Deck 4: Financial Forecasting

Question 1

A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?

A) $9,000
B) $8,000
C) $7,700
D) $8,100

Answer 1

D

Question 2

In developing the pro forma income statement we follow four important steps: 1) compute other expenses, 2) determine a production schedule, 3) establish a sales projection, 4) determine profit by completing the actual pro forma statement. What is the correct order for these four steps?

A) 1, 2, 3, 4
B) 4, 3, 2, 1
C) 2, 1, 3, 4
D) 3, 2, 1, 4

Answer 2

D

Question 3

BHS Inc. determines that sales will rise from $300,000 to $500,000 next year. Spontaneous assets are 70% of sales and spontaneous liabilities are 30% of sales. BHS has a 10% profit margin and a 40% dividend payout ratio. What is the level of required new funds?

A) $50,000
B) $20,000
C) $100,000
D) BHS is in balance and no new funds are needed.

Answer 3

A

Question 4

In using a systems approach to financial planning, it is not necessary to develop a:

A) pro forma income statement.
B) cash budget.
C) pro forma balance sheet.
D) contingent liability plan.

Question 5

XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production?

A) 1,100 units
B) -0- units
C) 500 units
D) 400 units

Question 6

In the percent-of-sales method:

A) as the dividend payout ratio goes up, the required new funds also rise.
B) as the dividend payout ratio rises, required new funds decline.
C) the dividend payout ratio does not affect new funds.
D) a change to the ex-dividend date causes the required new funds to change.

Question 7

In forecasting a firm's cash needs for some future period:

A) the percent-of-sales method is a detailed approach.
B) cash budgets are less exact than the percent-of-sales method.
C) a cash budget approach cannot deal effectively with both level and seasonal production schedules.
D) a cash budget approach can deal effectively with both level and seasonal production schedules.

Question 8

The difference between total receipts and total payments is referred to as:

A) cumulative cash flow.
B) beginning cash flow.
C) net cash flow.
D) cash balance.

Question 9

A firm has forecasted sales of $4,000 in January, $6,000 in February, and $5,500 in March. All sales are on credit. 40% is collected the month of sale and the remainder the following month. How much is collected from accounts receivable in February?

A) $5,400
B) $4,800
C) $6,000
D) $3,000

Question 10

In general, the larger the portion of a firm's sales that are on credit, the:

A) lower will be the firm's need to borrow.
B) higher will be the firm's need to borrow.
C) more rapidly credit sales will be paid off.
D) more the firm can buy raw materials on credit.

Question 11

In order to estimate production requirements, we:

A) add beginning inventory to projected sales in units and subtract desired ending inventory.
B) add projected sales in units to desired ending inventory and subtract beginning inventory.
C) add beginning inventory to desired ending inventory and divide by two.
D) add beginning inventory to desired ending inventory and subtract projected sales in units.

Question 12

A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the value of the ending inventory using FIFO?

A) $2,750
B) $3,000
C) $3,300
D) $2,550

Question 13

When using the percent-of-sales method in forecasting funds needed, which of the following is not true?

A) As the dividend payout ratio decreases, the required new funds also decrease.
B) Required new funds decrease as profits margins increase.
C) Required new funds increase as accumulated amortization increases.
D) As the tax rate increases, the required new funds increase.

Question 14

The percent-of-sales method of financial forecasting:

A) is more detailed than a cash budget approach.
B) requires more time than a cash budget approach.
C) assumes that balance sheet accounts maintain a constant relationship to sales.
D) provides a month-to-month breakdown of data.

Question 15

Pro forma financial statements are not:

A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) part of the year end filing with the securities regulator.

Question 16

A firm has forecasted sales of $3,000 in April, $4,500 in May, and $6,500 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be the balance in accounts receivable at the end of June?

A) $1,950
B) $6,500
C) $4,550
D) $5,100

Question 17

In the construction of the cash payments schedule, the major cash payment is generally:

A) the general and administrative expense.
B) costs associated with inventory manufactured.
C) interest and dividends.
D) payments for new plant and equipment.

Question 18

Ideally, sales projections should be derived from:

A) an external viewpoint.
B) an internal viewpoint.
C) both internal and external viewpoints.
D) the marketing department.

Question 19

Required production during a planning period will depend on the:

A) cost of beginning inventory of products.
B) credit sales during the period.
C) desired level of beginning inventory.
D) desired level of ending inventory.

Question 20

The key initial element in developing pro forma statements is:

A) a cash budget.
B) an income statement.
C) a sales forecast.
D) a collections schedule.

Question 21

The need for an increase or decrease in short-term borrowing can be predicted by:

A) ratio analysis.
B) trend analysis.
C) a cash budget.
D) an income statement.

Question 22

In a cash budget, the cumulative cash balance is equal to:

A) net cash flow minus the beginning cash balance.
B) net cash flow plus the beginning cash balance.
C) cumulative loan balance minus the ending cash balance.
D) cumulative loan balance plus the ending cash balance.

Question 23

In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced:

A) is always higher.
B) is always lower.
C) is always the same.
D) can be either higher or lower.

Question 24

Firms that successfully increase their rates of inventory turnover will, among other things,:

A) be able to reduce their borrowing needs.
B) be able to reduce their dividend payments to shareholders.
C) find it more difficult to be given credit by their resource suppliers.
D) have a greater need for high balances in their cash accounts.

Question 25

A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that:

A) all sales were from current production.
B) all sales were from beginning inventory.
C) sales were from beginning inventory until it was depleted, and then use sales from current production.
D) all sales were for cash.

Question 26

The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for:

A) change in retained earnings.
B) gross profit.
C) interest expense.
D) prepaid expenses.

Question 27

Which of the following is most likely to increase the final number for notes payable in the pro forma balance sheet?

A) Decrease in inventory.
B) Increase in retained earnings.
C) Decrease in accounts payable.
D) Decrease in accounts receivable.

Question 28

A firm has targeted a 40% growth in sales this year. Last year's cash as a percent of sales was 15%, accounts receivable 30%, and inventory 35%. What percentage growth in current assets is required to support the growth in sales under the percent-of-sales forecasting method?

A) 32%
B) 26%
C) 18%
D) Not enough information to tell.

Question 29

A firm has forecasted sales of $8,000 in January, $12,000 in February, and $11,000 in March. All sales are on credit. 40% is collected the month of sale and the remainder the following month. How much is collected from accounts receivable in February?

A) $10,800
B) $9,600
C) $12,000
D) $6,000

Question 30

Net cash flow is equal to:

A) income after taxes minus amortization.
B) income after taxes minus dividends.
C) cash receipts minus cash payments.
D) cash receipts minus cash payments minus amortization.

Question 31

ABC Co. has forecasted June sales of 600 units and July sales of 900 units. The company maintains ending inventory equal to 130% of next month's sales. June beginning inventory reflects this policy. What is June's required production?

A) 990 units
B) -0- units
C) 1,000 units
D) 800 units

Question 32

A rapid rate of growth in sales and profits may require:

A) higher dividend payments to shareholders.
B) increased borrowing by the firm to support the sales increase.
C) the firm to be less lenient with credit customers.
D) sales forecasts to be made less frequently.

Question 33

In the percent-of-sales method, an increase in dividends:

A) will increase required new funds.
B) will decrease required new funds.
C) has no effect on required new funds.
D) more information is needed.

Question 34

In using a systems approach to financial planning, it is necessary to develop everything except:

A) pro forma income statement.
B) cash budget.
C) pro forma balance sheet.
D) a collection schedule.

Question 35

A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 800 units, what is the value of the ending inventory using FIFO?

A) $1,800
B) $3,250
C) $3,600
D) $7,800

Question 36

In the percent-of-sales method if (A/S₁) and L/S₁) both increase, then:

A) RNF stays the same.
B) RNF goes down.
C) RNF goes up.
D) more information is needed.

Question 37

A firm has forecasted sales of $3,000 in April, $4,500 in May, and $12,000 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be the balance in accounts receivable at the end of June?

A) $1,950
B) $6,500
C) $8,400
D) $5,100

Question 38

In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the:

A) pro forma income statement.
B) cash budget.
C) prior balance sheet.
D) statement of retained earnings.

Question 39

A firm has beginning inventory of 400 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?

A) $9,000
B) $8,000
C) $7,700
D) $8,100

Question 40

In the development of the pro forma financial statements, the last step in the process is the development of the:

A) cash budget.
B) pro forma balance sheet.
C) pro forma income statement.
D) capital budget.

Question 41

Growth in sales volume precludes a shortage of funds.

Question 42

Internal analysis for sales projections involves examining economic and industry conditions.

Question 43

Companies generally prefer to maintain some minimum cash balance.

Question 44

Pro forma statements are generally prepared six months to a year into the future.

Question 45

If projected net cash flow for November is ($10,000); beginning cash balance is $4,000; minimum cash balance is $3,000; beginning loan balance is $8,000, what will be the cumulative loan balance at the end of November?

A) $14,000
B) $5,000
C) $17,000
D) $22,000

Question 46

An increase in sales and/or profits means there is also an increase in cash on the balance sheet.

Question 47

If projected net cash flow for January is ($6,500); beginning cash balance is $16,000; minimum cash balance is $5,000; beginning loan balance is $4,500, what will be the cash balance on the pro forma cash budget at the end of January?

A) $5,000
B) $10,000
C) $12,000
D) $4,500

Question 48

In the percent-of-sales method, a decrease in dividends:

A) will increase required new funds.
B) will decrease required new funds.
C) has no effect on required new funds.
D) more information is needed.

Question 49

Firms that decrease their rates of inventory turnover will, among other things:

A) have to increase their borrowing needs.
B) be able to reduce their dividend payments to shareholders.
C) find it easier to be given credit by their resource suppliers.
D) have a lesser need for high balances in their cash accounts.

Question 50

In the development of the pro forma financial statements, the second step in the process is the development of the:

A) cash budget.
B) pro forma balance sheet.
C) pro forma income statement.
D) capital budget.

Question 51

Which of the following is most likely to decrease the final number for notes payable in the pro forma balance sheet?

A) Increase in inventory.
B) Decrease in retained earnings.
C) Increase in accounts payable.
D) Increase in accounts receivable.

Question 52

BHS Inc. determines that sales will rise from $300,000 to $700,000 next year. Spontaneous assets are 70% of sales and spontaneous liabilities are 30% of sales. BHS has a 10% profit margin and a 40% dividend payout ratio. What is the level of required new funds?

A) $118,000
B) $40,000
C) $70,000
D) BHS is in balance and no new funds are needed.

Question 53

If on the last day of February the actual A/R balance was $12,000; projected sales in March are $50,000; 70% of sales are on credit; 60% of credit sales are collected in the month of sale and 40% are collected in the month after the sale, what is the projected A/R balance on the pro forma balance sheet for the end of March?

A) $26,000
B) $14,000
C) $20,000
D) $35,000

Question 54

Pro forma income statements follow a sales forecast and production plan.

Question 55

The primary purpose of the cash budget is to plan accounts payable payments.

Question 56

The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold.

Question 57

The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding.

Question 58

The main consideration in constructing the pro forma income statement is the costs specifically associated with the units sold during the period.

Question 59

Profit is generally adequate to finance significant growth.

Question 60

An increase in sales and profits generates the necessary cash required for economic growth.

Question 61

When sales volume varies from month to month it is not advisable to use level production.

Question 62

Pro forma income statements and balance sheets refer to projected financial statements.

Question 63

The percent-of-sales forecast is likely to be most accurate when used with cyclical companies.

Question 64

If inventory turnover is equal to 3, that means that the company keeps a three-month supply of inventory on hand.

Question 65

A firm's cash borrowing needs can be reduced if its inventory turnover rate can be increased.

Question 66

The percent-of-sales method would be more accurate under a steady sales assumption than cyclical sales.

Question 67

A cash budget is unnecessary under level production since we know how much will be produced every month.

Question 68

An increase in sales accompanied by an increase in accounts payable will reduce the amount of new external funds required.

Question 69

As the dividend payout ratio declines more external funds are required.

Question 70

A lower dividend payout ratio will decrease the firm's need for borrowing.

Question 71

When a financial manager calculates production requirements they add Projected Sales to desired ending inventory then subtract beginning inventory.

Question 72

A pro forma balance sheet needs data from the prior balance sheet, pro forma income statement and the cash budget.

Question 73

The primary purpose of the cash budget is to forecast income.

Question 74

The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due.

Question 75

Level production schedules usually have the advantage of reducing overall production costs.

Question 76

Lower profit margins resulting from increased competition would mean a lower need for external funds.

Question 77

It is helpful to break down the income statement into smaller monthly periods to enable evaluation of seasonal patterns of cash inflows and outflows.

Question 78

A higher growth rate in sales will require more external funds.

Question 79

The process of preparing a cash budget requires the financial manager translate the pro forma income statement into cash flows.

Question 80

The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a constant relationship to sales.