and approve each responsibility unit’s budget.

3. Which of the following advantages does a budget mostly provide? 9. The primary role of the budget director and the budgeting department is to
A. Coordination is increased. A. Settle disputes among operating executives during the development of the annual
B. Planning is emphasized. operating plan.
C. Communication is continuous. B. Develop the annual profit plan by selecting the alternatives to be adopted form the
D. Comparison of actual versus budgeted data. suggestions submitted by the various operating segments.
C. Compile the budget and manage the budget process.
24. Which of the following is NOT an advantage of budgeting? D. Justify the budget to the corporate planning committee of the board of directors.
A. It forces managers to plan.
B. It provides resource information that can be used to improve decision making. 10. The primary variable affecting active participation and commitment to the budget and the
C. It aids in the use of resources and employees by setting a benchmark that can be used control system is
for the subsequent evaluation of performance. A. Management efforts to achieve the budget rather than optimize results.

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B. The rigid adherence to the budget without recognizing changing conditions.

C. Top management involvement in support of the budget. 11. The process of developing budget estimates by requiring all levels of management to
D. The opportunity budgeting gives to risk-taker managers for department growth. estimate sales, production, and other operating data as though operations were being
initiated for the first time is referred to as:
12. A variant of fiscal-year budgeting whereby a twelve-month projections into the future is A. Forecasting. C. Continuous budgeting.
maintained at all times: B. Zero-based budgeting. D. Program budgeting.
A. Forecasting. C. Continuous budgeting.
B. Zero-based budgeting. D. Calendar budgeting. 38. Which of the following is a contemporary approach to budgeting?
A. incremental approach C. baseline approach
35. The method of budgeting which adds one month’s budget to the end of the plan when the B. zero-based approach D. both a and b are true
current month’s budget is dropped from the plan refers to
A. Long-term budget C. Incremental budget 51. Zero-base budgeting requires managers to
B. Operations budget D. Continuous budget A. Justify expenditures that are increases over the prior period’s budgeted amount.
B. Justify all expenditures, not just increases over last year’s amount.
27. A continuous budget C. Maintain a full-year budget intact at all times.
A. is a budget that is revised monthly or quarterly. D. Maintain a budget with zero increases over the prior period.
B. is a medium term plan that consists of more than 2 years’ projections.
C. is appropriate only for use of a not-for-profit entity. 13. Zero-based budgeting:
D. works best for an entity that can reliably forecast events a year or more into the future. A. involves the review of changes made to an organization’s original budget.
B. does not provide a summary of annual projections.
37. “Incremental budgeting” refers to C. involves the review of each cost component from a cost/benefit perspective.
A. line-by-line approval of expenditures D. emphasizes the relationship of effort to projected annual revenues.
B. setting budget allowances based on prior year expenditures
C. requiring top management approval of increases in budgets 18. A systematized approach known as zero-based budgeting:
D. using incremental revenues and costs in budgeting A. Classifies the budget by the prior year’s activity and estimates the benefits arising from
each activity.
49. A budget plan for annual fixed costs that arises from top management decisions directly B. Commence with either the current level of spending or projected whichever is lower.
reflecting corporate policy. C. Presents planned activities for a period of time but does not present a firm commitment.
A. Flexible budget. C. Discretionary budget. D. Divides the activities of individual responsibility centers into a series of packages that are
B. Static budget. D. Program budget. prioritized.

36. The term “decision package” relates to 20. Which of the following statements about Zero-based budgeting is incorrect?
A. comprehensive budgeting C. program budgeting A. All activities in the company are organized into break-up units called packages.
B. zero-based budgeting D. line budgeting B. All costs have to be justified every budgeting period.
C. The process is not time consuming since justification of costs can be done as a routine
41. The budget approach that is more relevant when the continuance of an activity or operation matter.
must be justified on the basis of its need or usefulness to the organization. D. Zero-based budgeting includes variable costs only.
A. the incremental approach C. the baseline approach
B. the zero-based approach D. both a and b are true 34. Budgeting expenditures by purpose is called

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A. program budgeting C. zero-based budgeting A. Flexible budget considers only variable costs but a master budget considers all costs.
B. line budgeting D. flexible budgeting B. Flexible budget allows management latitude in meeting goals whereas a master budget
is based on a fixed standard.
28. A static budget is not appropriate in evaluating a manager's effectiveness if a company has C. Master budget is for an entire production facility but a flexible budget is applicable to
A. substantial fixed costs. single department only.
B. substantial variable costs. D. Master budget is based on one specific level of production and a flexible budget can be
C. planned activity levels that match actual activity levels. prepared for any production level within a relevant range
D. no variable costs.
47. Which of the following is a difference between a static budget and a flexible budgets?
45. Flexible budgeting is a reporting system wherein the A. A flexible budget includes only variable costs; a static budget includes only fixed costs.
A. Budget standards may be adjusted at management’s discretion. B. A flexible budget includes all costs, a static budget includes only fixed costs.
B. Planned level of activity is adjusted to the actual level of activity before the performance C. A flexible budget gives different allowances for different levels of activity, a static budget
report is prepared. does not.
C. Reporting dates vary according to the managerial levels of the users. D. There is no difference between the two.
D. Packages of activities vary from period to period.
17. A system that classifies budget requests by activity and estimates the benefits arising from
15. A budget that presents the plan for a range of activity so that the plan can be adjusted for each activity:
changes in activity levels is referred to as: A. Incremental budgeting system.
A. Zero-based budgeting. B. Static budgeting system.
B. Continuous budgeting. C. Program planning and budgeting system.
C. Flexible budgeting. D. Participative system.
D. Program planning and budgeting system.
21. A budget that identifies revenues and costs with an individual controlling their incurrence is
16. A flexible budget is A. Master budget C. Product budget
A. one that can be changed whenever a manager so desires B. Responsibility budget D. None of the above
B. adjusted to reflect expected costs at the actual level of activity
C. one that uses the formula total costs = cost per unit x units produced 25. The difference between an individual's submitted budget projection and his or her best
D. the same as a continuous budget estimate of the item being projected is an example of
A. padding the budget
26. A series of budgets for varying levels of activity is a: B. adhering to zero-based budgeting assumptions
A. Variable cost budget. C. Master budget. C. creating budgetary slack
B. Flexible budget. D. Zero-based budget. D. being incongruent with participative budgeting

48. If a company wishes to establish a factory overhead budget system in which estimated costs 43. Budget slack is a condition in which
can be derived directly from estimates of activity levels, it should prepare a A. Demand is low at various times of the year
A. flexible budget. C. Discretionary budget. B. Excess machine capacity exists in some areas of the plant
B. Program budget. D. Manufacturing budget. C. There is an intentional overestimate of expenses or an underestimate of revenues
D. Managers grant favored employees extra time-off
46. The basic difference between a master budget and a flexible budget is that a

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39. The procedure for setting profit objectives in which the determination of profit objectives is A. a forecast of expected operating expenses.
subordinated to the planning, and the objectives emerge as the product of the planning itself B. a forecast of operating expenses and related revenues.
is the C. a forecast of units of production.
A. a priori method C. practical method D. concerned with the income-generating activities of a firm.
B. theoretical method D. a posteriori method
54. What is the proper preparation sequencing of the following budgets?
40. The procedure for setting profit objectives in which management specifies a given rate of 1. Budgeted Balance Sheet
return that it seeks to realize in the long run by means of planning toward that end is the 2. Sales Budget
A. a priori method C. pragmatic method 3. Selling and Administrative Budget
B. theoretical method D. ad hoc method 4. Budgeted Income Statement
A. 1, 2, 3, 4 C. 2, 3, 4, 1
50. Budgeting process in which information flows top down and bottom up is referred to as: B 2, 3, 1, 4 D. 2, 4, 1, 3
A. Continuous budgeting. C. Perpetual budgeting
B. Participative budgeting D. Joint budgeting 29. In estimating the sales volume for a master budget, which of the following techniques may
be used to improve the projections?
42. Which of the following is not a potential problem with participative budgeting? A. Brainstorming.
A. setting standards that are either too high or too low B. Statistical analysis.
B. padding the budget C. Estimating from previous sales volume.
C. build slack into the budget D. All of these are useful.
D. all of the above are potential problems
30. Using the concept of ‘expected value” in sales forecasting means that the sales forecast to be
33. The ideal financial planning process would be used is
A. top-down planning. A. developed using the indicator method
B. bottom-up planning. B. the sum of the sales expected by individual managers
C. a combination of top-down and bottom-up planning. C. based on expected selling prices of the products
D. None of the above D. based on probabilities

44. A common starting point in the budgeting process is 31. Several sales forecasts are available from different sources and the managers have good
A. expected future net income. C. to motivate the sales force. ideas about their likelihoods. This situation call for the use of
B. past performance. D. a clean slate, with no expectations. A. the expected value concept C. indicator methods
B. historical analysis D. a scatter diagram
57. Which one of the following is an external factor that would need to be considered in forming an
initial budget proposal? 53. An overly optimistic sales budget may result in
A. changes in product design A. increases in selling prices late in the year.
B. introduction of a new product B. insufficient inventories.
C. competitors' actions C. increased sales during the year.
D. adoption of a new manufacturing process D. excessive inventories.

14. Operating budgets are

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56. Which of the following budgets provides the data for the preparation of the direct labor cost D. The primary purpose of the cash budget is to show the expected cash balance at the end
budget? of the budget period.
A. Direct materials purchase budget. C. Sales budget.
B. Cash budget. D. Production budget. PROBLEMS:
Cost estimation formula
55. The increased use of automation and less use of the work force in companies has caused a . Management has prepared a graph showing the total costs of operating branch warehouses
trend towards an increase in throughout the country. The cost line crosses the vertical axis at P400,000. The total cost
A. both variable and fixed costs. of operating one branch is P650,000. The total cost of operating ten branches is
B. fixed costs and a decrease in variable costs. P2,900,000. For purposes of preparing a flexible budget based on the number of branch
C. variable costs and a decrease in fixed costs. warehouses in operation, what formula would be used to determine budgeted costs at
D. variable costs and no change in fixed costs. various levels of activity?
A. Y = P400,000 + P250,000X C. Y = P650,000 + P400,000X
32. In preparing a cash budget, which of the following is normally the starting point for projecting B. Y = P400,000 + P290,000X D. Y = P650,000 + P250,000X
cash requirements?
A. Fixed assets. C. Accounts receivable. Sales budget
B. Sales. D. Inventories. Purchases budget – merchandising concern
. PTO Company desires an ending inventory of P140,000. It expects sales of P800,000 and
52. Recognition of the many uncertainties in budgeting is exemplified by companies normally has a beginning inventory of P130,000. Cost of sales is 65% of sales. Budgeted purchases
A. forecasting sales are
B. establishing minimum required cash balances A. P 530,000 C. P 810,000
C. forecasting only fixed costs B. P 790,000 D. P1,070,000
D. omitting expected dividend payments from budgeted disbursements
. Calypso Co. has projected sales to be P600,000 in January, P750,000 in February, and
19. Which of the following statements is True? P800,000 in March. Calypso wants to have 50% of next month’s sales needs on hand at the
A. Under zero-based budgeting, a manager is required to start at zero budget levels each end of a month. If Calypso has an average gross profit of 40%, what are the February 28
period, as if the programs involved were being initiated for the first time. purchases?
B. The primary purpose of the cash budget is to show the expected cash balance at the end A. P465,000 C. P775,000
of the budget period. B. P310,000 D. P428,000
C. Budget data are generally prepared by top management and distributed downward in an
organization. . Blue Company budgeted purchases of P100,000. Cost of sales was P120,000 and the
D. The budget committee is responsible for preparing detailed budget figures in an desired ending inventory was P42,000. The beginning inventory was
organization. A. P20,000 C. P42,000
B. P32,000 D. P62,000
23. Which of the following is a valid statement?
A. Responsibility budget identifies revenue and costs with the individual responsible for their . The payment schedule of purchases made on account is: 60% in the time period of
incurrence. purchase, 30% in the following time period, and 10% in the subsequent time period. Total
B. The best way to establish budget figures is to use last year’s actual cost and activity data credit purchases were P200,000 in May, and P100,000 in June. Total payments on credit
as this year’s budget estimates. purchases were P140,000 in June. What were the credit purchases in the month of April?
C. A sales budget and a sales forecast are the same thing. A. P200,000 C. P145,000

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B. P100,000 D. P215,000 . Minerva Company sells a single product. Budgeted sales for the year are anticipated to be
640,000 units. The estimated beginning and ending finished goods inventory are 108,000
Production budget and 90,000, respectively. A production of one unit requires the following materials:
. Montalban Company’s sales budget shows the following expected sales for the following Material LL 0.50 lb. @ P0.60
year: Material MM 1.00 lb. @ P1.70
Quarter Units Material NN 1.20 lb. @ P1.00
First 120,000 What are the respective peso amounts of each material to be used in production during the
Second 160,000 year?
Third 90,000 Material LL Material MM Material NN
Fourth 110,000 A. P181,200 P1,026,800 P724,800
Total 480,000 B. P181,200 P1,026,800 P746,400
The inventory at December 31 of the prior year was budgeted at 36,000 units. The quantity C. P186,600 P1,057,400 P746,400
of finished goods inventory at the end of each quarter is to equal 30% of the next quarter’s D. P186,600 P1,057,400 P724,800
budgeted sales of units.
How much should the production budget show for units to be produced during the first Raw materials purchases budget
quarter? . If there were 30,000 pounds of raw material on hand on January 1, 60,000 pounds are
A. 48,000 C. 132,000 desired for inventory at December 31, and 180,000 pounds are required for annual
B. 96,000 D. 144,000 production, how many pounds of raw material should be purchased during the year?
A. 150,000 pounds C. 120,000 pounds
. Lorie Company plans to sell 400,000 units of finished product in July an anticipates a growth B. 240,000 pounds D. 210,000 pounds
rate in sales of 5% per month. The desired monthly ending inventory in units of finished
product is 80% of the next month’s estimated sales. . Silver Bowl Company manufactures a single product. It keeps its inventory of finished goods
There are 300,000 finished units in the inventory on June 30. Each unit of finished product at 75% the coming month’s budgeted sales. It also keeps its inventory of raw materials at 50%
requires four pounds of direct materials at a cost of P2.50 per pound. There are 800,000 of the coming month’s budgeted production. Each unit of product requires two pounds of
pounds of direct materials in the inventory on June 30. materials. The production budget is, in units: May, 1,000; June, 1,200; July, 1,300; august,
How many units should be produced for the three-month period ending September 30? 1,600. Raw material purchases in July would be
A. 1,260,000 C. 1,331,440 A. 1,525 pounds C. 2,550 pounds
B. 1,328,000 D. 1,424,050 B. 2,900 pounds D. 3,050 pounds

Ending inventory budget . Each unit of finished product uses 6 kilograms of raw materials. The production and inventory
. If the required direct materials purchases are 8,000 pounds and the direct materials required budgets for May 2007 are as follows:
for production is three times the direct materials purchases, and the beginning direct Beginning Inventory:
materials are three and a half times the direct materials purchases, what are the desired Finished goods 15,000 units
ending direct material in pounds? Raw materials 21,000 kg.
A. 20,000 C. 12,000 Budgeted unit sales 18,000 units
B. 4,000 D. 32,000 Planned ending inventory
Finished goods 11,400 units
Raw materials usage budget Raw materials 24,400 kg.

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During the production process, it is usually found that 10% of production units are scrapped as If 500,000 finished units were to be manufactured during the 2006-2007 fiscal year by
defective and this loss occurs after the raw materials have been placed in process. Strama Company, the units of raw material needed to be purchased would be
How many kilograms of raw materials should be purchased in June? A. 1,000,000 units C. 1,020,000 units
A. 89,800 C. 96,000 B. 1,010,000 units D. 990,000 units
B. 98,440 D. 99,400
. Diliman Corporation includes the following quarterly budget for production:
. Violet Company manufactures a single product. It keeps its inventory of finished goods at Quarter Production
twice the coming month’s budgeted sales, inventory of raw materials at 150% of the coming First 60,000 units
month’s budgeted production requirements. Each unit of product requires two pounds of Second 45,000 units
materials. The production budgets in units consist of the following:. Third 40,000 units
May 1,000 Fourth 65,000 units
June 1,200 Each unit of product requires 2.5 kilograms of direct materials. The company begins each
July 1,300 quarter with inventory of direct materials equal to 25 percent of the total quarter’s material
August 1,600 requirements.
Raw material purchases in June would be What is the budgeted purchases of materials for the second quarter?
A. 2,600 pounds C. 2,400 pounds A. 113,750 C. 46,250
B. 1,800 pounds D. 2,700 pounds B. 109,375 D. 112,500
. Sales Company is budgeting sales of 300,000 units of its only product for the coming year. Indirect labor costs
Production of one unit of product requires three pounds of Material Q and 2 pounds of . Namuco, Inc. uses flexible budgeting for cost control. During the month of September,
Material L. Inventory units at the beginning of the year are: Namuco, Inc. produced 14,500 units of finished goods with indirect labor costs of P25,375.
Actual, Jan. 1 Budgeted, Dec 31 Its annual master budget reflects an indirect labor costs, a variable cost, of P360,000 based
Finished goods 60,000 50,000 on an annual production of 200,000 units. In the preparation of performance analysis for the
Material Q 80,000 60,000 month of September, how much flexible budget should be allowed for indirect labor costs?
Material L 88,000 96,000 A. P30,000 C. P25,375
How many pounds of Material Q is Sales planning to buy during the coming year? B. P29,167 D. P26,100
A. 850,000 C. 862,000
B. 890,000 D. 908,000 Cash receipts budget
Sales
. Strama Company prepares its budgets on annual basis. The following beginning and . Generous Company began its operations on January 1 of the current year. Budgeted sales
ending inventory unit levels are planned for the fiscal year of June 1, 2006 through May 31, for the first quarter are P240,000, P300,000, and P420,000, respectively, for January,
2007. February and March. Generous Company expects 20% of its sales cash and the remainder
June 1, 2006 May 31, 2007 on account. Of the sales on account, 70% are expected to be collected in the month of sale,
Raw material* 40,000 50,000 25% in the month following the sale, and the remainder in the following month.
Work-in-process 10,000 10,000 How much should Generous receive from sales in March?
Finished goods 80,000 50,000 A. P304,800 C. P388,800
*Two (2) units of raw material are needed to produce each unit of finished product. B. 294,000 D. P295,200

Credit sales
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. Mendrez Company has a collection schedule of 60% during the month of sales, 15% the The sales on open account have been budgeted for the last six months of 2007 are shown
following month, and 15% subsequently. The total credit sales in the current month of below:
September were P80,000 and total collections in September were P57,000. What were the July P 60,000
credit sales in July? August 70,000
A. P90,000 C. P45,000 September 80,000
B. P30,000 D. P32,000 October 90,000
November 100,000
Cash collections December 85,000
. Obligacion Company has P299,000 in accounts receivable on January 1, 2006. Budgeted The estimated total cash collections during the fourth calendar quarter from sales made on
sales for January are P860,000. Obligacion expects to sell 20% of its merchandise for cash. open account during the fourth calendar quarter would be
Of the remaining sales, 75% are expected to be collected in the month of sale and the A. P172,500 C. P265,400
remainder the following month. B. P230,000 D. P251,400
The January cash collections from sales are:
A. P815,000 C. P471,000 . The Le Amore Company had the following budgeted sales for the first half of the current
B. P691,000 D. P987,000 year:
Cash Sales Credit Sales
. Adel Company has the following sales forecasts for the selected three-month period in January P70,000 P340,000
2007: February 50,000 190,000
Month Sales March 40,000 135,000
April P12,000 April 35,000 120,000
May 7,000 May 45,000 160,000
June 8,000 June 40,000 140,000
Seventy percent of sales are collected in the month of the sale, and the remainder is
collected in the following month. The company is in the process of preparing a cash budget and must determine the expected
Accounts receivable balance (April 1, 2007) P10,000 cash collections by month. To this end, the following information has been assembled:
Cash balance (April 1, 2007) 5,000
Minimum cash balance is P5,000. Cash can be borrowed in P1,000 increments from the Collections on sales: 60% in month of sale
local bank (assume no interest charges). 30% in month following sale
How much cash would be collected in June from sales? 10% in second month following sale
A. P 7,700 C. P 8,000 The accounts receivable balance on January 1 of the current year was P70,000, of which
B. P 8,500 D. P10,000 P50,000 represents uncollected December sales and P20,000 represents uncollected
November sales.
. The Avelina Company has the following historical pattern on its credit sales. The total cash collected by Le Amore Company during the month of January would be:
70 percent collected in month of sale A. P410,000 C. P344,000
15 percent collected in the first month after sale B. P254,000 D. P331,500
10 percent collected in the second month after sale
4 percent collected in the third month after sale Accounts receivable balance
2 percent uncollectible . As of January 1, 2007, the Liberal Sales Company had an account receivable of P500,000.
The sales for January, February, and March were as follows: P1,200,000, P1,400,000 and
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P1,500,000, respectively. Of each month’s sales, 80% is on account. 60% of account

sales is collected in the month of sale, with remaining 40% collected in the following month. Cash disbursements
What is the accounts receivable balance as of March 31, 2007? . Cascades Company, a merchandising firm, is preparing its master budget and has gathered
A. P720,000 C. P587,200 the following data to help budget cash disbursements:
B. P480,000 D. P600,000 Budgeted data:
Cost of goods sold P1,680,000
Credit to accounts receivable Desired decrease in inventories 70,000
. Ironman Company is preparing its cash budget for the month ending November 30. The Desired decrease in Accounts Payable 150,000
following information pertains to Ironman’s past collection experience from its credit sales: All of the accounts payables are for inventory purchases and all inventory items are
Current month’s sales 12% purchased on account. What are the estimated cash disbursements for inventories for the
Prior month’s sales 75% budget period?
Sales two months prior to current month 6% A. P1,460,000 C. P1,900,000
Sales three months prior to current month 4% B. P1,600,000 D. P1,760,000
Cash discounts (2/30, net/90) 2%
Doubtful accounts 1% . Albatross Company started its commercial operations on September 30 of the current year.
Credit sales: Projected manufacturing costs for the first three months of operations are P1,568,000,
November – estimated P2,000,000 P1,952,000, and P2,176,000, respectively. Depreciation, insurance, and property taxes
October 1,800,000 represent P288,000 of the estimated manufacturing costs. Insurance was paid on
September 1,600,000 September 30, and property taxes will be paid in July next year. Seventy-five percent of the
August 1,900,000 remainder of the manufacturing costs are expected to be paid in the month in which they are
How much is the estimated credit to Accounts Receivable as a result of collections expected incurred, with the balance to be paid in the following month. The cash payments for
during November? manufacturing costs in the month of November are:
A. P1,730,200 C. P1,762,000 A. P1,568,000 C. P1,664,000
B. P1,757,200 D. P1,802,000 B. P1,952,000 D. P1,856,000

Increase in accounts receivable Ending cash balance

. Lazaro Company will open a new store on January 1. Based on experience from its other . Albania Company expects its June sales to be P300,000, which is 25% higher than its May
retail outlets, Lazaro is making the following sales projections: sales. Purchases were P200,000 in May and are expected to be P240,000 in June. All sales
are on credit and are collected as follows: 80% in the month of the sale and 20% in the
Cash Sales Credit Sales following month. All payments in the month of sales are given 2% discount. Sixty percent of
January P600,000 P400,000 purchases are paid in the month of purchase to take advantage of purchase term of 1/10,
February 300,000 500,000 n/40. The remaining amount is paid in the following month. The beginning cash balance on
March 400,000 600,000 June 1 is P20,000. The ending cash balance on June 30 would be:
April 400,000 800,000 A. P64,160 C. P80,640
Lazaro estimates that 70% of the credit sales will be collected in the month following the B. P73,000 D. P85,440
month of the sale, with the balance collected in the second month following the sale. Based
on these data, the balance in accounts receivable on January 31 will be increased by Comprehensive
A. 400,000 C. P120,000 Question Nos. 30 through 33 are based on the following information:
B. P280,000 D. P580,000
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Apollo Merchandiser asks your services to develop cash and other budget information for the . The budgeted cash disbursements for the month of February are:
first quarter of 2007. In December 31, the store had the following balance: A. P2,929,000 C. P2,949,000
Cash P 55,000 B. P2,873,790 D. P2,853,790
Accounts receivable 4,370,000
Inventories 3,094,000 . The amount of cash collected from sales during the month of January is:
Accounts payable 1,330,550 A. P3,338,760 C. P3,404,100
B. P3,551,160 D. P3,556,560
The following information are relevant to 2007 operations:
Sales: . The number of units to be purchased during the month of March is:
a. Each month’s sales are billed on the last day of the month. A. 15,860 C. 12,000
b. Customers are allowed a 3 percent discount if payment is made within 10 days after the B. 12,260 D. 15,600
billing date. Receivables are booked gross.
c. Sixty percent of the billings are collected within the discount period, twenty-five percent Rajah Enterprises is a growing retailer of home care products. During the first four months of the
are collected by the end of the month, nine percent are collected by the end of the following year, it forecasts the following sales and purchases:
second month, and six percent are considered entirely uncollectible.
Sales Purchases
Purchases: January P7,200,000 P4,200,000
1. Fifty four percent of all purchases and selling, general, and administrative expenses are February 6,600,000 4,800,000
paid in the month purchased and the remainder in the following month. March 6,000,000 3,600,000
2. Each month’s units of ending inventory is equal to one hundred thirty percent of the next April 7,800,000 5,400,000
month’s units of sales. Rajah collects 70% of sales is collection during the month of sale, 20% the following month and
3. The cost of each unit of inventory is P200. 9% in the second month. 1% of sales are deemed uncollectible.
4. Selling, general, and administrative expenses, of which P20,000 is depreciation, are
equal to fifteen percent of the current month’s sales. In order to fully avail of the 2% discount, Rajah pays all the purchases by the tenth of the month
following the month of purchase.
Actual and projected sales are as follows:
UNITS PESOS Sales for the month of May are expected to be P6,600,000 and the amount of purchases are
November 11,800 P3,540,000 P6,000,000. Operating expenses to be paid during the month of May will be P1,440,000 and the
December 12,100 3,630,000 cash balance by May 1 is P2,200,000.
January 11,900 3,570,000
February 11,400 3,420,000 The Atlanta Corporation has forecast the following sales for the first seven months of the year:
March 12,000 3,600,000
April 12,200 3,660,000 January P120,000 May P120,000
February 160,000 June 200,000
. The respective amounts of budgeted purchases for the months of January and February March 180,000 July 220,000
are: April 240,000
A. P2,418,000 and P2,360,000 C. P2,250,000 and P2,436,000
B. P2,380,000 and P2,280,000 D. P3,570,000 and P3,420,000 Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of
the total material costs, 40 percent are paid in the month of purchase and 60 percent in the
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 Budgeting

following month. Labor costs will run P60,000 per month, and fixed overhead is P30,000 per
month. Interest payments on the debt will be P45,000 for both March and June. Finally, Atlanta’s . During the month of June, Super Sales expects to receive cash from sales amounting to:
sales force will receive a 3 percent commission on total sales for the first six months of the year, to A. P606,000 C. P398,100
be paid on June 30. B. P408,900 D. P359,100

. How much will be paid in the month of January for the purchase of materials? . The cumulative amount of marketable securities purchased as of July 31 amounts to:
A. P 27,200 C. P137,856 A. P126,000 C. P143,300
B. P117,200 D. P 33,600 B. 132,500 D. P 0

. How much does Atlanta plan to disburse in the month of June? . The amount of loan to be obtained to maintain a balance of P50,000 cash as of September 30
A. P 41,600 C. P207,200 will be:
B. P100,000 D. P117,200 A. P109.4 C. P 9.4
B. P 59.4 D. P 0.0
Question Nos. 36 through 38 are based on the following:
Super Sales’ actual sales and purchases for April and May are shown here along with forecasted Question Nos. 39 through 45 are based on the following data:
sales and purchases for June through September. The Ingo Corporation makes standard-size 2-inch fasteners, which it sells for P155 per thousand.
Irine Tee, the major stockholder, manages the inventory and finances of the company. She
Sales Purchases estimates sales for the following months to be:
April (Actual) P390,000 P200,000
May (Actual) 420,000 220,000 January P263,500 (1,700,000 fasteners)
June (forecast) 390,000 210,000 February P186,000 (1,200,000 fasteners)
July (forecast) 350,000 240,000 March P217,000 (1,400,000 fasteners)
August (forecast) 420,000 320,000 April P310,000 (2,000,000 fasteners)
September (forecast) 410,000 230,000 May P387,500 (2,500,000 fasteners)

The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit sales, Last year Ingo Corporation's sales were P175,000 in November and P232,500 in December
30 percent are collected in the month after the sale and 70 percent are collected two months after. (1,500,000 fasteners).
Super Sales pays for 45 percent of its purchases in the month after purchase and 55 percent two
months after. Ms. Tee is preparing for a meeting with Peninsula Banking Corporation to arrange the financing for
the first quarter. Based on her sales forecast and the following information she has provided, you
Labor expense equals 15 percent of the current month's sales. General overhead expense equals have to prepare a monthly cash budget, a monthly and quarterly pro forma income statement, a
P10,000 per month. Interest payments of P35,000 are due in June and September. A cash dividend pro forma quarterly balance sheet, and all necessary supporting schedules for the first quarter.
of P25,000 is scheduled to be paid in June. Tax payments of P30,000 are due in June and
September. There is a scheduled purchase for cash of an equipment, P290,000 in September. Past history shows that Ingo Corporation collects 50 percent of its accounts receivable in the
normal 30-day credit period (the month after the sale) and the other 50 percent in 60 days (two
Super Sales’ ending cash balance in May is P25,000. The minimum desired cash balance is months after the sale). It pays for its materials 30 days after receipt. In general, Ms. Tee likes to
P20,000. The maximum desired cash balance is P50,000. Excess cash (above P50,000) is used keep a two-month supply of inventory in anticipation of sales. Inventory at the beginning of
to buy marketable securities. Marketable securities are sold before borrowing funds in case of a December was 2,600,000 units. (This was not equal to her desired two-month supply.)
cash shortfall (less than P20,000).
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 Budgeting

The major cost of production is the purchase of raw materials in the form of steel rods, which are
cut, threaded, and finished. Last year raw material costs were P52 per 1,000 fasteners, but Ms. Tee . The amount of accounts payable paid in March for the purchase of materials is:
has just been notified that material costs have risen, effective January 1, to P60 per 1,000 A. P150,000 C. P104,000
fasteners. The Ingo Corporation uses FIFO inventory accounting. Labor costs are relatively B. P120,000 D. P130,000
constant at P20 per thousand fasteners, since workers are paid on a piecework basis. Overhead is
allocated at P10 per thousand units, and selling and administrative expense is 20 percent of sales. . The expected cash collections on accounts receivable in the month of February are:
Labor expense and overhead are direct cash outflows paid in the month incurred, while interest A. P224,750 C. P 93,000
and taxes are paid quarterly. B. P248,000 D. P186,000

The corporation usually maintains a minimum cash balance of P25,000, and it puts its excess cash . The amount of accounts receivable outstanding as of March 31, 2007 is:
into marketable securities. The average tax rate is 40 percent, and the company usually pays out A. P217,000 C. P310,000
50 percent of net income in dividends to stockholders. Marketable securities are sold before funds B. P224,750 D. P108,500
are borrowed when a cash shortage is faced. Ignore the interest on any short-term borrowings.
Interest on the long-term debt is paid in March, as are taxes and dividends. . The cost of goods sold for the first quarter of the coming year amounts to:
A. P363,800 C. P426,400
As of year-end, the Ingo Corporation balance sheet was as follows: B. P453,600 D. P373,400
Ingo Corporation
Balance Sheet . The total cash and marketable securities as of January 31 will be:
December 31, 2006 A. P45,450 C. P91,800
B. P25,000 D. P54,450
ASSETS
Current assets: . The expected net income during the first quarter of the coming year is:
Cash P 30,000 A. P 91,080 C. P 96,840
Accounts receivable 320,000 B. P161,400 D. P151,800
Inventory 237,800
Total current assets 587,800 Question Nos. 46 through 48 are based on the Russon Corporation, a retailer whose sales are all
Plant and equipment, net of accumulated depreciation of P200,000 800,000 made on credit. Sales are billed twice monthly, on the 10th of the month for the last half of the prior
Total Assets P1,387,800 month’s sales, and on the 20th of the month for the first half of the current month’s sales. The
terms of all sales are 2/10, net 30. Based upon past experience, the collection of accounts
LIABILITIES AND STOCKHOLDERS’ EQUITY receivable is as follows:
Accounts payable P 93,600
Long-term debt, 8% 400,000 Within the discount period 80%
Common stock 504,200 On the 30th day 18%
Retained earnings 390,000 Uncollectible 2%
Total Liabilities and Stockholders’ Equity P1,387,800
Russon’s average markup on its products is 20% of the sales price. All sales and purchases occur
. The budgeted production respective to each month of the first quarter of the coming year are: uniformly throughout the month. The sales value of shipments for May and the forecasts for the
A. 1,400,000; 2,000,000; 2,500,000 C. 2,500,000; 2,000,000; 1,400,000 next four months follow:
B. 1,400,000; 2,500,000; 2,000,000 D. 2,000,000; 1,400,000; 2,500,000 May (actual) P500,000

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 Budgeting

June 600,000
July 700,000
August 700,000
September 400,000
Russon purchases merchandise for resale to meet the current month’s sales demand and to
maintain a desired monthly ending inventory of 25% of the next month’s sales. All purchases are
on credit with terms of net/30. Russon pays for 50% of a month’s purchases in the month of
purchase and 50% in the month following the purchase.

. How much cash can Russon plan to collect in September from sales made in August?
A. P337,400 C. P400,400
B. P343,000 D. P280,000

. The budgeted peso value of Russon’s inventory on August 31 will be

A. P110,000 C. P112,000
B. P 80,000 D. P100,000

. How much cash can Russon plan to collect from accounts receivable during July?
A. P574,000 C. P619,000
B. P662,600 D. P608,600

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