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Chapter 22: Q22-1FC (page 1264)

Patrick works for McGill鈥檚 Computer Repair, owned and operated by Frank McGill. As a computer technician, Patrick has grown accustomed to friends and family members asking for assistance with their personal computers. In an effort to increase his income, Patrick started a personal computer repair business that he operates out of his home on a part-time basis, working evenings and weekends. Because Patrick is doing this 鈥渙n the side鈥� for friends and family, he does not want to charge as much as McGill鈥檚 charges its customers. When Frank McGill assigned Patrick the task of developing the budget for his department, Patrick increased the amount budgeted for computer parts. When the budget was approved, Patrick purchased as many parts as the budget allowed, even when they were not needed. He then took the extra parts home to use in his personal business in an effort to keep his costs down and profits up. So far, no one at McGill鈥檚 has asked about the parts expense because Patrick has not allowed the actual amount spent to exceed the budgeted amount.

Requirements

1. Why would Patrick鈥檚 actions be considered fraudulent?

2. What can a company do to protect against this kind of business risk?

Short Answer

Expert verified

Answer

The managers should review the budget and ask questions from the preparatory about the budgeted figures.

Step by step solution

01

Reason why Patrick’s actions are considered fraudulent

Patrick is using McGill鈥檚 resources to buy computer parts for his side income from his personal customers which is not ethical. That is why Patrick鈥檚 actions will be considered fraudulent.

02

What can a company do to protect against this kind of business risk

The managers should review the budget and ask questions from the preparatory about the budgeted figures. Also, the parts should be purchased in portions and not in bulk.

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Most popular questions from this chapter

Camp Company is a sporting goods store. The company sells a tent that sleeps six people. The store expects to sell 250 tents in 2018 and 280 tents in 2019. At the beginning of 2018, Camp Company has 25 tents in Merchandise Inventory and desires to have 5% of the next year鈥檚 sales available at the end of the year. How many tents will Camp Company need to purchase in 2018?

Using sensitivity analysis in budgeting

Refer to the Berry鈥檚 schedule of cash receipts from customers that you prepared in Short Exercise S22-9. Now assume that Berry鈥檚 sales are collected as follows:

60% in the month of the sale

20% in the month after the sale

18% two months after the sale

2% never collected

Prepare a revised schedule of cash receipts for January and February.

What is the formula used to determine the amount of direct materials to be purchased?

Preparing a financial budget

This problem continues the Piedmont Computer Company situation from Chapter 21. Assume Piedmont Computer began January with \(15,000 cash. Management forecasts that cash receipts from credit customers will be \)48,000 in January and \(51,000 in February. Projected cash payments include equipment purchases (\)20,000 in January and \(41,000 in February) and selling and administrative expenses (\)2,000 each month).

Piedmont Computer Company鈥檚 bank requires a \(26,000 minimum balance in the firm鈥檚 checking account. At the end of any month when the account balance falls below \)26,000, the bank automatically extends credit to the firm in multiples of \(5,000. Piedmont Computer Company borrows as little as possible and pays back loans each month in \)1,000 increments, plus 12% interest on the entire unpaid principal. The first payment occurs one month after the loan.

Requirements

1. Prepare Piedmont Computer Company鈥檚 cash budget for January and February 2020.

2. How much cash will Piedmont Computer Company borrow in February if cash receipts from customers that month total \(41,000 instead of \)51,000?

Using sensitivity analysis Rucker Company prepared the following budgeted income statement for 2019:

Requirements

1. Prepare a budgeted income statement with columns for 700 units, 1,300 units, and 1,700 units sold.

2. How might managers use this type of budgeted income statement?

3. How might spreadsheet software such as Excel assist in this type of analysis?
See all solutions

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