Deck 4: Financial Forecasting

Question 1

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

Answer 1

True

Question 2

Growth in sales volume precludes a shortage of funds.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

Profit is generally adequate to finance significant growth.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

Companies generally prefer to maintain some minimum cash balance.

Question 20

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 21

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) 1100 units
B) -0- units
C) 500 units
D) 400 units

Question 22

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 23

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 24

Required production during a planning period will depend on the

A) beginning inventory of products.
B) sales during the period.
C) desired level of ending inventory.
D) all of the other answers are correct

Question 25

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

Question 26

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

Question 27

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 28

Sales projections and the ability to accurately predict the future have a large impact on cash flow targets.

Question 29

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

Question 30

The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding or excess funds to be invested.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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

Question 38

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

Question 39

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

A) pro forma income statement.
B) cash budget.
C) pro forma balance sheet.
D) all of the other answers are correct

Question 40

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

Question 41

Pro forma financial statements are

A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) all of the other answers are correct

Question 42

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 43

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 44

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 45

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

Question 46

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 47

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

Question 48

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 49

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 50

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

Question 51

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 52

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

A) the percent-of-sales method is a "broad-brush" approach.
B) cash budgets are more exact than the percent-of-sales method.
C) a cash budget approach can deal effectively with both level and seasonal production schedules.
D) all of the other answers are correct

Question 53

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 54

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) none of the other answers are correct

Question 55

The difference between total receipts and total payments referred to as

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

Question 56

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 57

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 LIFO?

A) $2,750
B) $3,250
C) $3,300
D) $2,550

Question 58

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 59

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.

Question 60

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 61

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 62

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 LIFO?

A) $1,650
B) $3,250
C) $3,600
D) $1,800

Question 63

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

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

Question 64

Ellis Sport Shop projects the following sales: $$\begin{array} { c c c } \text { April } & \text { May } & \text { June } \\\$ 75,000 & \$ 95,000 & \$ 110,000\end{array}$$ Ninety percent of Ellis' sales are on credit with 60 percent of receivables collected in the month after the sale and the rest of receivables collected in the second month after the sale. February sales were $60,000 and March sales were $70,000. In the past Ellis' bad debt percentage has been 0 and this rate is expected to continue.

A) Prepare a monthly schedule of cash receipts for April-June.
B) What is the balance of Receivables at the end of June?

Question 65

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 66

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 67

Eddie's Bar and Restaurant Supplies expects its revenues and payments for the first part of the year to be: $\begin{array}{lrr} & \text { Sales } & \text { Payments } \\\text { Jan. } & \$ 14,000 & \$ 18,000 \\\text { Feb. } & 20,000 & 21,300 \\\text { Mar: } & 26,000 & 19,100 \\\text { April } & 22,000 & 22,400 \\\text { May } & 18,000 & 14,700\end{array}$ Seventy percent of the firm's sales are on credit. Past experience shows that 40 percent of accounts receivable are collected in the month after sale, and the remainder are collected in the second month after sale. Prepare a schedule of cash receipts for March, April, and May. Eddie's pays its payments in the following month. Eddie's had a cash balance of $2,000 on March 1, which is also its minimum required cash balance. There is an outstanding loan of $2,000 on March 1. Prepare a cash budget for March, April, and May.

Question 68

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 69

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) 2200 units
B) -0- units
C) 1000 units
D) 800 units

Question 70

The following is the balance sheet for 2005 for Marbell Inc. Sales for 2005 were $300,000. Sales for 2006 have been projected to increase by 20%. Assuming that Marbell Inc. is operating below capacity, calculate the amount of new funds required to finance this growth. Marbell has an 8% return on sales and 70% is paid out as dividends.

Question 71

The Amber Magick Shoppe has forecast its sales revenues and purchases for the last 5 months of 2005 to be as follows: Sixty percent of sales are on credit. On the basis of past experience, 50% of the accounts receivable are collected the month after the sale and the remainder are collected 2 months after the sale. Purchases are paid 30 days after they are incurred. The firm has a cash balance of $5,000 on hand as of October 31, but its minimum required cash balance is $4,000

A) Prepare a schedule of cash receipts for October, November, and December.
B) Prepare a cash budget for the same period.

Question 72

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 73

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 74

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 75

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 76

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 77

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 78

During 2005, Baker Company and Baumer Company made the following identical purchases:
100 units @ $10.00
200 units @ $10.50
200 units @ $11.50
100 units @ $12.00
Each company sold 400 units, but Baker uses LIFO inventory valuation and Baumer uses FIFO inventory valuation. Assume there was no beginning inventory. Calculate cost of goods sold and ending inventory for each company. How will the difference in cost of goods sold affect net income?

Question 79

Frank's Sporting Goods projects sales for the second quarter of 2006 to be as follows: $\text { April } \quad\$ 100,000\quad\quad \text { May } \quad\$ 120,000\quad\quad \text { June }\quad \$ 110,000$ Ten percent of Frank's sales are for cash, 70% of accounts receivable are collected one month following the sale, and the rest are collected two months following the sale. January sales were $40,000, February sales were $60,000, and March sales were $80,000.

A) Prepare a monthly schedule of cash receipts for the second quarter of 2006.
B) What is the balance in accounts receivable at the end of June?

Question 80

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