Which capital budgeting technique defines returns in terms of income instead of cash flows? 

EXTRA CREDIT  – possible 3 points – Can be answered only if all of your regular test questions are completed! What are the three (3) C’s to budgeting?

When are variances labeled as unfavorable? 

This question is worth a total of 20 points.    SHOW ALL COMPUTATIONS! Donovan Company’s balance sheet as of December 31, Year 1 is provided below:                                      Donovan Company                                  Balance Sheet                              December 31, Year 1             Assets             Cash                                                                $   17,500             Accounts receivable                                            20,000             Inventory                                                             12,500             Plant and equipment, net of depreciation      150,000             Total assets                                                      $ 200,000             Liabilities and Stockholders’ Equity             Accounts payable                                           $   15,000             Notes payable                                                      25,000             Capital stock                                                      100,000             Retained earnings                                                60,000             Total liabilities and stockholders’ equity       $ 200,000 In anticipation of preparing the company’s operating budget for the upcoming period, the company’s accountant has gathered the following information:        a) December Year 1 sales were $110,000.  Sales are expected to grow at a rate of 8% per month.  Half of all sales are for cash and half are on account. b.)  Inventory purchases are expected to total $50,000 during January and the inventory account is expected to have a $14,000 balance at January 31, Year 2.  All inventory purchases are on account. c.)  Selling and administrative expenses for January, Year 2 are budgeted at $30,000 (exclusive of depreciation) plus 10% of sales.  S&A expenses are paid in cash.  Depreciation is budgeted at $1,500 for the month. d.)  The notes payable will be paid in January, Year 2.  The amount due will be $25,250.  The $250 represents January’s interest expense. e.)  The company expects to purchase a new machine during January, Year 2 at a cost of $5,000.          Required:  Prepare a budgeted income statement for the month of January Year 2.  Use the traditional income statement format and ignore income taxes.

A cash flow that only occurs once is referred to as:

The resources used in the manufacturing process are frequently called

This question is worth a total of 14 points A. Serrano is opening Serrano Realty on January 2.  For several weeks she has been busy putting together an operating budget for the first quarter of operation for her new business.  Ms. Serrano has estimated her selling and administrative (S&A) costs as follows:                                                                                January            February           March             Depreciation                                       $    500             $   500           $   500             Marketing expenses                            $ 1,000             $   700           $   500             Miscellaneous costs                            $    250             $   200           $   200             Rent expense                                      $ 2,500             $2,500           $2,500             Salary expense                                    $ 2,000             $4,000           $4,000             Sales commissions                             $    500             $   600           $   700             Utilities expense                                 $    500             $   400           $   500               Total S&A costs before interest       $ 7,250             $8,900           $8,900 All selling and administrative costs are paid when incurred except utilities, marketing expenses, and sales commissions.  These items are paid in the month following the month incurred.           Required:  (NOTICE there are three (3) questions to this problem!) 1. Prepare a schedule of cash payments for selling and administrative expenses for January through March.  List each item and then total the month. (LABEL YOUR ACCOUNTS)        Jan.                              Feb.                             March   TOTAL Cash Payments                $                                 $                                       $   2.  How much will be owed for utilities as of March 31?   3.  Compute the amount of sales commissions payable as of March 31.      

Hamilton Company expects to begin operating on July 1, Year 1.  The company’s master budget contained the following operating expense budget:                                                                                   July                 August            September             Salary expense                                    $18,000           $18,000           $18,000             Sales commissions 5% of sales            15,000             16,000             12,000             Utilities                                                   1,400               1,400               1,400             Depreciation on store equipment           500                  500                  500             Rent                                                         3,600               3,600               3,600             Miscellaneous                                            900                  900                  900             Total operating expenses                    $39,400           $40,400           $36,400 Sales commissions are paid in cash in the month following the month in which the expense is recognized.  All other expense items requiring cash payment are paid in the month in which they are recognized.  The amount of commissions payable that would appear on the company’s September 30, Year 1 pro forma balance sheet is:

An investment yielding fixed annual payments is called a(n): 

Mickey Mouse Company is considering two investment opportunities whose cash flows are provided below: Year Investment A Investment B 0 ($15,000) ($9,000) 1     5,000   5,000 2     5,000   4,000 3     5,000   3,000 4     4,000   1,000 The company’s hurdle rate is 12%.  What is the present value index of Investment A?  (Do not round your present value factors and intermediate calculations.)