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Chapter 7 Financial Planning and Budgeting

Terms in this set (20)

A general partnership is a legal structure that has

all of the following are characteristics of not-for-profit organizations that distinguish them from business organizations except

ability to impose taxes on citizens

If the cash you have coming into a business is greater than that going out of the business, you have

positive cash flow

The financial statement that reports the revenues and expenses for a period of time such as a year or a month is the

income statement

the financial statement that reports the asses, liabilities, and stockholders' (or owners's) equity at specific date is the

balance sheet

financial strategic planning for beginning programs and business means

assessment of star-up abilites

You are setting up an account to handle your bills, credit card balances, and loan obligations. What is this type of account called?

accounts payable

Expenses that remain constant from month to month and do not change with volume or activity are called

fixed

Good cash management means

knowing when, where, and how your cash needs will occur

The U.S. small business administration makes loans to small business and start-up businesses. These loans are administered by

local banks

Purchas expense refers to

items you own that will depreciate

knowing when, where, and how your cash needs will occur is a principle of

good cash management

the point at which you meet fixed and variable costs is called

breakeven point

Basic budge concpets are

revenue, total costs, and profit

A non-for profit organization

must reinvest all excess revenue in the organization

General fixed expenses include

clinical salaries and wages

Break even is calculated by finding where

total costs and total revenue meet

full time equivalent refers to

the individuals who fill a full-time position

A forecast of your revenue and expenditures is called

the budget

The key to profitability is

managing cash flow

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Verified questions

ACCOUNTING

LawnCare USA provides lawn care and landscaping services to commercial clients. LawnCare USA uses activity-based costing to bid on jobs and to evaluate their profitability. LawnCare USA reports the following annual costs: Sunset Office Park, a new development in a nearby community, has contacted LawnCare USA to provide an estimate on landscape design and annual lawn maintenance. The job is estimated to require a single landscape design requiring 40 design hours in total and 250 direct labor-hours annually. LawnCare USA has a policy of pricing estimates at 150% of cost. 1. Allocate LawnCare USA’s costs to the activity-cost pools and determine the activity rate for each pool. 2. Estimate total cost for the Sunset Office Park job. 3. How much should LawnCare USA bid to perform the job? 4. Sunset Office Park asks LawnCare USA to give an estimate for providing its services for a 2-year period. What are the advantages and disadvantages for LawnCare USA to provide a 2-year estimate? $$ \begin{matrix} \text{Wages and salaries} & \text{\$ 360.000}\\ \text{Depreciation} & \text{72.000}\\ \text{Supplies} & \text{120.000}\\ \text{Other overhead} & \text{288.000}\\ \text{Total overhead costs} & \text{\$ 840.000}\\ \end{matrix} $$ . John Gilroy, controller of LawnCare USA, has established four activity cost pools: $$ \begin{matrix} \text{Activity Cost Pool} & \text{Activity Measure} & \text{Total Activity for the Year}\\ \text{Estimating jobs} & \text{Number of job estimates} & \text{250 estimates}\\ \text{Lawn care} & \text{Number of direct labor-hours} & \text{500 design hours}\\ \text{Other} & \text{Facility-sustaining costs that are not allocated to jobs} & \text{Not applicable}\\ \end{matrix} $$ . Gilroy estimates that LawnCare USA's costs are distributed to the activity-cost pools as follows: $$ \begin{matrix} \text{ } & \text{Estimating Jobs} & \text{Lawn Care} & \text{Landscape Design} & \text{Other} & \text{Total}\\ \text{Wages and salaries} & \text{5 \\\%} & \text{70 \\\%} & \text{15 \\\%} & \text{10 \\\%} & \text{100 \\\%}\\ \text{Depreciation} & \text{10 \\\%} & \text{65 \\\%} & \text{10 \\\%} & \text{15 \\\%} & \text{100 \\\%}\\ \text{Supplies } & \text{0 \\\%} & \text{ 100 \\\%} & \text{0 \\\%} & \text{0 \\\%} & \text{100 \\\%}\\ \text{Other overhead} & \text{15 \\\%} & \text{50 \\\%} & \text{20 \\\%} & \text{15 \\\%} & \text{100 \\\%}\\ \end{matrix} $$

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ACCOUNTING

Answer these questions about receivables and uncollectibles. For the true-false questions, explain any answers that turn out to be false. True or false? Credit sales increase receivables. Collections and write-offs decrease receivables. True or false? A proper way to express credit terms is “FOB shipping point.” Which receivables figure—the total amount that customers owe the company, or the net amount the company expects to collect—is more interesting to investors as they consider buying the company’s stock? Give your reason. Show how to determine net sales revenue. Show how to determine net accounts receivable. True or false? The direct write-off method of accounting for uncollectibles understates assets. Carolina Bank lent $150,000 to Sumter Company on a six-month, 6% note. Which party has interest receivable? Which party has interest payable? Interest expense? Interest revenue? How much interest will these organizations record one month after Sumter Company signs the note? When Carolina Bank accrues interest on the SumterCompany note, show the directional effects on the bank’s assets, liabilities, and equity (increase, decrease, or no effect). True or False? Credit card sales increase accounts receivable. True or False? Companies with strong liquidity usually factor receivables.

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ACCOUNTING

Sharon Hall, the owner of Sharon’s Party Picks, has delegated management of the business to Lola Oster, a friend. Hall drops by to meet customers and check up on cash receipts, but Oster buys the merchandise and handles cash payments. Business has been very good lately, and cash receipts have kept pace with the apparent level of sales. However, for a year or so, the amount of cash on hand has been too low. When asked about this, Oster explains that suppliers are charging more for goods than in the past. During the past year, Oster has taken two expensive vacations, and Hall wonders how Oster can afford these trips on her $52,000 annual salary and commissions. List at least three ways Oster could be defrauding Hall of cash. In each instance, also identify how Hall can determine whether Oster’s actions are ethical. Limit your answers to the store’s cash payments. The business pays all suppliers by check (no EFTs).

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ACCOUNTING

Johnny Buster owns Entertainment World, a place that combines fast food, innovative beverages, and arcade games. Worried about the shifting tastes of younger audiences, Johnny contemplates bringing in new simulators and virtual reality games to maintain customer interest. As part of this overhaul, Johnny is also looking at replacing his old Guitar Hero equipment with a Rock Band Pro machine. The Guitar Hero setup was purchased for $25,200 and has accumulated depreciation of$23,000, with a current trade-in value of $2,700. It currently costs Johnny$600 per month in utilities and another $5,000 a year in maintenance to run the Guitar Hero equipment. Johnny feels that the equipment could be kept in service for another 11 years, after which it would have no salvage value. The Rock Band Pro machine is more energy-efficient and durable. It would reduce the utilities costs by 30% and cut the maintenance cost in half. The Rock Band Pro costs$49,000 and has an expected disposal value of $5,000 at the end of its useful life of 11 years. Johnny charges an entrance fee of$5 per hour for customers to play an unlimited number of games. He does not believe that replacing Guitar Hero with Rock Band Pro will have an impact on this charge or materially change the number of customers who will visit Entertainment World. 1. Johnny wants to evaluate the Rock Band Pro project using capital budgeting techniques. To help him, read through the problem and separate the cash flows into four groups: (1) net initial investment cash flows, (2) cash flow savings from operations, (3) cash flows from terminal disposal of investment, and (4) cash flows not relevant to the capital budgeting problem. 2. Assuming a tax rate of 40%, a required rate of return of 8%, and straight-line depreciation over the remaining useful life of equipment, should Johnny purchase Rock Band Pro?

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