31
9) Under what circumstances does a firm violate the basic relationship underlying the percent of sales
forecast method?
Answer: The percent of sales method of financial forecasting provides reasonable estimates of a firm’s
financing requirements only when asset requirements and financing sources can be accurately forecast as
a constant percent of sales. There are some fairly common instances in which this type of relationship
fails to describe the relationship between an asset category and sales. Two such examples involve assets
for which there are scale economies and assets that must be purchased in discrete quantities (“lumpy
assets”). Economies of scale are sometimes realized from investing in certain types of assets. These assets
do not increase in direct proportion to sales. A lumpy asset, is an asset that must be purchased in large,
nondivisible components.
Diff: 2 Page Ref: 473
Keywords: Percent of Sales Method
Learning Obj.: L.O. 14.2
AACSB: Reflective Thinking
Learning Objective 14.3
1) Budgets should not be used for performance evaluation because there is too much uncertainty
involved and this makes it unfair to the person being evaluated.
Keywords: Budget, Performance Evaluation
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
2) The percent of sales method provides a more detailed plan for future financing needs than the cash
budget because both pro forma income statements and balance sheets are used in the analysis.
Keywords: Percent of Sales Method, Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
3) Cash budgets do not provide reasonable predictions for asset requirements when the asset purchases
are lumpy.
Keywords: Cash Budget, Lumpy Assets
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
4) The percent of sales method provides a general estimate, but the more detailed cash budget will
ultimately be used to estimate financing needs.
Keywords: Percent of Sales Method, Cash Budget, Financing Needs
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
32
5) Cash budgets are completed only on an annual basis because shorter periods of time are too variable
and uncertain for meaningful results.
Keywords: Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
6) The annual cash budget not only shows the amount of financing needed for the year, but also when the
funds will be needed.
Keywords: Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
7) The cash budget is composed of four elements: cash receipts, cash disbursements, depreciation, and the
net change in cash for the period.
Keywords: Cash Budget, Depreciation
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
8) Monthly cash receipts in the cash budget are typically made up of cash sales during the month and
collections from credit sales from prior months.
Keywords: Cash Receipts, Credit Sales, Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
9) A budget is a forecast of future events.
Keywords: Budget, Forecast
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
10) The cash budget represents a detailed plan of future cash flows.
Keywords: Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
33
11) The cash budget can be used to provide an estimate of the firm‘s future financing needs.
Keywords: Cash Budget, Financing Needs
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
12) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales
30% in the month of sale, 60% one month after the sale, and 10% two months after the sale.
Cash Sales
Credit Sales
January
$50,000
$50,000
February
$70,000
$110,000
March
$55,000
$95,000
April
$78,000
$130,000
May
$80,000
$105,000
June
$75,000
$148,000
What are Matterhorn’s total cash receipts for the month of March?
A) $99,500
B) $119,000
C) $150,000
D) $154,500
Keywords: Cash Budget, Cash Receipts
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
34
13) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales
30% in the month of sale, 60% one month after the sale, and 10% two months after the sale.
Cash Sales
Credit Sales
January
$50,000
$50,000
February
$70,000
$110,000
March
$55,000
$95,000
April
$78,000
$130,000
May
$80,000
$105,000
June
$75,000
$148,000
What are Matterhorn’s total cash receipts for the month of April?
A) $208,000
B) $176,000
C) $168,000
D) $98,000
Keywords: Cash Budget, Cash Receipts
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
14) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales
30% in the month of sale, 60% one month after the sale, and 10% two months after the sale.
Cash Sales
Credit Sales
January
$50,000
$50,000
February
$70,000
$110,000
March
$55,000
$95,000
April
$78,000
$130,000
May
$80,000
$105,000
June
$75,000
$148,000
What are Matterhorn’s total cash receipts for the month of May?
A) $185,000
B) $199,000
C) $119,000
D) $176,000
Keywords: Cash Budget, Cash Receipts
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
35
15) Matterhorn, Inc. had the following sales for the past six months. Matterhorn collects its credit sales
30% in the month of sale, 60% one month after the sale, and 10% two months after the sale.
Cash Sales
Credit Sales
January
$50,000
$50,000
February
$70,000
$110,000
March
$55,000
$95,000
April
$78,000
$130,000
May
$80,000
$105,000
June
$75,000
$148,000
What are Matterhorn’s total cash receipts for the month of June?
A) $120,400
B) $147,000
C) $195,400
D) $213,000
Keywords: Cash Budget, Cash Receipts
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
16) ABC Corporation began operations on January 1st of this year with a cash balance of $250,000. ABC
had sales of $200,000 for the month of January, all on credit. ABC allows its customers 30 days to pay.
ABC’s expenses for January equal $150,000, and ABC’s ending balance in accounts payable at January 31st
is $50,000. In its cash budget for January, ABC‘s ending cash balance should be equal to
A) $300,000 because of GAAP accrual accounting rules.
B) $150,000.
C) $200,000.
D) $100,000.
Keywords: Cash Receipts, Cash Budget, Credit Sales
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
36
17) Plimpton Sales presents income statements for the first three months of this year. Revenues are
$1,000,000 in January, $1,200,000 in February, and $1,400,000 in March, while expenses total $800,000 in
January, $900,000 February, and $1,000,000 in March. Despite the positive net income, the controller
believes Plimpton Sales needs to arrange short-term financing of $300,000 to make payroll the next
month. Which of the following statements is MOST correct?
A) The controller must have made a mistake since the company‘s net income for the three months is
$900,000.
B) The company‘s accounts receivable balance has decreased over the past three months.
C) The company‘s accounts payable balance has increased over the past three months.
D) The company‘s accounts receivable balance has increased and the accounts payable balance has
decreased over the past three months.
Keywords: Cash Receipts, Cash Disbursements, Accrual Accounting, Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
18) Which of the following statements is MOST correct concerning the relationship between a company‘s
cash budget and its income statement?
A) If net income is positive for 3 or more months in a row, then cash flow must be positive.
B) If net income is positive, then cash flow must be positive.
C) If net income is positive, then cash flow could be positive or negative, but if net income is negative,
cash flow must also be negative.
D) Cash flow could be positive whether net income is positive or negative.
Keywords: Cash Budget, Net Income
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
37
19) CraftCo, Inc.’s projected sales for the first six months of 2012 are given below:
Jan.
$500,000
April
$490,000
Feb.
$740,000
May
$740,000
Mar.
$380,000
June
$610,000
40% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and
the remaining 10% are collected in the second month following the sale. Cost of goods sold is 60% of
sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the
month of the sale. Total other cash expenses are $40,000/month. The company‘s cash balance as of
February 28, 2012 will be $25,000. Excess cash will be used to retire short-term borrowing (if any).
CraftCo, Inc. has no short term borrowing as of February 28, 2012. Assume that the interest rate on short–
term borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at the
beginning of each month. What is CraftCo, Inc.’s total cash receipts for April 2010?
A) $460,000
B) $490,000
C) $524,000
D) $560,000
Keywords: Cash Budget, Cash Receipts
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
20) CraftCo, Inc.’s projected sales for the first six months of 2012 are given below:
Jan.
$500,000
April
$490,000
Feb.
$740,000
May
$740,000
Mar.
$380,000
June
$610,000
40% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and
the remaining 10% are collected in the second month following the sale. Cost of goods sold is 60% of
sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the
month of the sale. Total other cash expenses are $40,000/month. The company‘s cash balance as of
February 28, 2012 will be $25,000. Excess cash will be used to retire short-term borrowing (if any).
CraftCo, Inc. has no short term borrowing as of February 28, 2012 Assume that the interest rate on short–
term borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at the
beginning of each month. What is CraftCo, Inc.’s total cash disbursements for April 2012?
A) $294,000
B) $334,000
C) $374,000
D) $414,000
Keywords: Cash Disbursements, Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
38
21) CraftCo, Inc.’s projected sales for the first six months of 2012 are given below:
Jan.
$500,000
April
$490,000
Feb.
$740,000
May
$740,000
Mar.
$380,000
June
$610,000
40% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and
the remaining 10% are collected in the second month following the sale. Cost of goods sold is 60% of
sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the
month of the sale. Total other cash expenses are $40,000/month. The company‘s cash balance as of
February 28, 2012 will be $25,000. Excess cash will be used to retire short–term borrowing (if any).
CraftCo, Inc. has no short term borrowing as of February 28, 2012. Assume that the interest rate on short–
term borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at the
beginning of each month. What is CraftCo, Inc.’s earnings before interest and taxes for April 2012?
A) $156,000
B) $142,000
C) $133,000
D) $ 93,000
Keywords: Pro Forma Income Statement
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
22) A firm‘s cash position would most likely be helped by
A) delaying payment of accounts payable.
B) more liberal credit policies for their customers.
C) purchasing land for investment purposes.
D) holding larger inventories.
Keywords: Cash Budget, Cash Balance
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
23) A firm‘s cash position would most likely be hurt by
A) decreasing excess inventory.
B) establishing stricter (shorter) credit terms.
C) retiring outstanding debt.
D) increasing the net profit margin.
Keywords: Cash Budget, Cash Balance
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
39
24) All of the following are found in the cash budget EXCEPT
A) a net change in cash for the period.
B) accounts receivable.
C) cash disbursements.
D) new financing needed.
Keywords: Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
25) The primary purpose of a cash budget is to
A) determine the level of investment in current and fixed assets.
B) determine financing needs.
C) provide a detailed plan of future cash flows.
D) determine the estimated income tax for the year.
Keywords: Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
26) Which of the following is always a non-cash expense?
A) income taxes
B) salaries
C) depreciation
D) none of the above
Keywords: Depreciation, Non-cash Expense, Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Reflective Thinking
27) A company collects 25% of its sales during the month of sale, 65% one month after the sale, and 10%
two months after the sale. The company expects sales of $50,000 in August, $80,000 in September, $90,000
in October, and $60,000 in November. How much money is expected to be collected in October?
A) $90,000
B) $79,500
C) $55,000
D) $22,500
Keywords: Cash Receipts, Accounts Receivable, Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
40
28) Plato Industries’ projected sales for the first six months of 2012 are given below:
Jan.
$250,000
April
$300,000
Feb.
$340,000
May
$350,000
Mar.
$280,000
June
$380,000
20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and
the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of
sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the
month of the sale. Total other cash expenses are $70,000/month. The company‘s cash balance as of
February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato
has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The
company must have a minimum cash balance of $40,000 at the beginning of each month. What is Plato
Industries’ total cash receipts for April 2012?
A) $340,000
B) $326,000
C) $302,000
D) $300,000
Keywords: Cash Budget, Cash Receipts
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking
29) Plato Industries’ projected sales for the first six months of 2012 are given below:
Jan.
$250,000
April
$300,000
Feb.
$340,000
May
$350,000
Mar.
$280,000
June
$380,000
20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and
the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of
sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the
month of the sale. Total other cash expenses are $70,000/month. The company‘s cash balance as of
February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato
has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The
company must have a minimum cash balance of $40,000 at the beginning of each month. What is Plato
Industries’ total disbursement in May?
A) $367,500
B) $348,000
C) $425,500
D) $324,000
Keywords: Cash Disbursements, Cash Budget
Learning Obj.: L.O. 14.3
AACSB: Analytical Thinking