Gleim CMA Test Prep: Part 1: Financial Planning, Performance, and Control (14 questions) [1] Gleim #: 6.1.1 -- Source: CMA 0205 In an organization that plans by using comprehensive budgeting, the master budget is A. A compilation of all the separate operational and financial budget schedules of the organization. B. The booklet containing budget guidelines, policies, and forms to use in the budgeting process. C. The current budget updated for operations for part of the current year. D. A budget of a not-for-profit organization after it is approved by the appropriate authoritative body. Answer (A) is correct. A company’s overall budget, often called the master or comprehensive budget, encompasses the organization’s operating and financial plans for a specified period, ordinarily a year. Thus, all other budgets are subsets of the master budget. In the operating budget, the emphasis is on obtaining and using current resources. In the financial budget, the emphasis is on obtaining the funds needed to purchase operating assets. Answer (B) is incorrect. The booklet containing budget guidelines, policies, and forms to use in the budgeting process is the budget manual. Answer (C) is incorrect. The current budget updated for operations for part of the current year is a continuous budget. Answer (D) is incorrect. A master budget may be prepared by a for-profit entity. [3] Gleim #: 6.1.3 -- Source: CMA 0205 2-3 In preparing a corporate master budget, which one of the following is most likely to be prepared last? A. B. C. D. Sales budget. Cash budget. Production budget. Cost of goods sold budget. Answer (A) is incorrect. The sales budget precedes the cash budget. Copyright 2012 Gleim Publications Inc. Printed for Wessam Tarek Page 1 Gleim CMA Test Prep: Part 1: Financial Planning, Performance, and Control (14 questions) Answer (B) is correct. The cash budget is the lynchpin of the financial budget. It combines the results of the operating budget with the cash collection and disbursement schedules to produce a comprehensive picture of where the company’s cash flows are expected to come from and where they are expected to go. All the other budgets listed feed the cash budget in one way or another. Answer (C) is incorrect. The production budget is the second step in the master budget, immediately following the sales budget. Answer (D) is incorrect. The cost of goods sold budget is completed well before the cash budget in the budgeting process. [4] Gleim #: 6.1.4 -- Source: CMA 694 3-11 The master budget process usually begins with the A. B. C. D. Production budget. Operating budget. Financial budget. Sales budget. Answer (A) is incorrect. The production budget normally cannot be prepared until the expected sales are known. Answer (B) is incorrect. The operating budget is another term for the budget used on a day-to-day basis for managing operations. It cannot be prepared until after the sales budget is prepared. Answer (C) is incorrect. Preparation of the sales budget is the first step in the overall budgeting process. Answer (D) is correct. The starting point for the annual budget is the sales forecast. All other aspects of the budget, including production, costs, and inventory levels, rely on projected sales figures. [5] Gleim #: 6.1.5 -- Source: CMA 1295 3-18 All of the following are considered operating budgetsexcept the A. B. C. D. Sales budget. Materials budget. Production budget. Capital budget. Copyright 2012 Gleim Publications Inc. Printed for Wessam Tarek Page 2 Gleim CMA Test Prep: Part 1: Financial Planning, Performance, and Control (14 questions) Answer (A) is incorrect. It is considered an operating budget. Answer (B) is incorrect. It is considered an operating budget. Answer (C) is incorrect. It is considered an operating budget. Answer (D) is correct. The operating budget consists of all budgets that concern normal operating activities, including the sales budget, production budget, materials budget, direct labor budget, and factory overhead budget. The capital expenditures budget, which outlines needs for new capital investment, is not a part of normal operations. The capital expenditures budget is sometimes prepared more than a year in advance to allow sufficient time to secure financing for these major expenditures. [6] Gleim #: 6.1.6 -- Source: CMA 1296 3-15 Which one of the following items is the last schedule to be prepared in the normal budget preparation process? A. B. C. D. Cash budget. Cost of goods sold budget. Manufacturing overhead budget. Selling expense budget. Answer (A) is correct. The last schedule prepared before the financial statements is the cash budget. The cash budget is a schedule of estimated cash collections and payments. The various operating budgets and the capital budget are inputs to the cash budgeting process. Answer (B) is incorrect. The cost of goods sold budget provides information necessary to prepare the cash budget. Answer (C) is incorrect. The manufacturing overhead budget provides information necessary to prepare the cash budget. Answer (D) is incorrect. The selling expense budget provides information necessary to prepare the cash budget. Copyright 2012 Gleim Publications Inc. Printed for Wessam Tarek Page 3 Gleim CMA Test Prep: Part 1: Financial Planning, Performance, and Control (14 questions) [7] Gleim #: 6.1.7 -- Source: CMA 1292 3-10 Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is the A. B. C. D. Capital expenditure plan. Income statement. Statement of cost of goods sold. Statement of cash flows. Answer (A) is incorrect. The capital expenditure plan must be prepared before the cash budget. Cash may be needed to pay for capital purchases. Answer (B) is incorrect. The income statement must be prepared before the statement of cash flows, which reconciles net income and net operating cash flows. Answer (C) is incorrect. Cost of goods sold is included in the income statement, which is an input to the statement of cash flows. Answer (D) is correct. The statement of cash flows is usually the last of the listed items prepared. All other elements of the budget process must be completed before it can be developed. [8] Gleim #: 6.1.8 -- Source: CIA 1190 IV-17 The master budget A. B. C. D. Shows forecasted and actual results. Reflects controllable costs only. Can be used to determine manufacturing cost variances. Contains the operating budget. Answer (A) is incorrect. The master budget does not contain actual results. Answer (B) is incorrect. The master budget reflects all applicable expected costs, whether or not controllable by individual managers. Answer (C) is incorrect. The master budget is not structured to allow determination of manufacturing cost variances, which requires using the flexible budget and actual results. Answer (D) is correct. All other budgets are subsets of the master budget. Thus, quantified estimates by management from all functional areas are contained in the master budget. These results are then combined in a formal quantitative model recognizing the organization’s objectives, inputs, and outputs. Copyright 2012 Gleim Publications Inc. Printed for Wessam Tarek Page 4 Gleim CMA Test Prep: Part 1: Financial Planning, Performance, and Control (14 questions) [9] Gleim #: 6.1.9 -- Source: CMA 692 3-9 The preparation of a comprehensive master budget culminates with the preparation of the A. B. C. D. Production budget. Capital investment budget. Cash management and working capital budget. Strategic budget. Answer (A) is incorrect. The production budget must precede the capital investment and cash budgets. Answer (B) is incorrect. A capital investment budget is prepared before a cash budget. Answer (C) is correct. The comprehensive master budget begins with the preparation of the sales budget and proceeds to the production budget. Answer (D) is incorrect. A strategic budget is a long-range planning tool that is prepared before the master budget. [10] Gleim #: 6.1.10 -- Source: CMA 691 3-1 Wilson Company uses a comprehensive planning and budgeting system. The proper order for Wilson to prepare certain budget schedules would be A. B. C. D. Cost of goods sold, balance sheet, income statement, and statement of cash flows. Income statement, balance sheet, statement of cash flows, and cost of goods sold. Statement of cash flows, cost of goods sold, income statement, and balance sheet. Cost of goods sold, income statement, balance sheet, and statement of cash flows. Answer (A) is incorrect. The balance sheet should not precede the income statement. Answer (B) is incorrect. The income statement cannot precede cost of goods sold. Answer (C) is incorrect. The statement of cash flows cannot precede the cost of goods sold. The latter is an input of the former. Answer (D) is correct. The pro forma cost of goods sold must be prepared before the pro forma income statement because it is a component of the income statement. Also, the income statement must be prepared before the pro forma balance sheet because net income is a necessary part of preparing the stockholders’ equity section of the balance sheet. In turn, the income statement and the balance sheet are necessary for estimating cash flows. If the statement of cash flows is prepared using the indirect method, balance sheet data, e.g., the changes in accounts receivable, inventory, and accounts payable, must be available to determine the adjustments needed to reconcile net income to net cash flow. Copyright 2012 Gleim Publications Inc. Printed for Wessam Tarek Page 5 Gleim CMA Test Prep: Part 1: Financial Planning, Performance, and Control (14 questions) [11] Gleim #: 6.1.11 -- Source: CMA 692 3-10 Which one of the following may be considered an independent item in the preparation of the master budget? A. B. C. D. Ending inventory budget. Capital investment budget. Pro forma income statement. Pro forma statement of financial position. Answer (A) is incorrect. The ending inventory budget is based on the current production budget. Answer (B) is correct. 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. Answer (C) is incorrect. The pro forma income statement is based on the sales budget, expense budgets, and all other elements of the current master budget. Answer (D) is incorrect. The pro forma balance sheet is based on the other elements of the current master budget. [12] Gleim #: 6.1.12 -- Source: CMA 697 3-21 The Yummy Dog Bone Company is anticipating that a major supplier might experience a strike this year. Because of the nature of the product and emphasis on quality, extra production cannot be stored as finished goods inventory. When developing a contingency budget that would anticipate a direct materials buildup, the two most significant items that will be affected are A. B. C. D. Production volume and direct material. Sales and ending inventory. Production and cash flow. Direct materials and cash flow. Answer (A) is incorrect. The nature of the product prevents an increase in production volume to augment finished goods inventory. Copyright 2012 Gleim Publications Inc. Printed for Wessam Tarek Page 6 Gleim CMA Test Prep: Part 1: Financial Planning, Performance, and Control (14 questions) Answer (B) is incorrect. Sales are dependent on demand, a factor not affected by the strike. Sales may decrease, however, if the company suffers a stockout. Furthermore, ending finished goods inventory cannot increase because of the nature of the product. Answer (C) is incorrect. The nature of the product prevents an increase in production volume to augment finished goods inventory. Answer (D) is correct. The most significant items are those that will vary between the contingency budget and the regular budget. The company cannot increase its finished goods inventory, but it can increase its inventory of the direct materials provided by the supplier. Thus, the items most affected will be direct materials and cash. The cash budget will be affected because of the need to pay for direct materials prior to their usage. [13] Gleim #: 6.1.13 -- Source: CMA 0408 2-031 Many companies use comprehensive budgeting in planning for the next year’s activities. When both an operating budget and a financial budget are prepared, which one of the following is correct concerning the financial budget? A. B. C. D. Included in the Financial Budget Capital Pro-forma Cash Budget Balance Sheet Budget Yes No Yes No Yes No Yes Yes Yes No No No Answer (A) is incorrect. The pro forma balance sheet is part of the financial budget. Answer (B) is incorrect. The capital budget and cash budget are part of the financial budget. Answer (C) is correct. In the financial budget, the emphasis is on obtaining the funds needed to purchase operating assets. It contains the capital budget, projected cash disbursement schedule, projected cash collection schedule, cash budget, pro forma balance sheet, and pro forma statement of cash flows. Answer (D) is incorrect. All three of these items are part of the financial budget. Copyright 2012 Gleim Publications Inc. Printed for Wessam Tarek Page 7 Gleim CMA Test Prep: Part 1: Financial Planning, Performance, and Control (14 questions) [14] Gleim #: 6.1.14 -- Source: CMA 0205 2-7 The starting point for creating a master budget for a proprietary secretarial school would be A. B. C. D. Estimating salaries of the instructors. Forecasting enrollment. Preparing a capital expenditure budget. Preparing the student recruiting budget. Answer (A) is incorrect. Instructor salaries will be addressed in the direct labor budget. Answer (B) is correct. The sales forecast drives all the other components of the operating budget. How much revenue the firm expects to bring in affects every other decision. Answer (C) is incorrect. Since the capital budget spans multiple budget periods, it must be prepared outside the operating budget cycle and often must be approved by the board of directors. Answer (D) is incorrect. The student recruiting budget is part of the marketing budget, which is prepared near the end of the operating budget process. [16] Gleim #: 6.1.16 -- Source: CMA 694 3-10 The financial budget process includes A. B. C. D. The cash budget. The capital budget. The budgeted statement of cash flows. All of the answers are correct. Answer (A) is incorrect. All of the listed budgets are elements of the financial budget process. Answer (B) is incorrect. All of the listed budgets are elements of the financial budget process. Answer (C) is incorrect. All of the listed budgets are elements of the financial budget process. Answer (D) is correct. The financial budget normally includes the capital budget, the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows. Copyright 2012 Gleim Publications Inc. Printed for Wessam Tarek Page 8