Chapter 16 2011 bec cpa – Flashcards
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Two Basic Budget Types 1, Project Budget 2, Master Budget
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A project budget consists of all the costs expected to attach to a particular project, such as the design of a new airliner or the building of a single ship. a. The master budget, also called the comprehensive budget or annual profit plan, encompasses the organization's operating and financial plans for a specified period (ordinarily a year or single operating cycle). b. The master budget consists of two large components, the operating budget and the financial budget. Both of these major budgets consist of multiple, interrelated subbudgets, listed in items c. and d. below.
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Two Parts of the Master budget
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1. Operating budget 2. Financial budget
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operating budget
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In the operating budget, the emphasis is on obtaining and using current resources. It contains the 1) Sales budget 2) Production budget 3) Direct materials budget 4) Direct labor budget 5) Manufacturing overhead budget 6) Cost of goods sold budget 7) Nonmanufacturing budget 8) Pro forma income statement
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financial budget
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In the financial budget, the emphasis is on obtaining the funds needed to purchase operating assets. It contains the 1) Capital budget (completed before operating budget is begun) 2) Cash budget a) Projected cash disbursement schedule b) Projected cash collection schedule 3) Pro forma balance sheet 4) Pro forma statement of cash flows
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Zero-based budgeting (ZBB)
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Zero-based budgeting (ZBB) is a budget and planning process in which each manager must justify his/her entire budget every year (or period).
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incremental budgeting
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in which the current budget is simply adjusted to allow for changes planned for the coming period. The managerial advantage of incremental budgeting is that the manager has to make less effort to justify changes in the budget.
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OPERATING BUDGET 1/8 Sales Budget
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a. The sales budget, also called the revenue budget, is the starting point for the cycle that produces the annual profit plan (i.e., the master budget). b. The sales budget is an outgrowth of the sales forecast. The sales forecast distills recent sales trends, overall conditions in the economy and industry, market research, activities of competitors, and credit and pricing policies.
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2/8 Production Budget
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a. The production budget follows directly from the sales budget. The production budget is concerned with units only. Product pricing is not a consideration since the goal is purely to plan output and inventory levels and the necessary manufacturing activity. b. To minimize finished goods carrying costs and obsolescence, the levels of production are dependent upon the projections contained in the sales budget.
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3/8 Direct materials budget
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The direct materials budget is concerned with both units and input prices. 1) Two dollar amounts are calculated in the direct materials budget: the cost of raw materials actually used in production and the total cost of raw materials purchased.
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4/8 Direct Labor Budget
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a. The direct labor budget depends on wage rates, amounts and types of production, numbers and skill levels of employees to be hired, etc. b. The cost of fringe benefits must be derived once the cost of wages has been determined. These include employer FICA match, health insurance, life insurance, and pension matching.
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5/8 Manufacturing overhead budget
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The manufacturing overhead budget reflects the nature of overhead as a mixed cost, i.e., one that has a variable component and a fixed component (for a fuller discussion of mixed costs b. Variable overhead contains those elements that vary with the level of production. 1) Indirect materials 2) Some indirect labor 3) Variable factory operating costs (e.g., electricity) . Fixed overhead contains those elements that remain the same regardless of the level of production. 1) Real estate taxes 2) Insurance 3) Depreciation
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6/8 Cost of goods sold budget
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a. The cost of goods sold budget combines the results of the projections for the three major inputs (materials, labor, overhead). The end result will have a direct impact on the pro forma income statement. Cost of goods sold is the single largest reduction to revenues for a manufacturer.
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7/8 Nonmanufacturing Budget
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A. The nonmanufacturing budget consists of the individual budgets for R&D, design, marketing, distribution, customer service, and administrative costs. The development of separate R&D, design, marketing, distribution, customer service, and administrative budgets reflects a value chain approach. B. The variable and fixed portions of selling and administrative costs must be treated separately. C. Note that management can make tradeoffs among elements of selling and administrative expenses that can affect contribution margin.
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8/8 Pro Forma Income Statement
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a. The pro forma income statement is the culmination of the operating budget process. b. The pro forma income statement is used to decide whether the budgeted activities will result in an acceptable level of income. If the initial pro forma income shows a loss or an unacceptable level of income, adjustments can be made to the component parts of the master budget.
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Capital Budget
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a. Separate from the operating budget cycle is the preparation of the capital budget, which often must be approved by the board of directors. The capital budget concerns financing of major expenditures for long-term assets and must therefore have a multi-year perspective. Productive machinery must be acquired to enable the company to achieve its projected levels of output. b. A procedure for ranking projects according to their risk and return characteristics is necessary because every organization has finite resources c. The capital budget has a direct impact on the cash budget and the pro forma financial statements.
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Cash Budget
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. The cash budget is the part of the financial budget cycle that ties together all the schedules from the operating budget. A cash budget projects cash receipts and disbursements for planning and control purposes. Hence, it helps prevent not only cash emergencies but also excessive idle cash.
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a. The pro forma balance sheet
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a. The pro forma balance sheet is prepared using the cash and capital budgets and the pro forma income statement. 1) The pro forma balance sheet is the beginning-of-the-period balance sheet updated for projected changes in cash, receivables, payables, inventory, etc. 2) If the balance sheet indicates that a contractual agreement may be violated, the budgeting process must be repeated.
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pro forma statement of cash flows
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b. The pro forma statement of cash flows classifies cash receipts and disbursements depending on whether they are from operating, investing, or financing activities.
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Shares of stock without par value may be issued for such consideration (in dollars) as may be fixed by a corporation's
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C. Board of directors.
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For what purpose will a shareholder of a publicly held corporation be permitted to file a shareholder derivative suit in the name of the corporation?
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derivative suit is a cause of action brought by one or more shareholders on behalf of the corporation to enforce a right belonging to the corporation. Shareholders may bring such an action when the board of directors refuses to act on the corporation's behalf. Generally, the shareholder must show (1) (s)he owned stock at the time of the wrongdoing, (2) (s)he made a demand to the corporation to bring suit or take other appropriate action, and (3) a bad faith refusal of the board of directors to pursue the corporation's interest.
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A corporate shareholder is entitled to which of the following rights?
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Shareholders do not have the right to manage the corporation or its business. Shareholder participation in policy and management is through exercising the right to elect directors. Shareholders also have the right to approve charter amendments, disposition of all or substantially all of the corporation's assets, mergers and consolidations, and dissolutions
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Which of the following corporate actions is subject to shareholder approval?
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A corporation is governed by shareholders (owners) who elect the directors on the corporation's board and who approve fundamental changes in the corporate structure.
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A corporate director commits a breach of duty if
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The director's action, prompted by confidential information, results in an abuse of corporate opportunity.
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The use of the master budget throughout the year as a constant comparison with actual results signifies that the master budget is also a
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If an unchanged master budget is used continuously throughout the year for comparison with actual results, it must be a static budget, that is, one prepared for just one level of activity.
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The basic difference between a master budget and a flexible budget is that a master budget is
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Prepared before the period begins while a flexible budget is prepared after it ends.
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Comparing actual results with a budget based on achieved volume is possible with the use of a
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D. Flexible budget. flexible budget is essentially a series of several budgets prepared for many levels of sales or production. At the end of the period, management can compare actual costs or performance with the appropriate budgeted level in the flexible budget. A flexible budget is designed to allow adjustment of the budget to the actual level of activity before comparing the budgeted activity with actual results.
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The use of standard costs in the budgeting process signifies that an organization has most likely implemented a
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A. Flexible budget. A flexible budget is a series of budgets prepared for many levels of sales or production. Another view is that it is based on cost formulas, or standard costs. Thus, the cost formulas are fed into the computerized budget program along with the actual level of sales or production. The result is a budget created for the actual level of activity.
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When compared to static budgets, flexible budgets
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Offer managers a more realistic comparison of budget and actual revenue and cost items under their control A flexible budget provides managers with the revenues and costs that "should" have been earned and incurred given the actual level of production achieved. This information is far more useful than the static budget prepared before the fiscal period began when the production level was uncertain.
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An organization's directors, management, and internal auditors all have important roles in creating a proper control environment. Senior management is primarily responsible for
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Establishing a proper ethical culture.COSO model treats internal control as a process - effected by an entity's board of directors, management, and other personnel - designed to provide reasonable assurance regarding the achievement of entity objectives.
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Of the following reasons to establish internal control, which is the most comprehensive?
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Provide reasonable assurance that the objectives of the organization are achieved. Internal control is a process, effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance about the achievement of the following objectives: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.
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Control activities constitute one of the five components of internal control. Control activities do not encompass
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Control activities are policies and procedures that help ensure that management directives are carried out. They are intended to ensure that necessary actions are taken to address risks to achieve the entity's objectives. Control activities have various objectives and are applied at various organizational and functional levels. However, an internal auditing function is part of the monitoring component.
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Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk?
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Lines of reporting can determine the ability of management or other employees to circumvent controls in place. This is directly related to the organizational structure and will affect the auditor's assessment of control risk
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Enterprise risk management (ERM) helps management achieve all of the following except A. Reaching objectives. B. Reporting on a timely basis. C. Preventing loss of reputation and resources. D. Complying with laws and regulations.
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Answer (B) is correct. Enterprise risk management (ERM) helps management 1. Reach objectives 2. Prevent loss of reputation and resources 3. Report effectively 4. Comply with laws and regulations
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Risk appetite should be considered in
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1. Evaluating strategic options 2. Setting related objectives 3. Developing risk management techniques
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The following are the categories of the capabilities of ERM:
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Risk appetite 1. and strategy 2. Risk response decisions 3. Operational surprises and losses 4. Multiple and cross-enterprise risks 5. Opportunities 6. Deployment of capital
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The components of ERM should be present and functioning effectively. What does "present and functioning effectively" mean?
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No material I. weaknesses exist. II. Risk is within the risk appetite.
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What are the four components of ERM
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Event identification, risk assessment, control activities, and A. objective setting.
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Inherent risk is
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Inherent risk is the risk when management has not taken action to reduce the impact or likelihood of an adverse event. Thus, it is risk in the absence of a risk response.
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Which of the following is closely related to traditional risk management instead of enterprise risk management (ERM)?
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Emphasis on specific functions. The enterprise risk management approach set forth by the committee of Sponsoring Organizations of the Treadway Commission (COSO) attempts to approach an organization as a whole instead of focusing on any specific area or risk.
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In an organization that plans by using comprehensive budgeting, the master budget is
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A compilation of all the separate operational and financial budget schedules of the organization. Incremental budgeting simply adjusts the current year's budget to allow for changes planned for the coming year; a manager is not asked to justify the base portion of the budget. ZBB, however, requires a manager to justify the entire budget for each year. Incremental budgeting offers to managers the advantage of requiring less managerial effort to justify changes in the budget.
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An advantage of incremental budgeting when compared with zero-based budgeting is that incremental budgeting
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Accepts the existing base as being satisfactory.
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When preparing a performance report for a cost center using flexible budgeting techniques, the planned cost column should be based on the
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Budget adjusted to the actual level of activity for the period being reported. If a report is to be used for performance evaluation, the planned cost column should be based on the actual level of activity for the period. The ability to adjust amounts for varying activity levels is the primary advantage of flexible budgeting
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The cash receipts budget includes
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A cash budget may be prepared monthly or even weekly to facilitate cash planning and control. The purpose is to anticipate cash needs while minimizing the amount of idle cash. The cash receipts section of the budget includes all sources of cash. One such source is the proceeds of loans.
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Which one of the following may be considered an independent item in the preparation of the annual master budget? a. Ending inventory budget. B. Capital investment budget. C. Pro forma income statement. D. Pro forma statement of financial position
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The capital investment budget may be prepared more than a year in advance, unlike the other elements of the master budget. Because of the long-term commitments that must be made for some types of capital investments, planning must be done far in advance and is based on needs in future years as opposed to the current year's needs.
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The cash budget must be prepared before completing the
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The pro forma balance sheet is the balance sheet for the beginning of the period updated for projected changes in cash, receivables, inventories, payables, etc. Accordingly, it cannot be prepared until after the cash budget is completed because cash is a current asset reported on the balance sheet.
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Which of the following is normally included in the financial budget of a firm? A. Direct materials budget. B. Selling expense budget. C. Budgeted balance sheet. D. Sales budget.
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Answer (C) is correct. The financial budget normally includes the capital budget, the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows.
