Exercise 3: Budgeting

A. Past collections experienced by Fox Company proved that 60% of the net sales billed in a month are collected during
the month of sales, 30% are collected in the following month, and 10% are collected in the second following month. A
record of monthly net sales of previous months is as follows:

November 450,000
2020
December 460,000
January 480,000
February 420,000
March 500,000
2021
April 550,000
May 600,000
June 700,000

On January 1, 2021, the net accounts receivable balance showed P229,000.

Required: Determine the following:

 Cash collections on AR during:
1. January 2021 471,000
2. March 2021 474,000
3. May 2021 575,000
 AR balance at the end of
4. February 2021 216,000
5. April 2021 270,000
6. June 2021 340,000

B. The sales manager of Matt Merchandising has budgeted the following sales for the 4 th quarter of 2020: October
P123,500, November P156,000 and December P208,000. Other budgeted estimates are:
 All merchandises are to sell at its invoice cost plus 30% mark up.
 Beginning inventories of each month are budgeted at 40% of that particular month’s projected cost of goods
sold.
Required: Determine the following:
7. Projected merchandise purchases for the month of October.
8. Projected merchandise purchases for the month of November.

C. The following information is taken from Jairus Corporation’s accounting records for the year ended December 31,
2020. These data would be used as the basis for the next year’s cash budget.
a. Customer sales receipts for P870,000
b. Purchased machinery and equipment for P125,000 cash
c. Settled income taxes of P110,000
d. Sold investment securities for P500,000
e. Paid dividends of P600,000
f. Received rentals of P105,000
g. Issued 500 shares of ordinary shares for P250,000
h. Paid a sum of P100,000 due to suppliers and payroll employees
i. Purchases real estate for P550,000 cash that was borrowed from a bank.
j. Paid P450,000 toward a bank loan.

Required: Determine the following:

9. Net cash flow provided by operations for 2020
10. Net cash flow used in investing activities for 2020
11. Net cash flow used in financing activities for 2020
12. Net cash increase or decrease for 2020
Multiple Choice

13. The master budget usually begins with the

a. Production budget b. Operating budget
c. Financial budget d. Sales budget

14. The production budget process usually begins with the

a. Direct labor budget b. Direct materials budget
c. Manufacturing overhead budget d. Sales budget

15. All of the following are considered operating budgets, except the
a. Sales budget b. Materials budget
c. Production budget d. Capital budget

16. Which of these budgets is usually prepared first?

a. Production budget b. Materials purchases budget
c. Cash disbursement budget d. Cash budget

17. Hawaii Inc. has projected sales to be P 260,000 in June, P 270,000 in July and P 300,000 in August. Hawaii collects
30% of a month's sales in the month of sale, 50% in the month following the sale, and 20% in the second month
following the sale. What is the accounts receivable balance on August 31?
a. P 90,000 b. P 210,000
c. P 264,000 d. some other number

18. Arizona Inc. has projected sales: February P10,000, March P9,000; April P8,000; May P 10,000 and June, P 11,000.
Arizona has 30% cash sales and 70% sales on account. Accounts are collected 40% in the month following the sale
and 55% collected the second month. What would be the total cash receipts in May?
a. P 3,000 b. P 8,150
c. P 8,705 d. some other number

19. The Ohio Company has the following historical pattern on its credit sales:
70% collected in the month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
1% uncollectible
The sales on open account have been budgeted for the last six months of 2020 are shown below:
July P60,000
August 70,000
September 80,000
October 90,000
November 100,000
December 85,000
What would be the estimated total cash collections during the fourth calendar quarter from sales made on open
account during the fourth calendar quarter?
a. P 172,500 b. P 230,000
c. P 251,400 d. P 265,400

20. Alabama Consortium is constructing a corporate planning model. Cash sales are 30% of the company's sales, with
the remainder subject to the following collection pattern:
One month after sale 60%
Two months after sale 30%
Three months after sale 8%
Uncollectible 2%

If Sn is defined as total sales in month 'n,' which one of the following expressions correctly describes Alabama’s
collection on account in any given month?
a. 0.6 S n-1 + 0.3 S n-2 + 0.08 S n-3 b. 0.42 S n+1 +0.21 S n+2 + 0.056 S n+3
c. 0.42 S n-1 + 0.21 S n-2 + 0.056 S n-3 d. 0.6 S n-1+0.3 S n-2 + 0.08 S n-3 - 0.02 S
21. Nevada Company manufactures a single product. Nevada keeps inventory of raw materials at 50% of the coming
month's budgeted production needs. Each unit of product requires three pounds of materials. The production budget
is, in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. Determine the raw materials purchases in July.
a. 1,450 pounds b. 2,400 pounds
c. 3,900 pounds d. some other numbers

22. Georgia Co. has projected sales to be P 60,000 in January, P 75,000 in February, and P 80,000 in March. Georgia
wants to have 25% of next month's sales needs on hand at the end of a month. If Georgia has an average gross
profit of 40%, what are the February purchases?
a. P 30,500 b. P 45,750
c. P 46,250 d. P 76,250

23. Philadelphia Company has budgeted sales of 24,000 finished units for the forthcoming 6-month period. It takes 4 lbs.
of direct materials to make one finished unit. Given the following:

Finished Units Direct Materials (pounds)

Beginning inventory 14,000 44,000
Target ending inventory 12,000 48,000

How many pounds of direct materials should be budgeted for purchase during the 6-month period?
a. 92,000 b. 88,000
c. 96,000 d. 100,00

24. Michigan Merchandising is preparing its cash budget for January 2010 and made the following projections:
Sales P1,500,000
Gross Profit Rate 25%
Decrease in Inventories 70,000
Decrease in Accounts Payable for Inventories 120,000

For January 2010, what were the estimated cash disbursements for inventories?
a. P 935,000 b. P 1,050,000
c. P 1,055,000 d. P1,175,000

25. Comparing actual results with a budget based on achieved volume is possible with the use of a
a. Monthly budget b. Master budget
c. Rolling budget d. Flexible budget

26. The use of standard costs in the budgeting process signifies that an organization has most likely implemented a
a. Flexible budget b. Capital budget
c. Zero-based budget d. Static budget

27. Texas Company has prepared the following flexible budget for production costs: costs = 340,000+ 9X, where X is the
number of units produced. Texas produced 20,000 units at a total cost of P 490,000. What is the variance of actual
costs from budgeted costs?
a. P 150,000 favorable b. P 30,000 favorable
c. P 30,000 unfavorable d. P 90,000 unfavorable

28. Which of the following is not an advantage of budgeting?

a. It requires managers to state their objectives.
b. It facilitates control by permitting comparisons of budgeted and actual results.
c. It facilitates performance evaluation by permitting comparisons of budgeted and actual results.
d. It provides a check-up device that allows managers to keep close tabs on their subordinates.

29. Budgets are a necessary component of financial decision making because they provide a (n)
a. Efficient allocation of resources b. Means to use all the firm's resources
c. Means to check managerial discretion d. Automatic corrective mechanism for errors

30. In an organization that plans by using comprehensive budgeting, the master budget is
a. A compilation of all the separate operational and financial budget schedules of the organization
b. The booklet containing budget guidelines, policies and forms to use in the budgeting process
c. The current budget updated for operations for part of the current year
d. A budget for a non-profit entity after it is approved by the appropriate authoritative body
 NOTE: Letter 'b' describes a budget manual.

31. Using the concept of 'expected value' in sales forecasting means that the sales forecast to be used is
a. Developed using the indicator method. b. The sum of the sales expected by individual
c. Based on expected selling prices of the products d. Based on probabilities

32. The budget method that maintains a constant twelve-month planning horizon by adding a new month on the end as
the current month is completed is called
a. An operating budget b. A capital budget
c. A continuous budget d. A master budget

33. A company that uses zero-based budgeting has

a. An expense budget of zero
b. Zero as the starting point of budgeting the coming year's expenses.
c. A zero variance between budgeted and actual performance.
d. An assumed sales level of zero

34. The capital budget is a(n)

a. Plan to ensure that there are sufficient funds available for the operating needs of the company
b. Exercise that sets the long-range goals of the company including the consideration of external influences
caused by others in the market
c. Plan that results in the cash requirements during the operating cycle
d. Plan that assesses the long-term needs of the company for plant and equipment purchases

35. The budget that describes the long-term position, goals, and objectives of an entity is the
a. Capital budget b. Operating budget
c. Cash management budget d. Strategic budget