Deck 7: Introduction to Budgets and Preparing the Master Budget

Question 1

Participative budgeting is the active participation of all affected employees in the formulation of the budget.

Answer 1

True

Question 2

Potential problems that can limit the benefits 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 functional budgeting

Answer 2

D

Question 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 3

C

Question 4

Budgeting can result in incentives to lie and cheat that undermine ________.

A) a company's ethical standards
B) a company's value chain
C) standard of objectivity promulgated by the Institute of Management Accountants
D) none of the above

Question 5

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

Question 6

Budgeted performance goals generally provide a better basis for evaluating actual performance than past performance.

Question 7

There are fewer benefits from budgeting in companies with uncertain or complicated environments.

Question 8

A major drawback of using historical results for judging current performance is that inefficiencies may be concealed in past performance.

Question 9

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

Question 10

A budget is an example of an informal business plan.

Question 11

In practice,when developing a budget,two extremes used for guidance are ________ and ________.

A) participative budget; zero-base budget
B) strategic budget; long-range budget
C) financial planning budget; strategic budget
D) zero-base budget; activities of current or prior period

Question 12

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

Question 13

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

Question 14

An effective budget process communicates from the top down,but not from the bottom up.

Question 15

________ budgeting is when budgets are formulated with the active involvement of all affected employees.

A) Rolling
B) Team
C) Participative
D) Zero-based

Question 16

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

Question 17

Which of the following statements about budgets and budgeting is FALSE?

A) Budgets help coordinate financial and operational activities.
B) The vast majority of managers use budgeting as an effective cost management tool.
C) Budgeting is the process of formulating an organization's plans.
D) Managers do not use budgets for performance evaluation.

Question 18

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) sales goals; bonuses
D) resource goals; bonuses

Question 19

The effectiveness of any budgeting system depends directly on the attitudes of top management toward the budgeting system.

Question 20

Factors that affect employee acceptance of budgets include ________.

A) perceived attitude of top management towards budgeting
B) level of participation by employees in budget process
C) degree of alignment between budget and employees' performance goals
D) all of the above

Question 21

Budgetary slack helps buffer managers from budget cuts imposed by higher-level management.

Question 22

Important factors used to forecast sales for a company include all of the following items EXCEPT ________.

A) changes in firm's prices
B) general economic conditions
C) changes in product mix
D) layout of production equipment

Question 23

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

Question 24

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.

Question 25

Managers may ________ their budgeted costs or ________ their budgeted revenue to create a budget target that is easier to achieve.

A) understate; overstate
B) overstate; understate
C) understate; understate
D) overstate; overstate

Question 26

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

Question 27

Which of the following budgets identifies the overall goals and objectives of the organization?

A) capital budget
B) cash budget
C) master budget
D) strategic plan

Question 28

A company identifies the following goals and objectives:
Increase sales 10 percent each year.
Increase profits 5 percent each year.
Increase total plant assets 5 percent each year.
Which of the following budgets identifies the overall goals and objectives of an organization?

A) sales budget
B) master budget
C) strategic plan
D) financial planning model

Question 29

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

Question 30

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.

Question 31

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

Question 32

Accurate sales forecasting is essential to effective budgeting.

Question 33

Which schedule gives the expected sales under a given set of conditions?

A) sales goal
B) sales budget
C) sales forecast
D) master budget

Question 34

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

Question 35

A manager has several forecasts of sales corresponding to different levels of advertising.The manager decides to implement $1 million of advertising in the next fiscal year.At this level of advertising,the manager uses the ________ in the ________.

A) sales goal; sales forecast
B) sales budget; sales forecast
C) sales forecast; sales goal
D) sales forecast; sales budget

Question 36

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

Question 37

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

Question 38

When examining a master budget,where does a company find the planned expenditures for facilities and equipment?

A) operating expense budget
B) capital budget
C) operating budget
D) purchases budget

Question 39

No matter how many technical experts a company uses in forecasting,the sales budget should ultimately be the responsibility of the ________.

A) economists
B) CEO
C) line managers
D) market research staff

Question 40

Where does a company find forecasted financial statements for a five to ten year period?

A) strategic plan
B) master budget
C) rolling budget
D) long-range plan

Question 41

In a master budget,a capital budget is used to prepare the ________.

A) sales budget
B) budgeted income statement
C) purchases and cost of goods sold budget
D) cash budget

Question 42

The financial budget includes ________.

A) the capital budget and the sales budget only
B) the capital budget and the budgeted income statement only
C) the capital budget, the cash budget and the budgeted balance sheet
D) the cash budget and the purchases budget only

Question 43

In a master budget,the schedule of cash disbursements for operating expenses is used to prepare the ________.

A) capital budget
B) purchases and cost of goods sold budget
C) sales budget
D) cash budget

Question 44

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

Question 45

The most forward-looking and least detailed budget is the strategic plan.

Question 46

A decision made during long-range planning includes whether to delete a product from a company's product line.

Question 47

Sales forecasts are usually prepared under the direction of the top sales executive.

Question 48

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

A) capital budget
B) purchases and cost of goods sold budget
C) budgeted income statement
D) operating expense budget

Question 49

The elements of a financial budget for a merchandising firm include the capital budget,the cash budget and the budgeted balance sheet.

Question 50

An operating budget is the major part of the master budget that focuses on the balance sheet and supporting schedules.

Question 51

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

A) sales budget
B) operating expense budget
C) capital budget
D) budgeted income statement

Question 52

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

Question 53

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

Question 54

The final output of the operating budget is ________.

A) budgeted statement of stockholders' equity
B) budgeted balance sheet
C) budgeted income statement
D) budgeted statement of cash flows

Question 55

Which budget guides day-to-day operations in a business?

A) sales budget
B) strategic plan
C) master budget
D) long-range plan

Question 56

In a master budget,the schedule of cash disbursements for purchases of inventory is used to prepare the ________.

A) operating expense budget
B) purchases budget
C) capital budget
D) cash budget

Question 57

A cash budget is a business plan that includes a set of schedules and financial statements.

Question 58

The ________ budget focuses on the budgeted income statement and the supporting schedules.

A) financial
B) operating
C) operating expense
D) purchases and cost of goods sold

Question 59

The master budget is a detailed and comprehensive analysis of the ________ of the ________ plan.

A) first month; activity-based strategic
B) first month; strategic
C) first year; continuous
D) first year; long-range

Question 60

The sales budget should be the responsibility of line management.

Question 61

Which budget is used to develop the schedule of cash disbursements for operating expenses?

A) purchases and cost of goods sold budget
B) cash disbursements budget
C) operating expense budget
D) cash budget

Question 62

When preparing the budgeted income statement,which of the following is the source for the amount of operating expenses?

A) schedule of disbursements for operating expenses
B) purchases budget
C) schedule of disbursements for purchases
D) operating expense budget

Question 63

Downstairs Company has the following sales budget for the last six months of 2010:
$\begin{array}{ll}\text { July } & \$ 100,000 \\\text { August } & 80,000 \\\text { September } & 110,000 \\\text { October } & 80,000 \\\text { November } & 100,000 \\\text { December } & 94,000\end{array}$
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 are the expected cash collections of sales in October?

A) $79,500
B) $85,900
C) $92,400
D) $99,500

Question 64

Upstairs Company has the following data:
$\begin{array}{ll}\text { Month }&\text { Budgeted Sales }\\\text { January } & \$ 108,000 \\\text { February } & 132,000 \\\text { March } & 144,000 \\\text { April } & 120,000\end{array}$
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

Question 65

Michael Company has a sales budget for next month of $300,000.Cost of goods sold is expected to be 50% 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) $138,000
B) $140,000
C) $150,000
D) $152,000

Question 66

For next year,David Company has budgeted sales of 8,000 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) 8,700

Question 67

What is the sequence of steps(order of preparation)for the operating budget?

A) sales budget, operating expense budget, purchases and cost of goods sold budget
B) sales budget, capital budget, operating expense budget
C) sales budget, purchases and cost of goods sold budget, schedule of cash collections from customers, operating expense budget
D) sales budget, schedule of cash collections from customers, purchases and cost of goods sold budget, schedule of cash disbursements for purchases, operating expense budget

Question 68

The schedule of cash disbursements for purchases uses the ________.

A) sales budget
B) operating expense budget
C) schedule of cash disbursements for operating expenses
D) purchases and cost of goods sold budget

Question 69

Benjamin Company has the following data:
$\begin{array}{ll}\text { Month }&\text { Budgeted Sales }\\\text { January } & \$ 108,000 \\\text { February } & 132,000 \\\text { March } & 144,000 \\\text { April } & 120,000\end{array}$
Cost of goods sold average 60% of sales.The inventory at December 31 was $19,440.Desired ending inventory levels are 20% of next month's sales at cost.What is the desired ending inventory value at February 28?

A) $15,840
B) $17,280
C) $26,400
D) $28,800

Question 70

The schedule of cash collections from customers has ________.

A) cash sales only
B) collections on credit sales only
C) A and B
D) budgeted purchases

Question 71

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 budgeted income statement.
D) Output from the financial budget is used to prepare the operating expense budget.

Question 72

The first step in preparing the financial budget is the ________.

A) cash budget
B) capital budget
C) operating expense budget
D) sales budget

Question 73

When preparing the budgeted income statement,which of the following is the source for the amount of sales?

A) sales budget
B) purchases budget
C) operating expense budget
D) schedule of cash collections from customers

Question 74

What is the sequence of steps(order of preparation)for the financial budget?

A) sales budget, capital budget, cash budget, budgeted income statement
B) sales budget, operating expense budget, purchases and cost of goods sold budget
C) capital budget, cash budget, budgeted balance sheet
D) disbursements for purchases, disbursements for operating expenses, cash budget

Question 75

The schedule of cash disbursements for operating expenses does NOT have ________.

A) rent expense
B) insurance expense
C) wages expense
D) amortization expense on patents

Question 76

The final output of the financial budget is ________.

A) budgeted statement of stockholders' equity
B) budgeted balance sheet
C) budgeted income statement
D) budgeted statement of cash flows

Question 77

When preparing the budgeted income statement,which of the following is the source for the amount of Cost of Goods Sold?

A) sales budget
B) operating expense budget
C) schedule of disbursements for operating expense
D) purchases and cost of goods sold budget

Question 78

What item is NOT a line item on the purchases and cost of goods sold budget?

A) purchases of inventory
B) sales
C) beginning inventory
D) desired ending inventory

Question 79

Matthew Company has a sales budget for next month of $400,000.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 $5,000 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) $160,000
C) $172,000
D) $220,000

Question 80

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

A) cash budget
B) capital budget
C) operating expense budget
D) sales budget