(8 marks; suggested time 10 minutes)
±In the midst of all of the scandals and mistrust of accounting, it is nice to have a basic tool
such as a budget so that a company can always get an accurate assessment of how it is
Provide a thoughtful response. Identify and fully discuss two ideas/issues.
(14 marks; suggested time 17 minutes)
Cash Collection Budget
Royland Enterprises sells on credit and for cash.
Cash sales account for 25% of its total sales.
Royland³s collection pattern for credit sales is as follows:
40% are collected in the month of sale,
36% are collected in the month following the sale,
24% are collected in the second month following the sale.
Sales for March are expected to be $330,000.
The accounts receivable balance at February
28 is $190,350.
Of that amount, $141,750 represents the balance due on February credit
There are no receivables from months prior to January.
a. What were January's total sales?
b. Calculate February's cash sales.
Estimate March's total cash collections.
(18 marks, suggested time 21 minutes)
ROI and Residual Income
The Montross Corporation is organized into three separate divisions.
Each division manager is
responsible for controlling working capital and net fixed assets.
Currently, the company
evaluates managers based on return on investment.
Information for each of the three divisions
is as follows:
Average Current assets
Average Net fixed assets
The minimum required rate of return is 10%.
a. Which division is performing best based on return on investment?
b. Which division is performing best based on residual income?
When calculating either ROI or RI, operating income (EBIT) is used as the starting figure
for determining the measure of income. If a division is to be evaluated fairly by either the
ROI or residual income performance measures, why should operating income (EBIT) be
used as the basis for the income measure.