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Ch16SM - CHAPTER 16 DISCUSSION QUESTIONS Q16-1 A capital...

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CHAPTER 16 DISCUSSION QUESTIONS 16-1 Q16-1. A capital expenditure is an expenditure intended to benefit future periods. It is nor- mally associated with the acquisition or improvement of plant assets. The real distinc- tion between a capital and revenue expendi- ture is not the immediate charging of the expenditure to income, as opposed to its gradual amortization, but the length of time required for its recovery in cash. Recoveries of revenue expenditures, such as product costs, are expected to take place in a matter of weeks or, at the most, months. The finan- cial recovery of capital expenditures is meas- ured in terms of years. Q16-2. Purposes of a research and development pro- gram are: (a) A planned search for new knowledge per- taining to the industry without reference to a specific application. (b) Creation of a new product or improve- ment of an existing product. (c) Invention of a new or improved process or machinery to make a finished product or component. Reasons for a research and development program are: (a) To protect the sales dollar, that is, to meet competition. Improving the quality of per- formance of products or achieving cost savings in either operating or capital expenditures falls into this category. (b) To do research to promote new sales dollars, either by entering a new market or by significantly expanding an existing market. (c) To investigate problems with respect to environmental protection, safety, working conditions, etc. Q16-3. Budgetary procedures for research and development expenditures are designed to: (a) force management to think about planned expenditures; (b) coordinate research and development plans with the immediate and long-range plans of the company; (c) force the research and development staff to consider major nonfinancial aspects of the program, such as personnel, equip- ment, and facilities requirements. Q16-4. A cash budget involves detailed estimates of anticipated cash receipts and disbursements for a specified period of time. It is designed to assist management in coordinating cash flow from operations as a basis for financial plans and control. The cash budget provides a sys- tematic approach to the synchronization of cash resources with needs. It assists man- agement in making intelligent decisions con- cerning capital expenditures, dividend policies, investments, and other financial matters, and often exerts a cautionary influence on any of the above plans. Periodic reports comparing actual with planned receipts and disburse- ments permit effective and continuous con- trol of cash by signaling significant deviations from the financial plans for the period. Q16-5. (a) Nonmanufacturing businesses must plan for the future just as carefully as manu- facturing concerns. Seasonal patterns in revenues and expenditures must be pro- vided for, and required equipment replacement and expansions must be budgeted.
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