Chapter 07 - Planning for Profit and Cost Control

Exercise 7-1A Ms. Huffman appears to be a person with an attitude problem. She does not understand how to involve her colleagues in the budgeting process. She degrades their input and uses the budget as a tool for criticism. In so doing, Ms. Huffman has failed to gain the support of upper-level management. The attitudes of upper-level management will have a significant impact on the effectiveness of the budget. Subordinates develop a keen awareness of management's expectations. If upper-level managers degrade, make fun of, or ignore the budget, subordinates will rapidly follow suit. If budgets are used to humiliate or embarrass subordinates, they will resent the treatment and the budgeting process that enables it. To be effective, upper-level management must accept and portray the budget as a sincere effort to express realistic goals that employees will be expected to accomplish. The proper atmosphere is essential to budgeting success. Once a negative pattern has been established, it is difficult to change. Perhaps the most effective solution in this case is to replace Ms. Huffman. Exercise 7-2A a. Sales Budget Cash sales Sales on account Total budgeted sales January $ 40,000 100,000 $140,000 February $ 44,000 110,000 $154,000 March $ 48,400 121,000 $169,400

b. The amount of sales revenue appearing on the 1st quarter income statement is the sum of the monthly amounts ($140,000 + $154,000 + $169,400 = $463,400). Exercise 7-3A a.
Schedule of Cash Receipts Current cash sales Plus collections from accounts receivable Total budgeted collections July August September $ 70,000 $ 75,000 $ 80,000 300,000 90,000 108,000 $370,000 $165,000 $188,000

b.

The current months sales on account will be collected in the following month. Accordingly, the amount of accounts receivable at the end of September is equal to Septembers sales on account ($129,600).

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Chapter 07 - Planning for Profit and Cost Control

Exercise 7-5A a. Sales for January are expected to be $392,000 ( $560,000 x 0.70) Beginning accounts receivable balance January sales on account Available for collection Less: Ending accounts receivable balance Cash collected $ 96,400 392,000 488,400 (73,600) $414,800

b. It is reasonable to assume that sales will decline in January. Customers tend to buy merchandise in December for Christmas gifts and to cut back on buying in January immediately after Christmas. Exercise 7-7A a. Inventory Purchases Budget Budgeted cost of goods sold Plus: Desired ending inventory Total inventory needed Less: Beginning inventory Required purchases (on account) January $50,000 5,400 55,400 5,000 $50,400 February $ 54,000 6,000 60,000 5,400 $ 54,600 March $60,000 7,500 67,500 6,000 $61,500

b.

The amount of cost of goods sold appearing on the first quarter pro forma income statement is the sum of the monthly amounts ($50,000 + $54,000 + $60,000 = $164,000). Since the quarter ends on March 31, the ending inventory for March is also the ending inventory for the quarter, $7,500.

c.

Exercise 7-8A a. Schedule of Cash Payments for Inventory Purchases April May Payment for current accounts payable $90,000 $108,000
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June $118,800

Chapter 07 - Planning for Profit and Cost Control

Payment for previous accounts payable Total budgeted payments for inventory

8,000 10,000 $98,000 $118,000

12,000 $130,800

b. Since 90% of the current purchases on account are paid in cash during the month of purchase, 10% will remain payable at the end of the month, $13,200 ($132,000 x 0.10). Exercise 7-9A a. Budgeted cost goods sold for July is $315,000 ($300,000 x 1.05) Ending inventory balance Budgeted cost of goods sold Total inventory needed Less: Beginning inventory balance Budgeted purchases b. $ 29,000 315,000 344,000 (28,000) $316,000 $ 35,000 221,200 $256,200

Junes payables balance paid in July Cash paid for July purchases ($316,000 x 0.70) Projected cash payments for July

Exercise 7-12A a. Budgeted payments for January: Sales commissions Rent Miscellaneous Total* $25,000 16,000 2,000 $43,000

*The amount of utilities is not included because the cash payment will be made in February. The amount of depreciation is not included because the depreciation does not require a cash payment. Recall that cash is paid at the time of purchase rather than when the depreciation is recognized.

b. The full $5,000 balance for the utilities charge will remain payable at the end of January. c. The problem implies that the monthly charge for depreciation is $4,000. Accordingly, the amount of depreciation to be recognized on an annual income statement would be $48,000 ($4,000 x 12). Exercise 7-13A a.
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Chapter 07 - Planning for Profit and Cost Control

Cash Budget Section 1: Cash receipts Beginning cash balance Add cash receipts Total cash available (a) Sections 2: Cash Payments For inventory purchases For S&A expenses For interest exp at 2% per month Total budgeted disbursements (b) Sections 3: Financing Activities Cash surplus (shortage) (a b=c) Borrowing (repayment) (dc) Ending cash balance (d)
1 2

July $ 42,500 180,000 222,500 165,526 54,500 0 220,026 2,474 11,526 $ 14,000

August $ 14,000 200,000 214,000 140,230 60,560 2311 201,021 12,979 1,021 $ 14,000

September $ 14,000 240,600 254,600 174,152 61,432 2512 235,835 18,765 (4,765) $ 14,000

11,526 x 2% = 231 (rounded) (11,526+1,021) x 2% = 251 (rounded). Note that $4,765 is repaid at the end of month in addition to interest that still has to be paid in September.

b. Cash flow from operating activities is equal to total (i.e., sum of the monthly amounts) cash receipts from customers minus the total (i.e., sum of the monthly amounts) of cash payments for inventory, S&A expense, and interest [i.e., $620,600 ($220,026 + $201,021 + $235,835) = ($36,282) net cash outflow.] c. Cash flow from financing activities is the amount borrowed less repayments (i.e., $11,526 + $1,021 $4,765 = $7,782 net cash inflow.)

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