Question

Which of the following statements concerning budget preparation for a merchandiser is​ correct?

A. Only an understanding of cost behavior is required to prepare an operating expense budget.

B. Operating expenses differ from operating cash outflows solely as a result of timing differences between when an expense is incurred and when an expense is paid.

C. If a company requires its ending inventory to equal a​ set, flat amount at the end of each​ month, the company would be able to prepare purchases budgets for 4 months as long as it knew the cost of sales for all 4 months.

D. Assuming only a portion of a​ company’s sales are made on​ account, bad debt expense under the percentage of sales method is calculated by multiplying total sales by the estimated uncollectible percentage.

E. None of the above statements is correct.

Answer 1

Statement C i.e. " If a company requires its ending inventory to equal a​ set, flat amount at the end of each​ month, the company would be able to prepare purchases budgets for 4 months as long as it knew the cost of sales for all 4 months" is correct,

Reason : The purchase  budget is created using a simple formula:

The desired ending inventory, plus the cost of goods sold, minus the value of the beginning inventory.

Since, the desired ending inventory is fixed for each month thus, accordingly the opening invetory for each month also remains the same as the fixed closing inventory and hence by only knowing the figure of cost of goods sold one can prepare the purchase budget in such situation.

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