Week 5 Homework 2024 V3- Manipal

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Prasad V. Potluri Siddhartha Institute of Technology *

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5200

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Accounting

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May 7, 2024

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Week 5 Homework 2024 1. According to the week 5 lecture, how do budgets assist managers? Ans. According to week 5 lecture, budgets assist the management and managers in:  control finances.  meet current commitments.  provide funding for future ventures, and  make financial decisions and meet organizational goals. 2. Budgeting is the process to develop an organizations budget. It is an integral part of planning. 3. You have recently been promoted within your organization, and you are now a vice president over the Texas division. There are 150 employees in your organization including 10 sales personnel. You are required to create a budget for your division and submit it to the president (your boss) located in the corporate office in Kansas. Describe the steps from the lecture that you will use to create this budget. Ans. These are the steps I will take to make a budget for the Texas division: 1. Make a list of the things that will be in the budget. This means listing all of the division's expected sources of income and expenses. This includes sales income, operating costs, salaries, marketing costs, overhead costs, and any other important financial factors. 2. List the changes you expect for each budget item: - Look at past sales numbers and trends, economic signs, what competitors are doing, market research studies, and any possible government rules that could affect the business. Look at how each of these things might affect the division's future income and costs. 3. Add Expected Changes to Each Budget Item: - Add the expected changes to each item's budget report. For instance, if sales have been steadily going up in the past, you should expect the same rate of growth in the coming time. Also, if you think that market trends or changes in the law will cause costs to go up, you should make changes to the budget to reflect this. 4. "Follow-up and the comparison": When the budget time is over, compare the real financial results to what was planned. Take note of any differences and think about why they happen. By making changes to your plans and estimates based on this information, you can make future budgets more accurate. By doing these things, I'll be able to make a complete budget for the Texas division that takes into account expected changes in income and costs, fits with the company's goals, and makes it easier to handle money and make decisions.

4. The Calendar Company expects to have $4,000 in cash on hand at the beginning of January, and the company's target cash balance is $2,000. Net cash flow for January is minus $10,000. The company borrows to meet short term cash needs. What amount will Calendar Company need to borrow to meet their target cash balance at the end of January? To figure out how much the Calendar Company needs to borrow to reach their target cash balance by the end of January, we need to look at their starting cash balance, their net cash flow for January, and their target cash balance. Details: Starting cash balance is $4,000. Target cash on hand: $2,000 Net cash flow: -$10,000 (a negative number means cash outflow). Here's how to figure out how much cash the company had at the end of January: To explain, ending cash balance equals beginning cash balance plus net cash flow. Cash on hand at the end of the day = $4,000 - $10,000 = -$6,000 It needs to borrow money to close the gap between its ending cash balance and its goal cash balance because its ending cash balance is less than its target cash balance. Calendar Company needs to borrow the difference between how much cash they want to have on hand and how much cash they actually have: How it works: Amount to borrow = Target cash amount - Cash amount at the end How much to borrow = $2,000 - ($6,000) How much to borrow = $2,000 plus $6,000 Loan amount = $8000 The Calendar Company needs to borrow $8,000 in order to reach their goal of having $8,000 in cash on hand at the end of January. 5. Roberts and Company had a balance in their retained earnings account at the end of 2023 in the amount of 3,000,000. They have forecasted net income in 2024 in the amount of 800,000. They pay an estimated 35% of their net income in dividends. What will be the budgeted addition to retained earnings at the end of 2024?

Ans. To figure out the budgeted addition in retained earnings at the end of 2024, we need to think about the following: 1. The forecasted net income in 2024 is $800,000. 2. The estimated dividend payout rate is 35% First, we calculate the amount of dividends to be paid out: Dividends = Net Income ( Dividend Payout Ratio). Dividends = $800,000 X 35% = $280,000. Next, we take the net income and take away the dividends paid out to get the amount that will be added to retained earnings: Now take away the dividends, this is the net income. $800,000 - $280,000 = $520,000 Budgeted Addition to retained earnings= $520,000 6. Given the same information in #5, what will be the budgeted ending balance in retained earnings at the end of 2024 for Roberts and Company? Ans. Budgeted ending balance in retained earnings at the end of 2024: Ending Balance = Retained Earnings at the end of 2023 + Budgeted addition to retained earnings = $3,000,000 + $520,000 = $3,520,000 7. You are the financial analyst for ABC company, and the president has asked you to create an expense budget for the sales department. The sales department is located in another office building, as there is no space available for them at the headquarters office. Last Year Forecasting Assumption Budget for this Year Salaries $300,000 5% increase 5%increase=$300,000X1.05 = $315,000 Stationary $ 2,000 3% decrease 0.97X 2000= $1,940 Cell Phones $ 10,000 10% increase 1.10 X10000= $11,000 Electricity $ 6,000 4% increase 1.04 X6000= $6,240 Office Rent $ 50,000 4% increase 1.04 X 50000= $52,000 Real Estate Taxes $ 7,000 no change =$7000 ______ Total: $375,000 $393,180

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8. How much could be saved if you suggested a work from home option for the sales department, and it was implemented? To calculate the potential savings from implementing a work-from-home option for the sales department, we need to consider the expenses associated with the office space that would no longer be required. Let's break down the potential savings: Office Rent: Savings = Annual rent expense Electricity: Savings = Annual electricity expense Real Estate Taxes: Savings = Annual real estate taxes expense Adding up these savings will give us the total amount that could be saved if the work-from-home option is implemented. Given the data provided: Office Rent: $52,000 Electricity: $6,240 Real Estate Taxes: $7,000 Total Potential Savings: = Office Rent + Electricity + Real Estate Taxes = $52,000 + $6,240 + $7,000 = $65,240 Therefore, if a work-from-home option is suggested for the sales department and implemented, the company could potentially save $65,240 annually. 9. Steve and Company have budgeted sales commissions of $600,000 for 2024, based on sales estimates of $3,000,000 for the same year. After the first quarter however, they realize that sales are exceeding expectations. Sales are now expected to reach $4,000,000 for 2024. By how much will Steve and Company adjust their budget beginning in the 2 nd quarter for sales commissions, assuming this trend continues? Steve and Company uses a static budgeting process. Ans. The budget for sales commissions needs to be changed for the second quarter because sales have gone up. To do this, we need to update the sales commission using the new estimate of $4,000,000 in sales for 2024. First, let's figure out the sales fee rate that was planned in the first place: Originally, the commission rate was calculated by dividing the planned sales by the planned commissions. = $600,000 / $3,000,000 = 0.20 or 20% Based on the new sales estimate, let's figure out the new sales commissions: Adjusted Sales Commissions = Adjusted Sales * Original Commission Rate = $4,000,000 * 0.20 = $800,000

To find the difference between the sales fees that were originally planned and those that were changed: Difference = Adjusted Sales Commissions - Original Budgeted Sales Commissions = $800,000 - $600,000 = $200,000 So from this scenario, Steve and Company will have to add an extra $200,000 to their budget for sales fees starting in the second quarter. 10. What are the 5 steps to zero budgeting according to Dave Ramsey? Ans. According to (Kamel, 2024), Dave Ramsey’s zero-based budgeting method provides a structured approach to managing finances effectively. Here are the five steps to create a zero-based budget: 1. Figure Out Your Income: Obtain a basic idea of how much we earn, including normal paychecks, money from side jobs, and any other money you get. 2. List all expenses. Giving: Set aside 10% of your pay to support causes that are important to you. Savings: Depending on your financial goals, save some of your cash. This could be for paying off debt or building up a disaster fund. The Four Walls: Make sure your basic needs are met by paying for things like food, energy, a place to live (rent or mortgage), and transportation first. Other Essentials: Think about costs like insurance, paying off debt, child care, and other things that are important for your financial health. Extras: Set aside money in your budget for fun things to do, eating out, hobbies, and other non- essential costs. Month-Specific Expenses: Make plans for any holidays, special events, or twice-yearly costs that might happen during the month to avoid financial stress. 3. Subtract Expenses from Income: Make sure that all of your bills are less than your income. Each dollar you earn should be used for a specific thing, like buying, saving, or giving. 4. Invest Any Extra Money: If you still have money left over after paying all your bills, put it toward your current financial goal. This could mean putting more money into an emergency fund or paying off your debt faster. You could also change how much you plan to spend until you hit zero. 5. Maintain a Buffer: Having a zero-based budget doesn't mean you have no money in the bank, but it is important to keep a small cushion of $100 to $300 in case you have to pay for something unexpected during the month.

11. Tammy’s Tasty Treats expects sales of $10,000, $15,000, and $40,000 during April, May, and June (big sale in June). To build business, Tammy allows all customers buy on credit, and all do so. In the past, 30% of Tammy’s sales have been collected during the month of sale, 55% are collected the following month, and 15% the month after that. If this trend continues, what will be Tammy’s total cash collections in the month of June? Sales April May June $10,000 $15,000 $40,000 Cash Collections: April May June In the month of sale 30% 3000 4500 12000 First month after sale 55% - 1650 2475 Second month after sale 15% - - 300 Total monthly cash flow $14,775 12. For the week, Bob’s Manufacturing has a beginning cash balance of 300,000. They spend 99,000 on direct materials, 19,000 on direct labor, and 29,000 on manufacturing overhead. They also have cash sales of 10,000, accounts receivable collections of 220,000 and asset sales of 30,000. They also purchased assets in the amount of 20,000 and had sales commissions and other administrative expenses in the amount of 40,000. What was Bob’s Manufacturing cash balance at the end of the week? Ans. To find Bob's Manufacturing's cash balance at the end of the week, we need to calculate the total cash inflows and outflows for the week and then adjust the beginning cash balance accordingly. Cash Inflows: - Cash sales: $10,000 - Accounts receivable collections: $220,000 - Asset sales: $30,000 Total Cash Inflows: $10,000 + $220,000 + $30,000 = $260,000 Cash Outflows: - Direct materials: $99,000

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- Direct labor: $19,000 - Manufacturing overhead: $29,000 - Asset purchases: $20,000 - Sales commissions and administrative expenses: $40,000 Total Cash Outflows: $99,000 + $19,000 + $29,000 + $20,000 + $40,000 = $207,000 Now, let's calculate the net cash flow: Net Cash Flow = Total Cash Inflows - Total Cash Outflows Net Cash Flow = $260,000 - $207,000 Net Cash Flow = $53,000 Next we adjust the beginning cash balance by adding the net cash flow: Ending Cash Balance = Beginning Cash Balance + Net Cash Flow Ending Cash Balance = $300,000 + $53,000 Ending Cash Balance = $353,000 Bob's Manufacturing's cash balance at the end of the week = $353,000. 13. Which budget is a combination of all the budgets of an organization, dealing with all phases of the operations of the business for a particular period of time? Ans. Master Budget 14. According to the lecture, what is generally required when forecasted assets exceed forecasted liabilities? Ans. The discrepancy is called external financing required (EFR) when forecasted assets exceed forecasted liabilities and equity. 15. Budgeted financial statements are sometimes referred to as proforma_ financial statements or proforma forecasts. 16. Which budget quantifies the capital investment decisions determined in the organization’s long term plans. Ans. Capital expenditure budget

17. Which budget is prepared for one level of activity, for example a particular volume of production or level of sales. Ans. Static Budgets 18. Charles and Company has begun selling a new pie recipe and they want you to help them with next year’s budgeted financial statements. Using the worksheet below, complete Charles and Company forecast and answer the questions which follow. Assumptions: To begin with, Charles and Company is sure sales will grow 50% next year. Assume that is true. Then assume that COGS, Current Assets, and Current Liabilities all vary directly with Sales (that means if sales grows a certain percentage, then the account in question will grow by that same percentage). Assume that fixed expenses will remain unchanged and that $8,000 worth of new Fixed Assets will be obtained next year. Long term debt and common stock accounts remain unchanged. Lastly, the current dividend policy will be continued next year. Charles and Company Financial Forecast Estimated This year for next year Sales $85,000 $127,500 COGS 35,000 $52,500 (41.17%of sales) Gross Profit 50,000 75,000 Fixed Expenses 3,000 3,000(no change) Before-Tax Profit 47,000 72000 Tax @ 33.3333% 15,667 23997.6 Net Profit 31,333 48002.4

Dividends $0 0 Current Assets $40,000 $60,000 (47.05% of sales) Net Fixed Assets 20,000 $28,000 Total Assets $60,000 $88,000 Current Liabilities $18,000 $27,000 (21.11% of sales) Long-term debt 3,000 3000 Common Stock 9,000 9000 Retained Earnings 30,000 30,000 Total Liabs & Eq $60,000 $69,000 Amount need to balance the balance sheet ___$19,000______ (Projected total assets minus projected liabilities)

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