978-0133423822 Chapter 17 Part 5

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25) Home to House Distributors is preparing a cash budget. The initial conclusion is that

the irm 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

inancing 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 irm’s accounts receivable faster

D) Purchase larger quantities of inventory to take advantage of trade discounts

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

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

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

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 lows that are needed in order to optimize the

price of the irm’s common stock

B) To calculate the amount of future cash lows that would be needed in order to achieve

the optimal level of inancing during the forecast period

C) To determine the amount and timing of short-term inancing 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

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

28) The timing of collections from sales made in past months is an important consideration

for cash budgeting.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

29) Depreciation expense is a deduction from cash low in the cash budget.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

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.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

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 relects the impact of

ixed asset purchases.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

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 irm’s future inancing

needs.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

33) The cash budget ignores discretionary inancing.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

34) A budget is a forecast of future events.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

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 December. Compute cash collections for November and December.

Assume that all months have 30 days.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

36) 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 December. Purchases equal 60% of sales and are made one month in

advance of budgeted sales. Payments are made 1 month after the date of purchase.

Compute payments for purchases for the months of November and December.

Question Status: Previous edition

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

37) The cash budget for Parker Process Meats, Inc. for the fourth quarter of 2014 is given

below:

Parker Process Meats, Inc.

Cash Budget for the Three Months Ending December 31, 2014

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 inal quarter

of 2014 for Parker.

Question Status: Revised

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

38) The treasurer for Brookdale Clothing must decide how much money the company needs

to borrow in July. The balance sheet for June 30, 2014 is presented below:

Brookdale Clothing Balance Sheet

June 30, 2014

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?

Question Status: Revised

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value

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 2014:

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 irst 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.

Question Status: Revised

Objective: 17.3 Prepare a cash budget and use it to evaluate the amount and timing of a irm’s short-

term inancing requirements.

Keywords: cash budgets

Principles: Principle 3: Cash Flows Are the Source of Value