Chapter 15: Budgeting and Controlling Operations and Taxes
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poor performance can result from many factors, internal and external, including the following
-Having the wrong objectives -customers not buying the company's product -poor scheduling of production or purchases -Theft and/ or spoilage of products -too many employees for the work being performed -opportunities lost -too many free services or donation
sales taxes
tax added to the gross amount of the sale of goods sold within the taxing jurisdiction.
federal unemployment tax
tax paid to the federal government to administer the unemployment insurance program
The ratio of net sales to working capital gives an idea of _____.
the support that is received from a business's current assets
taxable income
total revenues minus deductible expenses
True or false: The Internal Revenue Service (IRS) and certain states, counties, and localities require business owners to withhold the appropriate amount of income tax from each employee's earnings during each pay period.
true. The Internal Revenue Service (IRS) and certain states, counties, and localities require business owners to withhold the appropriate amount of income tax from each employee's earnings during each pay period. The amount withheld from all employees must be submitted to the IRS, along with Form 941, on a quarterly basis.
True or false: The U.S. tax system includes all the local, state, and federal tax systems.
true. The U.S. tax system includes all the federal, state, and local tax systems, each of which has at least two parts. Each part plays a vital role in tax determination and collection.
performance standards are usually state in terms
units consumed or produced price paid or charged.
characteristics of effective control systems
•Timely •Cost effective •Accurate •Quantifiable and measurable •Indicate cost-and-effect relationships •Responsibility of one individual •Generally accepted
steps in control
1. setting up standards of performance 2. measuring actual performance 3. comparing actual performance with planned performance standards 4. deciding whether any deviations are excessive 5. determining the appropriate corrective action needed to bring actual performance into conformity with planned performance
Identify the items that are taxable to individuals who are part of businesses.
Bonuses and salaries Cash withdrawn from a partnership or proprietorship
items on which an excise tax is imposed
Cigars and cigarettes Alcoholic beverages Tires for automobiles
Identify the sources from which customers' credit risks can be determined.
Customers' files and documents Financial and trade reports previous credit experience
ratios that are commonly used to check a company's source-of-funds relationships
Debt to owners' equity Current liabilities to owners' equity Long-term liabilities to working capital fixed assets to owner's equity
goods that are exempted from sales taxes.
Equipment used exclusively in processing various goods Goods that have to be resold
The Social Security and Medicare taxes that are collected by employers under the Social Security program are technically for the _____.
Federal Insurance Contributions Act (FICA)
Types of Audits
Financial auditing It involves the verification of the records and financial statements of a company by an outside certified public accountant (CPA). Internal auditing It functions primarily as a service to management for the improvement of its financial controls. Operations auditing It studies the basic activities of a company in order to identify problem areas and may include studies of functional areas.
true statement about the second part of unemployment compensation insurance.
It builds up a fund from which employees receive payment in case they are laid off.
true of an installment payment plan available to credit card users
It extends credit longer than other payment plans.
true statement about working capital.
It indicates a company's ability to pay its current liabilities.
true statements about credit management.
It involves determining how customers will pay for purchases. It aims to increase profits and the stability of customers. It involves the administration of credit operations.
true statement about the acid test (quick) ratio.
It is a rigorous test of the capability to pay debts rapidly.
true of the use of cash as a method of payment in business transactions?
It makes recordkeeping easier.
true statement about the Social Security program.
It requires employers to act as both taxpayers and tax collectors.
Identify the credit policies that can be used by small businesses.
Liberal extension of credit with a liberal collection policy Liberal extension of credit with a strict collection policy strict extension of credit with a collection policy adjusted to individual circumstances
forms in which feedback is provided (in the left column) with their descriptions
Observation This method is useful if one's knowledge is needed, one's presence may improve a work, or one is present for other purposes. An oral report This is the most prevalent type of control used in small firms, is time-consuming, and provides two-way communication. A written memo or report This type of feedback is used when facts must be assembled or when a record is needed, and it is expensive unless the reports are original.
Identify the advice offered by Robert Hackley to prepare for cash flow crises. (Check all that apply.)
Payments should be scheduled to one's maximum advantage. Some funds should be set aside in an interest-bearing account. A good credit rating should be established and maintained.
_____ is a payment system through which one can accept charge sales from startup with an attachment to one's android, to customer POS.
Square Point of Sale
business-related terms (in the left column) with their descriptions
The collection period ratio It consists of accounts receivable divided by average daily credit sales. The turnover rate It is expressed by the ratio of net sales to inventory. Accounts receivable It represents what business owners should acquire in cash from customers sometime in the future.
types of taxes that affect small businesses (in the left column) with their descriptions (in the right column).
The direct taxation of business income It is an income tax on corporate profits. Personal taxes It is paid on owners' salaries and other ownership-related income from their business.
parts of the U.S. tax systems (in the left column) with their descriptions (in the right column)
The first part It is the system for deciding what the taxes will be and who will pay them. The second part It is the system for collecting the taxes.
Before starting a business, which of the following decisions about federal, state, and local taxes should business owners take?
The form of business to be used
methods of computing inventory that are used in production.
The last-in, first-out (LIFO) method The average cost method The first-in, first-out (FIFO) method
Identify the factors on which the amount of the pay-as-you-go tax collected by the Internal Revenue Service (IRS) and certain states, counties, and localities depends. (Check all that apply.)
The length of pay period and the marital status of each employee The number of exemptions claimed on each employee's withholding exemption certificate The total wages of each employee
provisions of contracts when entrepreneurs sell their companies.
The price of purchase Warranties by the seller about the debt and liabilities of the company being sold A noncompeting clause from the seller
types of budgets required in preparing an operating budget (in the left column) with their descriptions
The sales budget It is planned first and considers the personnel and production functions. The production budget it includes personnel, production, and purchasing schedules in addition to inventory levels, the amount of materials, personnel time, and their costs. The personnel budget It is developed for the number of people required to produce a product, any costs of training them, their pay and benefits, and other factors involved.
Identify the decisions involving federal, state, and local taxes that must be taken at the start of a business. (Check all that apply.)
The time period for paying tariffs The method of handling income and expenses
Identify a feature of checks used for payment in business transactions.
They are easier to deal with in making bank deposits.
true statement about use taxes.
They are often applied to automobiles that are purchased outside a jurisdiction.
true statements about business records.
They are required by law and in legal matters. They help in better business management.
True or false: Budgetary control includes close and frequent controls in the areas where a company is affected most severely by poor performance.
True
items on which employees can receive tax-free benefits from a business
Tuition assistance and other employee benefits Legal and medical reimbursements Entertainment and travel expense compensation
excise tax
additional tax on certain items imposed by the federal government
current ratio
amount of current assets divided by the amount of current liabilities.
working capital
amount of current assets less current liabilities.
indirect taxes
are not paid by a person or firm, but by someone else
List in order, from the beginning, the steps that credit card users are required to follow when the users opt for an installment payment plan.
buyers make a down payment buyers make regular weekly or monthly payments buyers pay interest charges on the unpaid balance.
Three types of budges
capital budgets operating budgets cash flow budgets
In order to avoid taxes that are levied on the transfer of ownership of a business, owners must _____.
carefully do estate planning to reduce the tax bite on an inheritance
When Peer-to-Peer (P2P) payment products are used, the sender is always a _____.
consumer
credit management
deciding how customers will pay for purchases from your business setting credit policies and practices administering credit operations
Budget
detailed statement of financial results expected for a given future period
True or false: According to Robert Hackley, fixed costs should be kept high and variable expenses should be separated from revenue in order to deal with cash flow crises.
false. According to Robert Hackley, executive vice president of Hotsy, a Central Florida dealership that sells industrial pressure cleaning equipment and detergents, fixed costs should be kept low and variable expenses should be tied to revenue so that, if income drops, so do expenses. This is one of the ways to prepare for cash flow crises.
True or false: According to the Deficit Reduction Act of 1984, a home computer used for business purposes for any period of time qualifies for deductions.
false. According to the Deficit Reduction Act of 1984, if a business owner uses home computer for business purposes over 50 percent of the time, it qualifies for the appropriate credits or deductions.
True or false: In the context of the ratios used to asses a company's source-of-funds relationship, an extremely low value for fixed assets to owners' equity puts the company in a risky situation.
false. An extremely high value for fixed assets to owners' equity puts a company in a risky situation. While a bad year will probably decrease owners' income, the obligation to pay continues. On the other hand, a very good year results in large returns.
True or false: When a liberal attitude is adopted in collecting bad debts or in extending credit, bad-debt losses and collection costs decrease.
false. Being liberal in extending credit or in collecting bad debts tends to stimulate sales but increase collection costs and bad-debt losses. Strict policies have the reverse effect.
True or false: A tax consequence from the sale of a business is that the business owner cannot defer some taxes to a later period even if a part of the payment is received in stock.
false. The tax consequences from the sale of a business are that either the business owner pay an immediate capital gains tax on cash payments from the sale or if the owner receives part of the payment in stock, he or she may be able to defer some taxes to a later period.
Operating budget
forecasts sales and allocates expenses for achieving them.
cash flow budget
forecasts the amount of cash receipts and cash needed to pay expenses and make other purchases
financial audit
formalized examination and/or review of a company's financial records.
The best control of bad-debt losses begins with _____.
investigating customers' willingness and ability to pay
use tax
is a tax on the use, consumption, or storage of goods within a taxing jurisdiction.
Acid test (quick) ratio
is the ratio of (current assets- less inventory), / to current liabilities
Budgetary control
is the system of budgets used to control a company's financial activities.
Every business owner would probably prefer to make all sales for cash, given a choice, because _____.
it is instrumental in avoiding bad debts
The Deficit Reduction Act of 1984
limits the conditions under which computers used in the home can be deducted as business expenses
direct taxes
paid directly to a taxing authority by the person or business against which they are levied.
peer-to-peer (P2P)
payment systems are growing in popularity. There are many choices for using the services including Visa and Mastercard.
return on equity(ROE)
percentage of net profit your equity earns before taxes
The problem associated with evaluating inventory used during a year becomes increasingly acute when _____.
prices change rapidly or holding on to inventory for a long period.
control
process of ensuring that organizational goals are achieved
In the context of maintaining business records, the Internal Revenue Service (IRS) requires that _____.
records be kept complete and separate for each individual business
Capital budget
reflects a business's plans for obtaining, expanding, and replacing physical facilities.
The potential for losses from bad debts can be reduced by _____.
refusing to extend credit
ratios
relationships between two or more variables
feedback
response a receiver gives through further communication with the sender of the message or some other person
List in order, from the beginning, the various budgets that should be developed to prepare an operating budget.
sales budget production budget personnel budget
Performance standards
set-in advance- acceptable levels to which employee achievement should conform
