Exam 4: Cash Flow and Financial Planning

Table 4.3 The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the coming months of January through May. Historically, 75 percent of sales are for cash with the remaining 25 percent collected in the following month. The ending cash balance in January is $3,000. Prepare a cash budget for the months of February through May to answer the following multiple choice questions. -The ending cash balance for March is ________. (See Table 4.3)

The primary purpose in preparing pro forma financial statements is

Cash flows directly related to production and sale of the firm's products and services are called

Short-run financial plans and long-run financial plans generally cover periods ranging from ________ years and ________ years, respectively.

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

In the statement of cash flows, cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.

In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to

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 -If General Talc Mines cannot raise the external financing required through traditional credit channels, the firm may ________. (See Table 4.5)

In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to

The depreciable value of an asset, under MACRS, is

Under MACRS, an asset which originally cost $100,000, incurred installation costs of $10,000, and has an estimated salvage value of $25,000, is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 1?

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

Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions.

In the statement of cash flows, the financing flows are cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.

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

In preparation for the quarterly cash budget, the following revenue and cost information have been compiled. Prepare and evaluate a cash budget for the months of October, November, and December based on the information shown below. ∙ The firm collects 60 percent of sales for cash and 40 percent of its sales one month later. ∙ Interest income of $50,000 on marketable securities will be received in December. ∙ The firm pays cash for 40 percent of its purchases. ∙ The firm pays for 60 percent of its purchases the following month. ∙ Salaries and wages amount to 15 percent of the preceding month's sales. ∙ Sales commissions amount to 2 percent of the preceding month's sales. ∙ Lease payments of $100,000 must be made each month. ∙ A principal and interest payment on an outstanding loan is due in December of $150,000. ∙ The firm pays dividends of $50,000 at the end of the quarter. ∙ Fixed assets costing $600,000 will be purchased in December. ∙ Depreciation expense each month of $45,000. ∙ The firm has a beginning cash balance in October of $100,000 and maintains a minimum cash balance of $200,000.

Development of pro forma financial statements help the financial manager to project the amount, if any, of external financing required to support a given level of sales as well as a basis for analyzing in advance the level of profitability and overall financial performance of the firm in the coming year.

The key input to the short-run financial planning process is

The financial manager may cope with uncertainty and make more intelligent short-term financial decisions by preparing several cash budgets, each based on differing assumptions.

Net operating profit after taxes (NOPAT) represents the firm's earnings before interest and after taxes.