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1, 2004?
A) $32,000
B) $4,300
C) $25,000
D) None of the above
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
20) The primary purpose of a cash budget is to:
A) determine the level of investment in current and fixed assets.
B) determine accounts payable.
C) provide a detailed plan of future cash flows.
D) determine the estimated income tax for the year.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
21) Your firm is trying to determine its cash disbursements for the next two months (June and
July). In any month, the firm makes purchases of 60% of that month's sales, which are paid the
following month. In addition, the firm incurs the following costs every month and pays for them
in the month the expenses are incurred: wages/salaries of $10,000, rent of $4,000, and
miscellaneous cash expenses of $1,000. Depreciation amortized on a monthly basis is $2,000.
June's sales are expected to be $100,000, and July's sales are expected to be $150,000. Cash
disbursements for the month of July are expected to be:
A) $105,000.
B) $107,000.
C) $77,000.
D) $75,000.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
30
22) As of December 31, Budget, Inc. had a cash balance of $50,000. December sales were
$150,000 and are expected to be $100,000 in January. 20% of sales in any month are cash sales,
and 80% of sales are collected during the following month. In January, Budget is expected to
have total cash disbursements of $120,000, and Budget requires a minimum cash balance of
$50,000. Budget's expected cash receipts for January are:
A) $80,000.
B) $100,000.
C) $110,000.
D) $140,000.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
23) Which of the following is NOT an element of the cash budget?
A) Cash receipts
B) Cash disbursements
C) Depreciation expense
D) New financing needed
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
24) Which of the following will decrease cumulative borrowing on the cash budget?
A) A decrease in interest expense
B) A decrease in collections
C) An increase in equipment purchases
D) Both A and B
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
31
25) Home to House Distributors is preparing a cash budget. The initial conclusion is that the firm
will need to borrow more money than its bank is willing to lend. Which of the following actions
could Home to House Distributors perform to reduce its need for bank financing this year?
A) Pay cash for purchasing inventory instead of having to rely on trade credit
B) Prepay next year's quarterly income tax payments
C) Try to collect the firm's accounts receivable faster
D) Purchase larger quantities of inventory to take advantage of trade discounts
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
26) Which of the following expenses should be included as a cash outlay in the preparation of a
cash budget?
A) The payment of accounts payable
B) The payment of depreciation expense
C) The payment of accrued income taxes
D) All of the above
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
27) The preparation of a cash budget serves which of the following purposes?
A) To estimate the amount and timing of cash flows that are needed in order to optimize the price
of the firm's common stock
B) To calculate the amount of future cash flows that would be needed in order to achieve the
optimal level of financing during the forecast period
C) To determine the amount and timing of short-term financing that would be required for the
operation of a business during the forecast period
D) To estimate the amount of sales volume that would be required in order to achieve the break-
even point
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
32
28) The cash budget consists of all the following factors EXCEPT:
A) cash receipts.
B) cash disbursements.
C) new financing needed.
D) net income.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
29) Depreciation expense is a deduction from cash flow in the cash budget.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
30) The percent-of-sales method is more detailed than the cash budget method.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
31) Depreciation expense is always included in the cash budget as it reflects the impact of fixed
asset purchases.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
32) The cash budget can be used to provide an estimate of the firm's future financing needs.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
33) The cash budget ignores discretionary financing.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
33
34) A budget is a forecast of future events.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
35) Broad Cloth, Inc.'s average collection period is 15 days. The vice-president of marketing has
projected credit sales of $2. million for October, $2.5 million for November and $3 million for
30 days.
5(3,000,000) = $2,750,000.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
34
37) The cash budget for Parker Process Meats, Inc. for the fourth quarter of 2004 is given below:
Parker Process Meats, Inc.
Cash Budget for the Three Months Ending December 31, 2004
Cash receipts Oct. Nov. Dec.
Total collections $31,050 $4,050 $49,950
Cash disbursements:
Purchases 44,550 48,600 52,650
Wages and salaries 7,425 7,425 7,425
Other expenses 2,025 1,350 675
Taxes 17,415
Total disbursements $54,000 $57,375 $78,165
The expected sales for the period are as follows:
Oct.: $86,400 Nov.: $91,800 Dec.: $83,700
The total depreciation expense for the period will be $8,775. An interest payment on outstanding
debt of $15,000 will be made in December. Using the information given, construct a pro forma
income statement for the final quarter of 2004 for Parker.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
35
38) The treasurer for Brookdale Clothing must decide how much money the company needs to
borrow in July. The balance sheet for June 30, 2004 is presented below:
Brookdale Clothing Balance Sheet
June 30, 2004
Cash $75,000 Accounts payable $400,000
Marketable securities 100,000 Long-term debt 300,000
Accounts receivable 300,000 Common stock 100,000
Inventory 250,000 Retained earnings 200,000
Total current assets 725,000 Total liabilities and
Fixed assets 275,000 stockholder's equity $1,000,000
Total assets $1,000,000
The company expects sales of $250,000 for July. The company has observed that 25% of its sales
is for cash and that the remaining 75% is collected in the following month. The company plans to
purchase $400,000 of new clothing. Usually 40% of purchases is for cash and the remaining 60%
of purchases is paid in the following month. Salaries are $100,000 per month, lease payments are
$50,000 per month, and depreciation charges are $20,000 per month. The company plans to
purchase a new building for $200,000 in July and sell its marketable securities for $100,000. If
the company must maintain a minimum cash balance of $50,000, how much money must the
company borrow in July?
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
36
39) The ZYX Corporation is planning to request a line of credit from its bank and wants to
estimate its cash needs for the month of September. The following sales forecasts have been
made for 2005:
July $500,000
August $400,000
September $300,000
October $200,000
November $100,000
Collection estimates were obtained from the credit collection department as follows: 20%
collected within the month of sale; 70% collected the first month following the sale; and 10%
collected the second month following the sale. Payments for labor and raw materials are
typically made in the month in which these costs are incurred. Total labor and raw material costs
each month are 50% of sales. General administrative expenses are $30,000 per month, lease
payments are $10,000 per month, and depreciation charges are $20,000 per month. The
corporation tax rate is 40%; however, no corporate taxes are paid in September. Prepare a cash
budget for September.
Topic: 17.3 Developing a Short-Term Financial Plan
Keywords: cash budgets
Principles: Principle 3: Cash Flows Are the Source of Value
37
