2/18/24, 10:17 PM Part_1 - Test Bank - Assessment Review

Question 1
1.B.5.v
aq.ce.cb.007_0720
LOS: 1.B.5.v
Lesson Reference: Capital Expenditures and Cash Budgets
Difficulty: medium
Bloom Code: 4

The following information is available for Better Bottle Company, a producer of durable reusable water bottles:

Sales Budget
January 8,000 units
February 7,800 units
March 8,500 units

Inventory Data
Accounts Payable Balance, Jan 1 $59,000
Beginning Inventory Jan 1 1,800 units
Desired Ending Inventory, March 31 2,300 units

Additional information:

Desired inventory at the end of each month is 25% of next month's sales.
The purchase price of inventory is $35 per unit.
Each month 80% of purchases is paid by the end of the month. The remaining 20% is paid in the following month.

Prepare the inventory purchase payments schedule for January, February, and March. What are the cash payments on purchases for each of these
months, respectively?

Your Answer

$228,200 for January, $223,300 for February, and $242,900 for March

$285,250 for January, $279,125 for February, and $303,625 for March
Correct

$287,200 for January, $280,350 for February, and $298,725 for March

$280,000 for January, 273,000 for February, and 297,500 for March.

Rationale
 $228,200 for January, $223,300 for February, and $242,900 for March
These amounts represent current month purchase payments. However, past month purchase payments must also be considered.

Rationale
 $285,250 for January, $279,125 for February, and $303,625 for March
These amounts represent budgeted purchases. However, the budgeted purchases must be evaluated with respect to the payment policy for Better
Bottle Company to determine budgeted purchase payments.

Rationale
 $287,200 for January, $280,350 for February, and $298,725 for March

This solution requires first determining how much inventory needs to be purchased to support the budgeted sales volume. The budgeted purchases
are then evaluated with respect to the payment policy for Better Bottle Company to determine budgeted purchase payments.

Inventory Purchase Payments Schedule

January February March
Sales Volume (units) 8,000 7,800 8,500
Planned Ending Inventory 1,950 2,125 2,300
less Beginning Inventory (1,800) (1,950) (2,125)
Purchase Volume (units) 8,150 7,975 8,675
× Price per unit $35 $35 $35
Budgeted Purchases $285,250 $279,125 $303,625
Current Month Purchase Pmts (80%) $228,200 $223,300 $242,900

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2/18/24, 10:17 PM Part_1 - Test Bank - Assessment Review
Inventory Purchase Payments Schedule
January February March
Past Month Purchase Pmts 59,000 57,050 55,825
Total Cash Payments for Purchases $287,200 $280,350 $298,725

Rationale
 $280,000 for January, 273,000 for February, and 297,500 for March.
These amounts represent the sales volume multiplied by the price of inventory. However, beginning and ending inventory must be considered. In
addition, budgeted purchases must then be evaluated with respect to the payment policy for Better Bottle Company to determine budgeted
purchase payments.

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2/18/24, 10:17 PM Part_1 - Test Bank - Assessment Review

Question 2
1.B.5.u
aq.ce.cb.005_0720
LOS: 1.B.5.u
Lesson Reference: Capital Expenditures and Cash Budgets
Difficulty: hard
Bloom Code: 6

The sales revenue budget and direct material purchases budget for Want Best Corp are below. As Want Best Corp closes out its current year,
management is planning a $40,000 ending balance in accounts receivable (net of uncollectible debt). Want Best Corp's budget policy assumes that 70%
of sales will be collected in the current quarter, 25% will be collected in the subsequent quarter, and 5% will not be collected. Want Best Corp's suppliers
expect 80% of purchases to be paid in the current quarter, with 20% to be paid the subsequent quarter. Want Best Corp will close out its current year with
a $36,000 ending balance in accounts payable.

Sales Budget Q1 Q2 Q3 Q4 Total

Revenue $242,000 $295,000 $274,000 $236,000 $1,047,000
Current Quarter Collections $169,400 $206,500 $191,800 $165,200 $732,900
Past Quarter Collections 40,000 60,500 73,750 68,500 242,750
Total Sales Collections $209,400 $267,000 $265,550 $233,700 $975,650

Purchases Budget Q1 Q2 Q3 Q4 Total

Direct Material Purchases $133,000 $119,000 $151,900 $138,000 $541,900
Current Quarter Payments $106,400 $95,200 $121,520 $110,400 $433,520
Past Quarter Payments 36,000 26,600 23,800 30,380 116,780
Total Supplier Payments $142,400 $121,800 $145,320 $140,780 $550,300

If Want Best Corp changes their budget policy to collect 80% of sales in the current quarter with the full 20% collected in the subsequent quarter, and to
pay 70% of purchases in the current quarter with 30% paid in the subsequent quarter, what will be the net effect on cash for the year? Under the new
policy, Want Best Corp would continue to plan on an ending accounts receivable balance of $40,000 (net of uncollectible debt), and an ending accounts
payable balance of $36,000.

Your Answer

There will be no change in net cash because of the new budget policy.

$64,150

$13,800
Correct

$77,950

Rationale
 There will be no change in net cash because of the new budget policy.
The new budget policy will affect net cash for the year.

Rationale
 $64,150
This answer represents the change in total sales collections for the year; however, it does not consider the change in purchase payments for the
year.

Rationale
 $13,800
This answer represents the change in total purchase payments for the year; however, it does not consider the change in sales collections for the
year.

Rationale
 $77,950

The following is Want Best Corp's new sales budget and purchases budget under the new budget policy:

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2/18/24, 10:17 PM Part_1 - Test Bank - Assessment Review
Sales Budget Q1 Q2 Q3 Q4 Total
Revenue $242,000 $295,000 $274,000 $236,000 $1,047,000
Current Quarter Collections $193,600 $236,000 $219,200 $188,800 $837,600
Past Quarter Collections 40,000 48,400 59,000 54,800 202,200
Total Sales Collections $233,600 $284,400 $278,200 $243,600 $1,039,800

Purchases Budget Q1 Q2 Q3 Q4 Total

Direct Material Purchases $133,000 $119,000 $151,900 $138,000 $541,900
Current Quarter Payments $93,100 $83,300 $106,330 $96,600 $379,330
Past Quarter Payments 36,000 39,900 35,700 45,570 157,170
Total Supplier Payments $129,100 $123,200 $142,030 $142,170 $536,500

Sales Budget New Policy Old Policy Change

Total Sales Collections $1,039,800 $ 975,650 $64,150
Total Supplier Payments (536,500) (550,300) 13,800
Net Cash $ 503,300 $ 425,350 $77,950

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2/18/24, 10:17 PM Part_1 - Test Bank - Assessment Review

Question 3
1.B.5.v
tb.ce.cb.008_1805
LOS: 1.B.5.v
Lesson Reference: Capital Expenditures and Cash Budgets
Difficulty: hard
Bloom Code: 3

Isle Industries’ budget for the upcoming quarter is as follows:

April May June

Sales $46,000 $59,000 $55,000
Direct Material Purchases 30,000 35,000 33,500
Direct Labor Costs 15,000 18,000 17,250
Variable Overhead Costs 8,000 11,000 9,500

Half of Isle's sales are cash and half are credit. Credit sales are collected 60% in the month of sale and 35% in the following month; 5% are uncollectible.
Isle buys 75% of its direct materials on credit and the rest with cash. Credit purchases are paid 60% in the month of purchase and 40% in the following
month. Direct labor costs are paid 85% in the month incurred and 15% in the following month. Variable overhead costs are paid in the month following
incurrence. What will Isle report as its total budgeted cash disbursements for May?

$43,300
Correct

$59,050

$62,050

$47,800

Rationale
 $43,300
The total expected cash disbursements for May will be $43,300 if the direct material purchases made on credit that are expected to be paid for in
May are omitted ($8,750 + $9,000 + $15,300 + $2,250 + $8,000). This expected payment needs to be included as it is expected to occur in May;
therefore, this is an incorrect answer.

Rationale
 $59,050
Cash will be disbursed in May for six reasons: Cash purchases of materials made in May, credit purchases of materials made in May, credit purchases
of materials made in April, direct labor for May, direct labor for April, and variable overhead for April. In May $8,750 worth of direct materials are
expected to be purchased in cash ($35,000 × 25%) and $26,250 worth are expected to be purchased on credit ($35,000 × 75%). Of the $26,250,
$15,750 will be paid for in May ($26,250 × 60%). In April $22,500 worth of direct materials are expected to be purchased on credit ($30,000 × 75%). Of
the $22,500 expected to be purchased on credit in April, $9,000 will be paid for in May ($22,500 × 40%). Of the expected total May direct labor cost of
$18,000, $15,300 will be paid in May ($18,000 × 85%). Of the expected total April direct labor cost of $15,000, $2,250 will be paid for in May ($15,000 ×
15%). The entire expected $8,000 in April variable overhead will be paid in May. In total, $59,050 is expected for cash disbursements in May ($8,750 +
$15,750 + $9,000 + $15,300 + $2,250 + $8,000). Therefore, this is the correct answer.

Rationale
 $62,050
The total expected cash disbursements for May would be $62,050 if the payment for variable overhead is assumed to be the variable overhead for
May instead of the variable overhead for April ($8,750 + $15,750 + $9,000 + $15,300 + $2,250 + $11,000). That is not the correct cash payment pattern
for those expenses; therefore, this is an incorrect answer.

Rationale
 $47,800
The total expected cash disbursements for May would be $47,800 if the amounts for April credit direct material purchases and April direct labor
costs that are expected to be paid in May are omitted ($8,750 + $15,750 + $15,300 + $8,000). Those expected payments need to be included in the
calculation; therefore, this is an incorrect answer.

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2/18/24, 10:17 PM Part_1 - Test Bank - Assessment Review

Question 4
1.B.5.r
aq.ce.cb.001_0720
LOS: 1.B.5.r
Lesson Reference: Capital Expenditures and Cash Budgets
Difficulty: medium
Bloom Code: 4

Ekin Shoes has five planned capital projects for this next year. (1) A new extra support sole manufacturing machine that will require payments of
$6,000,000 each quarter this year. (2) A new manufacturing facility that will require payments of $73,000,000 for the first two quarters. (3) The purchase of
a sport shoe line from a competitor for two payments of $23,000,000 in the first and third quarter. (4) Four cutting-edge artificial intelligence
manufacturing robots for payments of $32,000,000 in the third quarter and 120% of the first payment in the fourth quarter. (5) New production
monitoring equipment for the Wind George brand of shoe for $9,000,000 payments in the first, third, and fourth quarters.

Based on this information, compute the cash budget for capital projects for each of the next four quarters.

Correct

$111,000,000 for the first quarter, $79,000,000 for the second quarter, $70,000,000 for the third quarter, and $53,400,000 for the fourth quarter

$111,000,000 for the first quarter, $79,000,000 for the second quarter, $70,000,000 for the third quarter, and $47,000,000 for the fourth quarter

$143,000,000 for the first quarter, $143,000,000 for the second quarter, $143,000,000 for the third quarter, and $143,000,000 for the fourth quarter

$88,000,000 for the first quarter, 79,000,000 for the second quarter, $47,000,000 for the third quarter, and $53,400,000 for the fourth quarter

Rationale
 $111,000,000 for the first quarter, $79,000,000 for the second quarter, $70,000,000 for the third quarter, and $53,400,000 for the fourth
quarter

The following is Ekin's quarterly capital projects budget for the year:

Q1 Q2 Q3 Q4
Project 1 $ 6,000,000 $ 6,000,000 $ 6,000,000 $ 6,000,000
Project 2 73,000.000 73,000,000 - -
Project 3 23,000,000 - 23,000000 -
Project 4 - - 32,000,000 38,400,000
Project 5 9,000,000 - 9,000,000 9,000,000
Total $111,000,000 $79,000,000 $70,000,000 $53,400,000

Rationale
 $111,000,000 for the first quarter, $79,000,000 for the second quarter, $70,000,000 for the third quarter, and $47,000,000 for the fourth
quarter
This answer does not multiply capital Project 4’s third-quarter payment by 120% to get the fourth-quarter payment.

Rationale
 $143,000,000 for the first quarter, $143,000,000 for the second quarter, $143,000,000 for the third quarter, and $143,000,000 for the
fourth quarter
This answer treats the payments of all five capital projects as if they were occurring every quarter.

Rationale
 $88,000,000 for the first quarter, 79,000,000 for the second quarter, $47,000,000 for the third quarter, and $53,400,000 for the fourth
quarter
This answer does not consider the capital expenditures of Project 3. Purchasing a product line from a competitor is a capital project.

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