Chapter 20: 20-2QS-2 (page 913)
For each of the following items 1 through 6, indicate yes if it describes a potential benefit of budgeting or no if it describes a potential negative outcome of budgeting.
2. Budgets are useful in assigning blame for unexpected results.
No
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Ahmed Company purchases all merchandise on credit. It recently budgeted the following month-end accounts payable balances and merchandise inventory balances. Cash payments on accounts payable during each month are expected to be: May, \(1,600,000; June, \)1,490,000; July, \(1,425,000; and August, \)1,495,000. Use the available information to compute the budgeted amounts of (1) merchandise purchases for June, July, and August and (2) cost of goods sold for June, July, and August.
Participatory budgeting can sometimes lead to negative consequences. From the following list of outcomes that can arise from participatory budgeting, identify those with potentially negative consequences.
Blue Wave Co. predicts the following unit sales for the coming four months: September, 4,000 units; October, 5,000 units; November, 7,000 units; and December, 7,600 units. The company’s policy is to maintain finished goods inventory equal to 60% of the next month’s sales. At the end of August, the company had 2,400 finished units on hand. Prepare a production budget for each of the months of September, October, and November.
Kayak Co. budgeted the following cash receipts (excluding cash receipts from loans received) and cash payments (excluding cash payments for loan principal and interest payments) for the first three months of next year.
According to a credit agreement with the company’s bank, Kayak promises to have a minimum cash balance of \(30,000 at each month-end. In return, the bank has agreed that the company can borrow up to \)150,000 at a monthly interest rate of 1%, paid on the last day of each month. The interest is computed based on the beginning balance of the loan for the month. The company repays loan principal with any cash in excess of \(30,000 on the last day of each month. The company has a cash balance of \)30,000 and a loan balance of $60,000 at January 1. Prepare monthly cash budgets for January, February, and March.
Karim Corp. requires a minimum \(8,000 cash balance. If necessary, loans are taken to meet this requirement at a cost of 1% interest per month (paid monthly). Any excess cash is used to repay loans at month-end. The cash balance on July 1 is \)8,400, and the company has no outstanding loans. Forecasted cash receipts (other than for loans received) and forecasted cash payments (other than for loan or interest payments) follow. Prepare a cash budget for July, August, and September. (Round interest payments to the nearest whole dollar.)
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