Chapter 22 Master Budgets and Planning
MULTIPLE CHOICE QUESTIONS
1) Personnel who will have performance evaluated according to the budget standards should not be
consulted and involved in preparing the budget.
A) True
B) False
2) A budget can be an effective means of communicating management’s plans to the employees of a
business.
A) True
B) False
3) Budgets are normally more effective when all levels of management are involved in the budgeting
process.
A) True
B) False
4) Managers must ensure that activities of employees and departments, contribute to meeting the
company’s overall goals.
A) True
B) False
5) One of the major benefits of formal budgeting is the positive effect it can have on employee
attitudes if applied correctly.
A) True
B) False
6) Budgeting is an informal plan for future business activities.
A) True
B) False
7) A budget is a formal statement of future plans, usually expressed in monetary terms.
A) True
B) False
8) Budgets are long-term financial plans that generally cover more than a one-year period.
A) True
B) False
9) The process of evaluating performance can be improved by using budgets.
A) True
B) False
10) Continuous budgeting is the practice of revising the entire set of budgets for the periods remaining
and adding new budgets to replace those for the periods that have elapsed.
A) True
B) False
11) Budget preparation is best determined in a top-down managerial approach.
A) True
B) False
12) The task of preparing a budget should be the sole task of the most important department in an
organization.
A) True
B) False
13) The responsibility for coordinating the preparation of a master budget should be assigned to the
Chief Executive Officer.
A) True
B) False
14) Larger, more complex organizations usually require a longer time to prepare their budgets than
smaller organizations because of the considerable effort to coordinate the different units within the
business.
A) True
B) False
15) A rolling budget is a specific budget application relevant only to a merchandising company.
A) True
B) False
16) The sequence of the budgets within the master budget are dictated by GAAP.
A) True
B) False
17) The number and types of budgets included in a master budget depend on the company’s size and
complexity.
A) True
B) False
18) The capital expenditures budget summarizes the effects of financing activities on cash.
A) True
B) False
19) The capital expenditures budget summarizes the effects of investing activities on cash.
A) True
B) False
20) The merchandise purchases budget depends on information provided by the sales budget.
A) True
B) False
21) The production budget cannot be prepared until the direct materials and direct labor budgets are
prepared.
A) True
B) False
22) The merchandise purchases budget is the starting point for preparing the master budget of a
merchandiser.
A) True
B) False
23) The master budget includes individual budgets for sales, production or purchases, various
expenses, capital expenditures, and cash.
A) True
B) False
24) Part of the budgeting process is summarizing the financial statement effects on the budgeted
income statement and the budgeted balance sheet.
A) True
B) False
25) The budget process rarely coincides with the accounting period.
A) True
B) False
26) A master budget refers to a company’s sales budget that includes all of its segments or departments.
A) True
B) False
27) Activity-based budgeting is a budget system based on expected activities and their levels for the
budget period, which helps management plan for the resources required.
A) True
B) False
28) Traditional budgeting is generally better than activity-based budgeting when attempting to reduce
costs by eliminating non-value-added activities.
A) True
B) False
29) The sales budget is derived from the production budget.
A) True
B) False
30) The production budget is derived from the sales budget and the company’s desired inventory levels.
A) True
B) False
31) A capital expenditures budget is prepared before the operating budgets.
A) True
B) False
32) The selling expenses budget is normally prepared before the sales budget because selling expenses
affect the amount of sales.
A) True
B) False
33) The sales budget comes from a careful analysis of forecasted economic and market conditions,
business capacity, and advertising plans.
A) True
B) False
34) To develop the sales budget, companies must estimate both unit sales and the production cost per
unit.
A) True
B) False
35) A manufacturing budget shows dollar amounts estimated to be spent to purchase additional plant
assets and amounts expected to be received from plant asset disposals.
A) True
B) False
36) A capital expenditures budget shows dollar amounts estimated to be spent to purchase additional
plant assets and amounts expected to be received from plant asset disposals.
A) True
B) False
37) If a merchandiser’s budgeted beginning inventory is $8,300, budgeted ending inventory is $9,400,
and cost of goods sold is expected to be $10,260, then budgeted purchases should be $11,360.
A) True
B) False
38) Part of the cash budget is based on information taken from the capital expenditures budget.
A) True
B) False
39) A cash budget shows the expected cash receipts and cash expenditures during the budget period.
A) True
B) False
40) The budgeted balance sheet is prepared primarily from data contained in the previously prepared
components of the master budget.
A) True
B) False
41) The budgeted balance sheet and income statement are normally completed after preparation of
operating and capital expenditure budgets.
A) True
B) False
42) The financial statement effects of the budgeting process are summarized on the cash budget and the
capital expenditures budget.
A) True
B) False
43) A company’s history indicates that 20% of its sales are for cash and the remaining 80% are on
credit. Collections on credit sales are 30% in the month of the sale and 70% the following month.
Projected sales for January, February, and March are $75,000, $92,000 and $60,000, respectively.
The March expected cash receipts are $80,500.
A) True
B) False
44) A company’s history indicates that 20% of its sales are for cash and the remaining 80% are on
credit. Collections on credit sales are 30% in the month of the sale and 70% the following month.
Projected sales for January, February, and March are $75,000, $92,000 and $60,000, respectively.
The March expected cash receipts are $77,920.
A) True
B) False
45) Production budgets always show both budgeted units of product and total costs for the budgeted
units.
A) True
B) False
46) The manufacturing budgets include the sales budget and the budgeted income statement.
A) True
B) False
47) A formal statement of future plans, usually expressed in monetary terms, is a:
A) Variance report.
B) Prospectus.
C) Position statement.
D) Budget.
E) Variance analysis.
48) The process of planning future business actions and expressing them as a formal plan is called:
A) Variance analysis.
B) Budgeting.
C) Cost accounting.
D) Managerial accounting.
E) Standard cost analysis.
49) All of the following are necessary for budgets to be effective except:
A) Employees affected by a budget should be consulted when it is prepared.
B) Evaluations should be made carefully with opportunities to explain differences between
actual and budgeted amounts.
C) Goals should be challenging and attainable.
D) Managers must be aware of potential negative outcomes of budgeting, such as budgetary
slack.
E) All budgeted amounts must be spent to ensure that budgets aren’t reduced for the next period.
50) Which of the following is not a result of following a well-designed budgeting process?
A) Improved communication of management’s action plans.
B) Assurance of future profits.
C) Improved coordination of business activities.
D) Improved performance evaluations.
E) Improved decision-making processes.
51) Which of the following is a benefit derived from budgeting?
A) Budgeting avoids needing industry and economic factors in decision making.
B) Budgeting avoids the need for incentives to improve employee performance.
C) Budgeting provides a basis for evaluating performance.
D) Budgeting focuses management’s attention on past performance.
E) Budgeting eliminates the need for coordination across departments.
52) Which of the following statements about budgeting is false?
A) The master budget should only be prepared by top management.
B) Budgeting forces managers to think ahead and formalize future objectives.
C) Budgets help coordinate the activities of the entire organization.
D) Budgeting is an aid to planning and control.
E) Budgets create standards for performance evaluation.
53) A budget is best described as:
A) An informal statement of company’s future plans usually expressed in monetary terms.
B) The minimum acceptable performance level.
C) A master control device.
D) A formal statement of a company’s future plans usually expressed in monetary terms.
E) The most crucial component of a company’s evaluation process.
54) The central guidance of the budget process is the responsibility of the:
A) Chief Executive Officer (CEO).
B) Budget Committee.
C) Chief Financial Officer (CFO).
D) Board of Directors.
E) Chief Accounting Officer.
55) Budgets that are periodically revised and have new periods added to replace those that have lapsed
are called:
A) Production budgets.
B) Cash budgets.
C) Sales budgets.
D) Capital expenditures budgets.
E) Rolling budgets.