1) Which of the following is NOT a benefit of budgeting? *

| June 4, 2016

Question

1) .0/msohtmlclip1/01/clip_image001.gif”>Which of the following is NOT a benefit ofbudgeting?

A) Allowing managers to build in some budgetaryslack

B) Forcing managers to look ahead and state objectives for thefuture

C) Providing lead time to solve potentialproblems

D) Providing motivation for employees to work towardobjectives

E) Creating standards against which actual performance can bemeasured

2) .0/msohtmlclip1/01/clip_image001.gif”>Which of the following is NOT true regarding the masterbudget?

A) Information from the sales budget is used for budgeting cashreceipts

B) Information from the selling and administrative budget is used for budgeting cashpayments

C) Information from the direct labor budget is used for the cost of goods soldbudget

D) A budgeted capital expenditure results in a cash outflow in the cashbudget

E) All of the above are truestatements

3) .0/msohtmlclip1/01/clip_image001.gif”>Actual sales for Beauty Beavis Corporation in May were $200,000 (5,000 units sold). IfBeauty Beavis projects an increase in units sold of 10% per month and it will raise the price per unit by $2, what is the amount of budgeted sales revenue for the month ofJune?

A)

$200,000

B)

$215,500

C)

$220,000

D)

$226,000

E)

$231,000

4) .0/msohtmlclip1/01/clip_image001.gif”>Meathead Corporation is preparing its quarterly Raw Materials Purchases Budget. The beginning Raw Materials balance is 55,000 units, and Meathead wants an ending Raw Materials balance thatis 80% of the beginning amount. Historical data shows that 5% of Raw Materials purchasesare returned to suppliers due to defects. If Meathead Corporation projects needing 600,000 unitsof Raw Materials for production in the quarter, it should budget for gross purchasesof:

A) 643,157units

B) 641,550units

C) 635,000units

D) 620,000units

E) 618,450units

5) .0/msohtmlclip1/01/clip_image001.gif”>Psycho Company budgets for production of 200,000 units in the upcoming quarter. Toproduce one unit, it requires $10 of direct materials, 1.5 hours of direct labor, and overhead is applied ata rate of 50% of direct labor. If manufacturing line workers are paid $20/hour, the budgeteddirect labor cost for the quarter shouldbe:

A)

$300,000

B)

$2,000,000

C)

$6,000,000

D)

$6,300,000

E)

$9,000,000

6) .0/msohtmlclip1/01/clip_image002.gif”>Warhorse Enterprises breaks down its selling and administrative expense budget as follows:

Office SuppliesExpense

$ 1,000

Office WagesExpense

17,000

DepreciationExpense

4,000

MiscellaneousExpense

6,000

On the company’s cash budget, the company should budget for selling and administrative expenses:

A) A cash outflow of$18,000

B) A cash outflow of$24,000

C) A cash outflow of$28,000

D) A cash outflow of$32,000

E) A cash inflow of$28,000

7) .0/msohtmlclip1/01/clip_image003.gif”>Octomom recently signed a contract to provide motivational speeches on “how to be amodel citizen”. The contract is for three years. She will be paid $10,000 per year at the beginning ofeach year. However the funds will be held in a trust, to which she will not have access until the end ofthe third year. If the trust expects to earn 9% on those funds, how should Octomom calculatethe amount held by the trust on her behalf at the end of year3?

A) Future Value of1

B) Present Value of anAnnuity

C) Present Value of an AnnuityDue

D) Future Value of anAnnuity

E) Future Value of an AnnuityDue

8) .0/msohtmlclip1/01/clip_image003.gif”>Settle the Score Contractors is in negotiation to purchase equipment; it offers the seller a 4year note payable with a face value of $70,000; the interest rate for similar notes is 8% and all principalis due in 4 years. If the seller accepts the deal, the actual purchase price of the equipmentis:

A)

$51,149

B)

$51,450

C)

$70,000

D)

$95,235

E)

$95,802

9) .0/msohtmlclip1/01/clip_image002.gif”>Average Joe won $120,000 in the local lottery, which has several payment options. Assuminga time value of money rate of 3%, which option is worth themost?

A) A one-time payment of $120,000, paid one year fromtoday

B) An annuity payment of $30,000 each quarter (end of quarter) for the nextyear

C) An annuity payment of $30,000 each quarter (beginning of quarter) for the nextyear

D) An annuity payment of $10,000 each month (end of month) for the nextyear

E) An annuity payment of $10,000, each month (beginning of month) for the nextyear

10) .0/msohtmlclip1/01/clip_image003.gif”>Sardigna Natzione just received a restricted contribution from a donor. The gift of$1,500,000 cash must be put in a mutual fund indexed to the stock market for 40 years before it can be used.If Sardigna Natzione expects the fund to return 10% annually, how much will be available at the endof the 40 yearperiod?

A)

$33,150

B)

$1,500,000

C)

$14,668,650

D)

$16,597,223

E)

$67,888,950

11) .0/msohtmlclip1/01/clip_image002.gif”>Johnson S.P.A. invested $100,000 in a capital project; it has a 3 year life and a salvage valueof

$40,000. If Johnson projects net income from the project to be $50,000 per year, the accountingrate of return (ARR) based on the average investmentis:

A) 47%

B) 50%

C) 71%

D) 83%

E) 167%

12) .0/msohtmlclip1/01/clip_image003.gif”>For which of the following capital budgeting techniques is it necessary to know net income onthe accrual basis?

A) PaybackPeriod

B) Discounted PaybackPeriod

C) Accounting Rate of Return(ARR)

D) Net Present Value(NPV)

E) Internal Rate of Return(IRR)

13) .0/msohtmlclip1/01/clip_image003.gif”>Bush Gardening Company is considering purchasing a machine for $21,000. The machine will generate net cash flows of $2,000 per year. Annual depreciation expense would be $1,500. Whatis the payback period for the newmachine?

A) 4 years

B) 6 years

C) 10.5years

D) 14years

E) 42years

14) .0/msohtmlclip1/01/clip_image003.gif”>Which of the following is a good guideline regarding the Internal Rate of Return(IRR)?

A) If the internal rate of return is greater than inflation, accept theproject

B) If the internal rate of return is less than the cost of capital, accept theproject

C) If the internal rate of return is greater than the cost of capital, decline theproject

D) The internal rate of return can never be equal to the cost ofcapital

E) None of the above are goodguidelines

15) .0/msohtmlclip1/01/clip_image003.gif”>A synonym for “what if” analysisis:

A) Differential analysis

B) Sensitivityanalysis

C) Alternativeanalysis

D) Make or breakanalysis

E) Prioritizationanalysis

BUDGETING AND PLANNING

Iron Creatures Enterprises has budgeted thefollowing:

February

March

April

May

TotalSales

$100,000

$??????

$??????

$??????

MerchandisePurchases

$60,000

$90,000

$120,000

$70,000

Cash sales account for one-fifth of total sales, while the remaining four-fifths are on account. Iron Creaturesbudgets for sales of 10,000 units in February. Unit sales projected for March, April, and May are 12,000 (March),11,000 (April), and 14,000 units(May).

Past experience indicates collections on account are asfollows:

· 40% will be collected in the month of sale

· 45% will be collected in the followingmonth

· 10% will be collected in the 2nd month following thesale

· 5% are nevercollected

Purchases of merchandise inventory are all on credit; 25% is paid in the month of purchase, 50% is paid in the1st month after the purchase and 25% in the 2nd month following thepurchase.

Other items budgeted include thefollowing:

A) Selling and Administrative Expenses of $70,000 per year, including $10,000 of annual depreciationexpense

B) Equipment costing $45,000 will be purchased for cash inApril

C) Fixed assets with a cost of $30,000 and accumulated depreciation of $18,000 will be sold in May; a gainof

$5,000 is expected to berealized

D) The company will purchase stock of various other companies in the month of April, paying $20,000cash

E) Interest on any line of credit loan must be paidmonthly

Iron Creatures wishes to maintain a minimum cash balance of $12,000 at the end of each month. Thecompany borrows money from the bank at 6% interest if necessary to maintain the minimum cash balance. Borrowedmoney is repaid in months when there is an excess cash balance. The beginning cash balance on April 1 is projected tobe

$12,000. The beginning loan balance on April 1 is projected to be$31,000.

1) Complete the supporting schedules for cash collections from sales and cash payments for merchandise.

CASH COLLECTIONS ON SALES

CollectionMonth

SaleMonth

Feb.

March

April

May

June

July

Never

CASHSALES

April (TOTAL: )

May (TOTAL: )

CREDITSALES

February(TOTAL: )

March (TOTAL: )

April (TOTAL: )

May (TOTAL: )

TOTAL COLLECTION ONCREDIT

CASH PAYMENTS ON MERCHANDISE PURCHASES

PaymentMonth

PurchaseMonth

Feb.

March

April

May

June

July

Never

CREDITSALES

February(TOTAL: )

March (TOTAL: )

April (TOTAL: )

May (TOTAL: )

TOTAL PAYMENT ONMERCHANDISE

2) Prepare a cash budget for Iron Creatures Enterprises for the months of April and May. Be sure to indicatethe ending cash balance and ending loan balance for each month.

APRIL MAY

Beginning of Month LoanBalance $ $

—————————————————————————————————————————————————–

Beginning of Month CashBalance $ $

Add: Collections fromCustomers

.0/msohtmlclip1/01/clip_image004.gif”>.0/msohtmlclip1/01/clip_image004.gif”>CashSales

.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>CreditSales

.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>Add:

.0/msohtmlclip1/01/clip_image005.gif”>Less: Payment for MerchandisePurchases

.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>Less:

.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image006.gif”>Less:

.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>Less:

.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>Less:

.0/msohtmlclip1/01/clip_image005.gif”>Preliminary End of Month CashBalance

.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>Add: LoanAdditions

.0/msohtmlclip1/01/clip_image005.gif”>.0/msohtmlclip1/01/clip_image005.gif”>Less: LoanPayments

End of Month CashBalance $ $

—————————————————————————————————————————————————–

End of Month LoanBalance $ $

TIME VALUE OF MONEY – SHOW ALL WORK ANDCALCULATIONS!!!!

1) Rain Makers Corporation is negotiating a five year contract with its new CEO, Earl Honeywood. Thecorporation has proposed two contract options for the CEO, outlined asfollows:

OPTION1: A five year contract, starting January 1, Year 1, for $6,000,000. Earl Honeywood wouldbepaid $1,200,000 each year at the end of the year (December 31) for five consecutiveyears.

OPTION2: A five year contract, starting January 1, Year 1, for $6,800,000. Earl Honeywood wouldbepaid at the end of each year (December 31). He would receive $1,000,000 in Years 1through 3, and then $1,900,000 in Years 4 and5.

You have been hired as Earl’s investment manager, and believe that Earl should consider the time value of moneyat12% before making his decision. Calculate the present value of the two contract options to aid Earl in hisdecision.

A) Present Value of OPTION 1:

B) Present Value of OPTION 2:

2) Your strange neighbor from down the street heard that you were an aspiring accountant and asked youfor advice regarding his retirement plan. Specifically, he wants to retire in 20 years and has never contributed toa retirement plan. Respond to the followingquestions:

A) If he contributes $5,500 at the endof each year for 20 years and the return on his investment is 6% peryear, how much money will be in his account when he is ready for retirement?

B) Using the same information as “A”, what amount would be in his account after twenty years if hecontributed the $5,500 at the beginning of each year instead of the end?

C) If your strange neighbor wanted to have $600,000 in his account when he retires and wanted to invest atthe

endof each year, how much would he have to invest per year assuming a rate of return of 8%?

3) You are in business negotiations with Mr. Mohammed Ezekiel Abedube, a Nigerian prince who you met onthe Internet after he sent you an unsolicited e-mail. In exchange for your assistance, he promises youquarterly payments of $200,000 (at the end of each quarter) for 2 years and then an annual payment of $1,000,000 (atthe end of each year) for years 3 through 10. If you consider the time value of money to be 8% and assuming thathemakes good on his promise, what are his future payments worth to you today?

CAPITAL BUDGETING–SHOW ALL WORK ANDCALCULATIONS!!!!

1) Grimason Organization is considering the purchase of a machine that costs $100,000. It calculates thatthe purchase would contribute $30,000 in before-tax income to the company. The company pays tax at anaverage 35% rate. The machine’s estimated useful life is 10 years with a salvage value of $20,000. Thecompany depreciates all fixed assets using the straight-line method. The Grimason Organization’s desired rate of returnis 12%; the present value of an annuity of 1 at 12% for ten periods is 5.65. The present value of 1 due inten periods at 12% is0.322.

A) What is the payback period? – NOTE: Just calculate regular payback period, notdiscounted!

B) What the accounting rate of return based on the average investment?

2) The following is information regarding two alternative investments being considered by Bob-Fruit Company.The company requires a 10% return on investments. The equipment for Project A has no salvage value;the equipment for Project B has a salvage value of $25,000 (not included in the net cash flows indicatedbelow).

PROJECTA

PROJECTB

InitialInvestment

($175,000)

($145,000)

Expected net cash flows inyear:

1

40,000

32,000

2

56,000

50,000

3

80,295

66,000

4

90,400

72,000

5

55,000

29,000

A) Calculate the payback period for PROJECT A.

B) Calculate the net present value and the profitability index for PROJECT A.

C) Calculate the payback period for PROJECT B).

D) Calculate the net present value (5 points) and the profitability index (3 points) for PROJECTB.

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