Exam 4: Cash Flow and Financial Planning

Three important line items on the statement of cash flows that must be obtained from the income statement include all of the following EXCEPT

________ forecast is based on the relationships between the firm's sales and certain economic indicators.

The firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.

Table 4.5 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, 2010. 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 2010. Total depreciation for 2010 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 2010. (j) The firm predicts a 4 percent net profit margin. Balance Sheet General Talc Mines December 31, 2009 -The external funds requirement results primarily from ________. (See Table 4.5)

Required financing and excess cash are typically viewed as short-term. Therefore, required financing may be represented by notes payable and excess cash is assumed invested in a liquid, interest-paying vehicle such as marketable securities.

The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets.

Cash disbursements may include all of the following EXCEPT

One basic weakness of the simplified pro-forma approaches lies in the assumption that the firm's past financial condition is an accurate indicator of its future.

Income Statement Huddleston Manufacturing Company For the Year Ended December 31, 2010 Huddleston Manufacturing estimates its sales in 2011 will be $3 million. Interest expense is expected to remain unchanged at $70,000, and the firm plans to pay cash dividends of $140,000 during 2011. Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2011, based on the 2010 income statement shown above.

Table 4.1 Ruff Sandpaper Co. Balance Sheets For the Years Ended 2009 and 2010 -For the year ended December 31, 2008, a corporation had cash flow from operating activities of $20,000, cash flow from investment activities of -$15,000, and cash flow from financing activities of -$10,000. The Statement of Cash Flows would show a

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

Key inputs to short-term financial planning are

The excess cash balance is the amount available for investment by the firm if the desired minimum cash balance is less than the period's ending cash.

Table 4.8 Balance Sheet Wirl Wind Company -The Wirl-Wind Company of America is trying to plan for the next year. Using the current income statement and balance sheet given in Table 4.8, and the additional information provided, prepare the company's pro forma statements. ∙ Sales are projected to increase by 15 percent. ∙ Total of $75,000 in dividend will be paid. ∙ A minimum cash balance of $650,000 is desired. ∙ A new asset for $50,000 will be purchased. ∙ Depreciation expense for next year is $50,000. ∙ Marketable securities will remain the same. ∙ Accounts receivable, inventory, accounts payable, notes payable, and accruals will increase by 15 percent. ∙ $30,000 new issue of bond will be sold. ∙ No new stock will be issued.

For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to

Since depreciation and other non-cash charges represent a scheduled write-off of an earlier cash outflow, they should NOT be included in the cash budget.

The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

Table 4.4 Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2010, for Hennesaw Lumber, Inc. Hennesaw 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 2010. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2009 is shown below. From your preparation of the pro forma income statement, answer the following multiple choice questions. -The pro forma cost of goods sold for 2010 is ________. (See Table 4.4)

A firm's operating cash flow (OCF) is defined as

The ________ method of developing a pro forma income statement forecasts sales and values for the cost of goods sold, operating expenses, and interest expense that are expressed as a ratio of projected sales.