Week 5 Homework 2025 Solutions
1. According to the week 5 lecture, how do budgets assist managers?
Control finances
Meet current commitments
Provide funding for future ventures, and
Make financial decisions and meet organizational goals.
Lecture
2. According to the lecture, once the pro forma or budgeted financial statements have been
developed and all of the analysis has been complete what are the next steps for managers to
take?
- If they like the results, they can simply let the future take its course
- If they don’t like the results, they can take action to change things.
- They may need to find ways to create external financing if required
3. You have recently graduated with your Masters degree and you have promoted within your
organization. You are now a vice president over the Colorado division. There are 75 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.
List the items to be included in the budget (example, all the sources of income and all the
expenditures expected to be made)
Summarize what is known about how each item in the budget and how it is expected to change
in the future. Some of the factors to be considered are:
a. Past sales levels and trends
b. Economic trends
c. Likely action of competitors
d. Market research studies
e. Possible government actions, for example new legislation affecting the business.
Apply the expected changes to each budget item to produce the budget
Follow-up: At the end of the budget period compare the actual results that occurred with the
budget and note the variances (the amounts that the actual results differed from what was
expected). Use these variances to improve the budget next time.
4. The Larkin Company expects to have $8,000 in cash on hand at the beginning of January, and
the company's target cash balance is $4,000. Net cash flow for January is minus $20,000. The
company borrows money to meet short term cash needs. What amount will the Larkin Company
need to borrow to meet their target cash balance at the end of January?
Beginning Cash $8,000
Net cash flow (receipts less disbursements) ($20,000)
= Ending cash before financing ($12,000)
Minimum cash balance desired $4,000
Required financing $16,000
End cash balance after financing $4,000
5. John and Company had a balance in their retained earnings account at the end of 2024 in the
amount of 2,000,000. They have forecasted net income in 2025 in the amount of 900,000. They
pay an estimated 35% of their net income in dividends. What will be the budgeted addition to
retained earnings during 2025?
900,000 – 315,000 = 585,000
6. Given the same information in #5, what will be the budgeted ending balance in retained
earnings at the end of 2025 for John and Company?
Beginning Balance $2,000,000
Add Net Income $900,000
Less Dividends $315,000 (900,000 *.35)
Ending Balance $2,585,000
7. You are the budgeting analyst for Roberts and company. 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. Create the expense
budget.
Last Year Forecasting Assumption Budget for this Year
Salaries $600,000 5% increase 630,000
Stationary $ 4,000 3% decrease 3,880
Cell Phones $ 20,000 10% increase 22,000
Electricity $ 12,000 4% increase 12,480
Office Rent $100,000 4% increase 104,000
Real Estate Taxes $ 7,000 no change 7,000
Total: $743,000 $779,360
8. Reference back to question #7. The president asks you for advice in reducing the sales budget.
How much could be saved if you suggested a work from home option for the sales department,
and it was implemented?
Electricity 12,480
Office Rent 104,000
Real Estate Tax 7,000
Total 123,480
9. Photographs and More have budgeted sales commissions of $700,000 in 2025 based on sales
estimates of $5,000,000. After the first quarter however, they realize that sales are exceeding
expectations. Sales are now expected to reach $6,000,000 for 2024. By how much will
Photographs and More adjust their budget beginning in the 2nd quarter for sales commissions,
assuming this trend continues? Photographs and More uses a static budgeting process.
Answer: 0 adjustment. A static budget is a budget prepared for one level of activity, for
example a particular volume of production or level of sales. It does not change.
10. What are the 5 steps to zero budgeting according to Dave Ramsey?
1. Write down your monthly income.
2. Write down your monthly expenses.
3. Write down your seasonal expenses.
4. Subtract your income from your expenses to equal zero.
5. Track and Go!
11. Tammy’s Tasty Treats expects sales of $20,000, $30,000, and $80,000 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?
Answer:
April May June
Sales 20,000 30,000 80,000
Cash Collections:
Month of sale 30% 6,000 9,000 24,000 (June at 30%)
1st month after sale 55% 11,000 16,500 (May at 55%)
2nd month after sale 15% 3,000 (April at 15%)
Total June Collections $43,500
12. For the week, Rex Manufacturing has a beginning cash balance of 600,000. They spend 198,000 on
direct materials, 38,000 on direct labor, and 58,000 on manufacturing overhead. They also have
cash sales of 20,000, accounts receivable collections of 440,000 and asset sales of 60,000. They also
purchased assets in the amount of 40,000 and had sales commissions and other administrative
expenses in the amount of 80,000. What was Bob’s Manufacturing cash balance at the end of the
week?
Beginning Cash 600,000
Sources of Cash
Sales +20,000
A/R Collections +440,000
Asset Sales + 60,000
= Total Cash Available 1,120,000
Uses of Cash
Direct Materials - 198,000
Direct Labor - 38,000
Mfg Overhead - 58,000
Selling & Admin - 80,000
Asset Purchase - 40,000
Dividend Payment 0
Total Uses of Cash -414,000
Net Cash Position 706,000
13. Which account on the balance sheet represents the sum of all net income not paid out in the form
of dividends to stakeholders?
Retained Earnings
14. What type of budgeting sets the initial figures for each activity to zero, and to receive funding from
the budgeting process each activity must be justified in terms of its continued usefulness and the
resources needed for that activity. This type of activity forces management to think carefully about the
operations of the organization before allocating resources.
Zero-Based Budgeting
15. What type of budget quantifies the capital investment decisions determined in the organization’s
long term plans?
Capital Expenditures Budget
16. According to the lecture, once the pro forma financial statements have been developed, managers
can do some _________ analysis on the forecast to see if they like the results. Hint: We studied this last
week.
Ratio
17. According to the lecture, as the growth rate increases what also increases?
External financing required.
18. Explain haw a company can get into trouble by “growing to fast”.
As the growth rate in sales goes up, so does External Financing Required. As a result, many businesses
can get into trouble by "growing too fast". Even though they're making money (on the income
statement) they don't have enough cash to support their growth.
19. Charles and Company has begun selling a new cake recipe and they want you to help them with next
year’s budgeted financial statements. Using the information below, complete Charles and Company
forecast. After you complete the forecast, explain if Charles and Company will require external financing,
or if they will have excess financing. If so, how much?
Assumptions:
To begin with, Charles and Company believes sales will grow 25% 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 and they are in the 33.3333% tax bracket.
Charles and Company
Financial Forecast
Estimated
This year for next year
Sales $85,000 106,250
COGS 35,000 43,750
Gross Profit 40,000 62,500
Fixed Expenses 3,000 3,000
Before-Tax Profit 37,000 59,500
Tax @ 33.3333% 12,332 19,833
Net Profit 24,668 39,667
Dividends $0 ___0____
Current Assets $40,000 50,000
Net Fixed Assets 20,000 28,000
Total Assets $50,000 78,000
Current Liabilities $18,000 22,500
Long-term debt 3,000 3,000
Common Stock 9,000 9,000
Retained Earnings 13,000 52,667 Profit of 39,667 + beg bal of 13,000
Total Liabs & Eq $43,000 87,167
Amount need to balance the balance sheet -9,167
(Charles and Company will have excess financing in the amount of $9,167, as total liabilities and
equity exceed total assets).
