Exam 4: Financial Planning and Forecasting

___________forecast is based on a buildup, or consensus, of sales forecasts through the firm's own sales channels, adjusted for additional factors such as production capabilities.

One basic weakness of the simplified pro-forma approaches lies in the assumption that certain variables, such as cash, accounts receivable, and inventories, can be forced to take on certain "desired" values.

A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.

The most common components of cash receipts are

Firms that have a good understanding of their cost structures will use the percentage-of-sales approach when budgeting, but make adjustments to the historical ratios to better reflect current conditions.

The weakness of the judgmental approach to preparing a pro forma balance sheet is

In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of$500. The ending cash balance for August totals .

Cash planning involves the preparation of the firm's cash budget. Without adequate cash-regardless of the level of profits-any firm could fail.

Generally, mature utility companies have stable predictable cash flows; as such,

The best way to adjust for the presence of fixed costs when using the simplified approach for proforma income statement preparation is

A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2004. Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions. A. The firm estimates sales of $1,000,000. B. The firm maintains a cash balance of $25,000. C. Accounts receivable represents 15 percent of sales. D. Inventory represents 35 percent of sales. E. A new piece of mining equipment costing $150,000 will be purchased in 2004. Total depreciation for 2004 will be $75,000. F. Accounts payable represents 10 percent of sales. G. There will be no change in notes payable, accruals, and common stock. H. The firm plans to retire a long term note of $100,000. I. Dividends of $45,000 will be paid in 2004. J. The firm predicts a 4 percent net profit margin Balance Sheet General Talc Mines December 31, 2003 Assets Cash \ 25,000 Accounts receivable 120,000 Inventories 300,000 -\ldots... Total current assets \ 445,000 Net fixed assets \ 500,000 -\ldots... Total assets \9 45,000 Liabilities and stockholders' equity Accounts payable \ 80,000 Notes payable 350,000 Accruals 50,000 -\ldots... Total current liabilities \ 480,000 Long-term debts 150,000 Total liabilities \ 630,000 Stockholders' equity Common stock \ 180,000 Retained earnings 135,000 Total stockholders' equity \ 315,000 Total liabilities and stockholders' equity \ 945,000 -The pro forma total liabilities amount is____________

Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2004, for Saw Lumber, Inc. Saw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2004. The income statement for the year ended December 31, 2003 is shown below. Income Statement Saw Lumber, Inc. For the Year Ended December 31, 2003 Sales Revenue \ 4,200,000 Less: Cost of goods sold 3,570,000 -\@cdots\@cdots\cdot-\cdot Gross profits \ 630,000 Less: Operating expenses 210,000 -\@cdots\@cdots\cdot-\cdot Operating profits \ 420,000 Less: Interest expense 105,000 -\@cdots-. Net income before taxes \ 315,000 Less: Taxes (40\%) 126,000 -\@cdots-. Net income after taxes \ 189,000 Less: Cash dividends 120,000 -\@cdots-. To: Retained earnings \6 9,000 -The pro forma accumulated retained earnings account on the balance sheet is projected to. ______________(See Figure 4.2)

An internal sales forecast is based on the relationships that can be observed between the firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.

The cash budget gives the financial manager a clear view of the timing of the firm's expected profitability over a given period.

In cash budgeting, other cash receipts are cash receipts expected to result from sources other than sales. Items such as interest and dividends, proceeds from the sale of equipment, depreciation, and stock and bond sales proceeds are examples of other cash receipts.

To deal with the uncertainty of forecasts, managers will often do scenario analysis; managers will forecast both pessimistic and optimistic scenarios along with the base case.

Due to the no fixed costs assumption in the percent-of-sales method, the use of cost and expense ratios generally tends to understate profits when sales are increasing and overstate profits when sales are decreasing.

A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2004. Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions. A. The firm estimates sales of $1,000,000. B. The firm maintains a cash balance of $25,000. C. Accounts receivable represents 15 percent of sales. D. Inventory represents 35 percent of sales. E. A new piece of mining equipment costing $150,000 will be purchased in 2004. Total depreciation for 2004 will be $75,000. F. Accounts payable represents 10 percent of sales. G. There will be no change in notes payable, accruals, and common stock. H. The firm plans to retire a long term note of $100,000. I. Dividends of $45,000 will be paid in 2004. J. The firm predicts a 4 percent net profit margin. Balance Sheet General Talc Mines December 31, 2003 Assets Cash \ 25,000 Accounts receivable 120,000 Inventories 300,000 -\ldots... Total current assets \ 445,000 Net fixed assets \ 500,000 -\ldots... Total assets \9 45,000 Liabilities and stockholders' equity Accounts payable \ 80,000 Notes payable 350,000 Accruals 50,000 -\ldots... Total current liabilities \ 480,000 Long-term debts 150,000 Total liabilities \ 630,000 Stockholders' equity Common stock \ 180,000 Retained earnings 135,000 Total stockholders' equity \ 315,000 Total liabilities and stockholders' equity \ 945,000 -The external financing required in 2004 will be__________

The primary purpose in preparing a budget is

In order to prepare a cash budget, the finance department would need