2024 – Problem 1 Consider the following statements about capital budgeting a is are more appropriate for long term
5 Problems – 2024
2024 – Problem 1 Consider the following statements about capital budgeting a is are more appropriate for long term.
Problem# 1
Consider the following statements about capital budgeting.
Long-term investments
a. _______ is (are) more appropriate for long-term investments.
b. _______ highlights risky investments.
Accrual-based income
c. _______ shows the effect of the investment on the company’s accrual-based income.
d. _______ is the interest rate that makes the NPV of an investment equal to zero.
e. In capital rationing decisions, management must identify the discount rate when the _______ method is used.
f. _______ provides management with information on how fast the cash invested will be recouped.
g. _______ is the rate of return, using discounted cash flows, a company can expect to earn by investing in the asset.
h. _______ does not consider the asset’s profitability.
Net cash inflows
i. _______ uses accrual accounting rather than net cash inflows in its computation.
Requirement:
1. Fill in each statement with the appropriate capital budgeting method: Payback period, ROR, NPV, or IRR.
> 
Problem # 2
Water Planet is considering purchasing a water park in Atlanta, Georgia, for $1,870,000. The new facility will generate annual net cash inflows of $460,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses straight-line depreciation, and its stockholders demand an annual return of 10% on investments of this nature.
>requirements
Requirements:
1. Compute the payback period, the ROR, the NPV, the IRR, and the profitability index of this investment.
2. Recommend whether the company should invest in this project.
Problem # 3
Budgeted balance sheet
Thumbtack’s March 31, 2012, budgeted balance sheet follows:
“THUMBTACK OFFICE SUPPLY
Budgeted Balance Sheet
March 31, 2012″
>assets 
Assets Liabilities
Current assets: Current liabilities:
Cash $18,000 Accounts payable $12,500
Accounts receivable 12,000 Salary and commissions payable 1,400
Inventory 16,000 Total liabilities $13,900
Prepaid insurance 
Prepaid insurance 2,200
Total current assets $48,200 Stockholder’s Equity
Plant assets: Common stock 16,000
Equipment and fixtures 45,000 Retained earnings 33,300
Less: Accumulated depreciation 30,000 Total stockholders’ equity $49,300
Total plant assets $15,000
Total assets $63,200 Total liabilities and stockholders’ equity $63,200
The budget committee of Thumbtack Office Supply has assembled the following data.
a. Sales in April were $40,000. You forecast that monthly sales will increase 2% over April’s sales in May. June’s sales will increase 4% over April’s sales. July’s sales will increase 20% over April’s sales. Collections are 80% in the month of sales and 20% in the month following sale.
Thumbtack maintains inventory
b. Thumbtack maintains inventory of $11,000 plus 2.5% of the COGS budgeted for the following month. COGS = 50% of sales revenue. Purchases are paid 30% in the month of purchase and 70% in the month following the purchase.
c. Monthly salaries amount to $7,000. Sales commissions equal 5% of sales for that month. Salaries and commissions are paid 30% in the month incurred and 70% in the following month.
d.
Rent expense $2,400, paid as incurred
Depreciation expense $200
Insurance expense $100, expiration of prepaid amount
Income tax 20% of operating income, paid as incurred
Requirements:
1. Prepare Thumbtack’s sales budget for April and May, 2012. Round all amounts to the nearest $1.
2. Prepare Thumbtack’s inventory, purchases, and cost of goods sold budget for April and May.
3. Prepare Thumbtack’s operating expenses budget for April and May.
4. Prepare Thumbtack’s budgeted income statement for April and May.
5. Prepare the schedule of budgeted cash collections from customers for April and May.
6. Prepare the schedule of budgeted cash payments for purchases for April and May.
7. Prepare the schedule of budgeted cash payments for operating expenses for April and May.
8. Prepare the cash budget for April and May. Assume no financing took place.
9. Prepare a budgeted balance sheet as of May 31, 2012.
10. Prepare the budgeted statement of cash flows for the two months ended May 31, 2012. (Note: You should omit sections of the cash flows statements where the company has no activity.
Assume the following changes to the original facts:
a. Collections of receivables are 60% in the month of sale, 38% in the month following the sale, and 2% are never collected. Assume the March receivables balance is net of the allowance for uncollectibles.
b. Minimum required inventory levels are $8,000 plus 30% of next month’s COGS.
c. Purchases of inventory will be paid 20% in the month of purchase, 80% in the month following purchase.
d. Salaries and commissions are paid 60% in the month incurred and 40% in the following month.
Requirements:
1. Prepare Thumbtack’s revised sales budget for April and May. Round all calculations to the nearest dollar.
2. Prepare Thumbtack’s revised inventory, purchases, and cost of goods sold budget for April and May.
3. Prepare Thumbtack’s revised operating expenses budget for April and May.
4. Prepare Thumbtack’s revised budgeted income statement for April and May.
Problem # 4
Refer to the original data and the revisions presented in Problem 1.
Requirements:
1. Prepare the schedule of budgeted cash collections from customers for April and May.
2. Prepare the schedule of budgeted cash payments for purchases for April and May.
3. Prepare the schedule of budgeted cash payments for operating expenses for April and May.
4. Prepare the cash budget for April and May. Assume no financing took place.
Problem # 5
Jalapenos! is based in Pleasant Hill, California. The merchandising company has three divisions: Clothing, Food, and Spices. The Clothing division has two main product lines: T-shirts and sweatshirts. The company uses a shared warehousing facility. There are $50,000 in fixed warehousing costs each month, of which $40,000 are traceable to the three divisions based on the amount of square feet used. There is 100,000 square feet of warehouse space in the facility. The clothing division uses 60,000 square feet of the space, but 5,000 of that space isn’t traceable to t-shirts or sweatshirts. Facts related to the divisions and products for the month ended October 31, 2012, follow:
Clothing Food Spices
T-shirts Sweatshirts
Square feet used 40,000 15,000 30,000 10,000
Sales revenue $300,000 $100,000 $150,000 $80,000
COGS (variable) $210,000 $60,000 $60,000 $32,000
Fixed selling expenses $7,000 $5,000 $3,000 $1,000
Variable selling expenses $9,000 $8,500 $11,000 $2,500
Requirements:
1. Calculate the rate per square foot for Warehousing. Calculate the traceable fixed costs for each division and for each product in the Clothing division.
2. Prepare an income statement for the company using the contribution margin approach. Calculate net income for the company, divisional segment margin for both divisions, and product segment margin for both products.
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