Deck 4: Financial Planning and Forecasting

Question 1

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
$\begin{array}{lc}\text { Sales Revenue } & \$ 4,200,000 \\\text { Less: Cost of goods sold } & 3,570,000 \\& -\cdots \cdots \cdot-\cdot \\\text { Gross profits } & \$ 630,000 \\\text { Less: Operating expenses } & 210,000\\& -\cdots \cdots \cdot-\cdot \\\text { Operating profits } & \$ 420,000 \\\text { Less: Interest expense } & 105,000 \\& -\cdots-. \\\text { Net income before taxes } & \$ 315,000 \\\text { Less: Taxes }(40 \%) & 126,000\\& -\cdots-. \\\text { Net income after taxes } & \$ 189,000 \\\text { Less: Cash dividends } & 120,000 \\& -\cdots-. \\\text { To: Retained earnings }&\$69,000\end{array}$

-The pro forma operating expenses for 2004 are_____________

A) $200,000
B) $210,000
C) $225,000
D) $150,000

Answer 1

$225,000

Question 2

Nortel Networks is concerned about their forecasting accuracy; as such, Nortel should

A) wind down business operations and liquidate the company's assets.
B) avoid attempting to forecast cash flows at all.
C) prepare cash budgets using worst-case, base-case, and best-case scenarios.
D) prepare one cash budget and trust things will work out.

Answer 2

prepare cash budgets using worst-case, base-case, and best-case scenarios.

Question 3

The___________ method of developing a pro forma balance sheet estimates values of certain balancesheet accounts while others are calculated. In this method, the firm's external financing is used as abalancing, or plug, figure.

A) accrual
B) judgmental
C) percent-of-sales
D) cash

Answer 3

judgmental

Question 4

Cash disbursements may include all of the following EXCEPT

A) fixed asset outlays.
B) rent payments.
C) tax payments.
D) amortization expense.

Question 5

A weakness of the percent-of-sales method to preparing a pro forma income statement is

A) the assumption that the firm faces linear total revenue and total operating cost functions.
B) ease of calculation and preparation.
C) the assumption that the firm's past financial condition is an accurate predictor of its future.
D) the assumption that the values of certain accounts can be forced to take on desired levels.

Question 6

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

A) be a difficult model to apply.
B) overestimate profits when sales are increasing.
C) be an accurate predictor of profits.
D) underestimate profits when sales are increasing.

Question 7

The net cash flow for February is____________
$$\begin{array}{l}\begin{array} { l r l } &\text { Sportif, Inc. }\\\text { Month } &{ \text { Sales } } & \text { Disbursements } \\\text { January } & \$ 5,000 & \$ 6,000 \\\text { February } & 6,000 & \$ 7,000 \\\text { March } & 10,000 & \$ 4,000 \\\text { April } & 10,000 & \$ 5,000 \\\text { May } & 10,000 & \$ 5,000\end{array}\end{array}$$

A) $5,750
B) -$1,250
C) $750
D) -$1,000

Question 8

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

A) the sales forecast.
B) the pro forma income statement.
C) the cash budget.
D) the cash forecast.

Question 9

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

A) the assumption that the values of certain accounts can be forced to take on desired levels.
B) ease of calculation and preparation.
C) the assumption that the firm's past financial condition is an accurate predictor of its future.
D) the assumption that the firm faces linear total revenue and total operating cost functions.

Question 10

In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm

A) had an excess cash balance of $50,000.
B) required total financing of $5,000.
C) required total financing of $15,000.
D) had an excess cash balance of $75,000.

Question 11

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. for August is

A) required total financing of $2,500.
B) required total financing of $500.
C) excess cash balance of $500.
D) excess cash balance of $5,500.

Question 12

Assuming a zero cash balance at the start of January, the cash balance at the end of March is. _____________
$$\begin{array}{l}\begin{array} { l r l } &\text { Sportif, Inc. }\\\text { Month } &{ \text { Sales } } & \text { Disbursements } \\\text { January } & \$ 5,000 & \$ 6,000 \\\text { February } & 6,000 & \$ 7,000 \\\text { March } & 10,000 & \$ 4,000 \\\text { April } & 10,000 & \$ 5,000 \\\text { May } & 10,000 & \$ 5,000\end{array}\end{array}$$

A) $250
B) $2,500
C) $500
D) $4,000

Question 13

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$

-The pro forma current liabilities amount is___________

A) $475,000
B) $450,000
C) $500,000
D) $400,000

Question 14

The most common cash disbursement are

A) cash purchases, dividends, and interest income.
B) cash sales, rent, and accounts payable.
C) cash purchases, dividends, and accounts payable.
D) dividend income, cash sales, and accounts payable.

Question 15

In April, a firm had an ending cash balance of $35,000.$40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firmis $25,000. At the end of May, the firm

A) had an excess cash balance of $25,000.
B) required financing of $25,000.
C) required financing of $10,000.
D) had an excess cash balance of $0.

Question 16

A firm plans to depreciate a five year asset in the next planning period.directly affected immediately are the

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

Question 17

A projected excess cash balance for the month may be

A) financed with long-term securities.
B) financed with short-term securities.
C) invested in long-term securities.
D) invested in marketable securities.

Question 18

Generally, firms that are subject to high degree of____________ , relatively short production cycles, orboth tend to use shorter planning horizons.

A) profitability
B) operating uncertainty
C) financial certainty
D) financial planning

Question 19

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

A) the fixed asset outlay plan.
B) the pro forma income statement.
C) the long-term financing plan.
D) all of the above.

Question 20

The percent-of-sales method of preparing the pro forma income statement assumes all costs are

A) variable.
B) independent.
C) fixed.
D) constant.

Question 21

A firm plans to retire outstanding bonds in the next planning period. The statements that will be affected are the

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

Question 22

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

A) overstate retained earnings and understate the financing needed.
B) overstate retained earnings and overstate the additional financing needed.
C) understate retained earnings and overstate the financing needed.
D) understate retained earnings and understate the additional financing needed.

Question 23

The primary purpose in preparing pro forma financial statements is

A) to ensure the ability to pay dividends.
B) for risk analysis.
C) for profit planning.
D) for cash planning.

Question 24

The most common components of cash receipts are

A) accrual collections, cash sales, and interest income.
B) dividend income, cash sales, and accounts payable.
C) cash sales, receivable collections, and miscellaneous receipts.
D) retained earnings, dividends, and cash sales.

Question 25

The key aspects of the financial planning process are

A) cash planning and investment planning.
B) cash planning and financing.
C) cash planning and profit planning.
D) investment planning and profit planning.

Question 26

The firm's final sales forecast is usually a function of

A) economic forecasts.
B) accounts receivable experience.
C) salespeople's estimates of demand.
D) internal and external factors in combination.

Question 27

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$



-The external funds requirement results primarily from (See Figure 4.3)

A) high cost of sales.
B) low profit margin.
C) the payment of dividends.
D) the retirement of debt and purchase of new fixed assets.

Question 28

Of the following, generally the easiest to estimate are

A) month-to-month short-term borrowing.
B) cash disbursements.
C) cash sales.
D) cash receipts.

Question 29

Key inputs to short-term financial planning are

A) leverage analysis.
B) operating budgets.
C) economic forecasts.
D) sales forecasts, and operating and financial data.

Question 30

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$

-If General Talc Mines cannot raise the external financing required through traditional credit channels, the firm may (See Figure 4.3)

A) factor accounts receivable.
B) increase sales.
C) sell common stock.
D) purchase additional fixed assets to raise productivity.

Question 31

Generally, firms that are growing rapidly

A) have excess cash.
B) are in need of cash.
C) have just the right amount of cash.
D) are cash rich.

Question 32

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$

-The pro forma accumulated retained earnings amount is _

A) $130,000
B) $140,000
C) $175,000
D) $90,000

Question 33

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

A) building capacity can be challenging in this environment.
B) planning for future capital expenditures is very difficult to do.
C) planning for the payment of dividends to shareholders can be done with confidence.
D) planning for future financing needs cannot be done with accuracy.

Question 34

___________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.

A) A pro forma
B) An external sales
C) An internal sales
D) A sales

Question 35

In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the

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

Question 36

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
$\begin{array}{lc}\text { Sales Revenue } & \$ 4,200,000 \\\text { Less: Cost of goods sold } & 3,570,000 \\& -\cdots \cdots \cdot-\cdot \\\text { Gross profits } & \$ 630,000 \\\text { Less: Operating expenses } & 210,000\\& -\cdots \cdots \cdot-\cdot \\\text { Operating profits } & \$ 420,000 \\\text { Less: Interest expense } & 105,000 \\& -\cdots-. \\\text { Net income before taxes } & \$ 315,000 \\\text { Less: Taxes }(40 \%) & 126,000\\& -\cdots-. \\\text { Net income after taxes } & \$ 189,000 \\\text { Less: Cash dividends } & 120,000 \\& -\cdots-. \\\text { To: Retained earnings }&\$69,000\end{array}$

-The pro forma accumulated retained earnings account on the balance sheet is projected to. ______________(See Figure 4.2)

A) decrease $52,500
B) increase $57,000
C) increase $52,500
D) decrease $57,000

Question 37

The financial planning process begins with___________ financial plans that in turn guide theformation of ___________ plans and budgets.

A) short-run; operating
B) short-run; long-run
C) long-run; short-run
D) long-run; strategic

Question 38

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
$\begin{array}{lc}\text { Sales Revenue } & \$ 4,200,000 \\\text { Less: Cost of goods sold } & 3,570,000 \\& -\cdots \cdots \cdot-\cdot \\\text { Gross profits } & \$ 630,000 \\\text { Less: Operating expenses } & 210,000\\& -\cdots \cdots \cdot-\cdot \\\text { Operating profits } & \$ 420,000 \\\text { Less: Interest expense } & 105,000 \\& -\cdots-. \\\text { Net income before taxes } & \$ 315,000 \\\text { Less: Taxes }(40 \%) & 126,000\\& -\cdots-. \\\text { Net income after taxes } & \$ 189,000 \\\text { Less: Cash dividends } & 120,000 \\& -\cdots-. \\\text { To: Retained earnings }&\$69,000\end{array}$

-The pro forma net income after taxes for 2004 are__________

A) $52,500
B) $57,000
C) $202,500
D) $207,000

Question 39

A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement-called the external financing required-of $230,000. The firm should prepare to

A) arrange for a loan of $230,000.
B) do nothing; the balance sheet balances.
C) invest in marketable securities totaling $230,000.
D) repurchase common stock totaling $230,000.

Question 40

Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to

A) understate profits when sales are increasing and overstate profits when sales are decreasing.
B) understate profits when sales are decreasing and overstate profits when sales are increasing.
C) overstate profits, no matter what the change in sales, as long as fixed costs are present.
D) understate profits, no matter what the change in sales, as long as fixed costs are present.

Question 41

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 .

A) $5,500
B) $3,500
C) $2,500
D) $1,500

Question 42

The key input to any cash budget is

A) the pro forma balance sheet.
B) the current tax laws.
C) the production plan.
D) the sales forecast.

Question 43

A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firmmakes 20 percent of sales in cash and collects the balance one month following the sale. The firm'stotal cash receipts in July

A) are $200.
B) are $180.
C) are $220.
D) cannot be determined with the information provided.

Question 44

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

A) to proportionately vary the fixed costs with the change in sales.
B) to disproportionately vary the costs with the change in sales.
C) to adjust for projected fixed-asset outlays.
D) to break the firm's historical costs into fixed and variable components.

Question 45

One way a firm can reduce the amount of cash it needs in any one month is to

A) slow down the payment of receivables.
B) speed up payment of accounts payable.
C) delay the payment of wages.
D) accrue taxes.

Question 46

_________consider proposed fixed-asset outlays, research and development activities, marketingand product development actions, and both the mix and major sources of financing.

A) Cash budgeting
B) Long-term financial plans
C) Pro-forma statements
D) Short-term financial plans

Question 47

Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to

A) neither understate nor overstate profits.
B) understate profits when sales are increasing.
C) understate profits when sales are decreasing.
D) overstate profits when sales are increasing.

Question 48

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$

-General Talc Mines may prepare to (See Figure 4.3)

A) arrange for a loan equal to the external funds requirement.
B) cancel the retirement of the long term note to cover the needed financing.
C) eliminate the dividend to cover the needed financing.
D) repurchase common stock equal to the external funds requirement.

Question 49

The key inputs for preparing pro forma income statements using the simplified approaches are the

A) sales forecast for the coming year and financial statements for the preceding year.
B) sales forecast for the preceding year and financial statements for the coming year.
C) cash budget for the coming year and sales forecast for the preceding year.
D) sales forecast for the coming year and the cash budget for the preceding year.

Question 50

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$

-The pro forma total liabilities amount is____________

A) $500,000
B) $700,000
C) $550,000
D) $650,000

Question 51

$$\begin{array}{l}\text { Sportif, Inc. }\\\begin{array} { l r l } \text { Month } & \text { Sales } & \text { Disbursements } \\\hline \text { January } & \$ 5,000 & \$ 6,000 \\\text { February } & 6,000 & \$ 7,000 \\\text { March } & 10,000 & \$ 4,000 \\\text { April } & 10,000 & \$ 5,000 \\\text { May } & 10,000 & \$ 5,000\end{array}\end{array}$$

-The firm has a negative net cash flow in the month(s) of (See Figure 4.1)

A) February and March.
B) February.
C) January, February, and March.
D) January and February.

Question 52

All of the following are eventual cash outflows to the firm EXCEPT

A) the purchase of shares of stock in the firm by an investor.
B) the declaration of dividends by the board of directors.
C) the purchase of goods for resale.
D) all of the above require eventual cash outflows to the firm.

Question 53

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$

-The pro forma net fixed assets amount is__________

A) $575,000
B) $500,000
C) $650,000
D) $600,000

Question 54

The primary purpose in preparing a budget is

A) for risk analysis.
B) to estimate sales.
C) for profit planning.
D) for cash planning.

Question 55

The primary purpose in preparing pro forma financial statements is

A) for risk analysis.
B) to ensure the ability to pay dividends.
C) for profit planning.
D) for cash planning.

Question 56

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

A) An internal
B) An external
C) A pro forma
D) A sales

Question 57

Once sales are forecasted,__________must be generated to estimate a variety of operating costs.

A) a production plan
B) a cash budget
C) a pro forma statement
D) an operating budget

Question 58

Short-run financial plans and long-run financial plans generally cover periods ranging from__________years and__________ years, respectively.

A) one to three, three to five
B) two to ten, one to two
C) one to five, five to ten
D) one to two, two to ten

Question 59

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
$\begin{array}{lc}\text { Sales Revenue } & \$ 4,200,000 \\\text { Less: Cost of goods sold } & 3,570,000 \\& -\cdots \cdots \cdot-\cdot \\\text { Gross profits } & \$ 630,000 \\\text { Less: Operating expenses } & 210,000\\& -\cdots \cdots \cdot-\cdot \\\text { Operating profits } & \$ 420,000 \\\text { Less: Interest expense } & 105,000 \\& -\cdots-. \\\text { Net income before taxes } & \$ 315,000 \\\text { Less: Taxes }(40 \%) & 126,000\\& -\cdots-. \\\text { Net income after taxes } & \$ 189,000 \\\text { Less: Cash dividends } & 120,000 \\& -\cdots-. \\\text { To: Retained earnings }&\$69,000\end{array}$

-The pro forma cost of goods sold for 2004 is__________

A) $3,500,000
B) $4,000,000
C) $3,825,000
D) $3,750,000

Question 60

Which of the following would be the least likely to utilize pro forma financial statements or a cashbudget?

A) investors.
B) middle management.
C) top management.
D) lenders.

Question 61

Historically, electricity has a $500,000 fixed component and 4% of sales variable component. Next year's sales are forecasted to be $10,000,000. The electricity budget would be

A) $1,000,000.
B) $750,000.
C) $1,200,00.
D) $900,000.

Question 62

If a firm expects short-term cash surpluses it can plan

A) short-term borrowing.
B) short-term lending.
C) leverage decisions.
D) long-term investments.

Question 63

Historically, in the retail jewelry industry, cost of goods sold averages 40% of sales. If next year's sales are expected to be $1,600,000, the gross profit forecast would be

A) $960,000.
B) $1,100,000.
C) $640,000.
D) $800,000.

Question 64

A firm has actual sales in November of $1,000 and projected sales in December and January of$3,000 and $4,000, respectively. The firm makes 10 percent of its sales in cash, collects 40 percent ofits sales one month following the sale, and collects the balance two months following the sale. The firm's total cash receipts in November

A) are $100.
B) are $700.
C) are $1,000.
D) cannot be determined with the information provided.

Question 65

Under the judgmental approach for developing a pro forma balance sheet, the "plug" figurerequired to bring the statement into balance may be called the

A) accounts receivable.
B) cash balance.
C) retained earnings.
D) external financing required.

Question 66

$$\begin{array}{l}\text { Sportif, Inc. }\\\begin{array} { l r l } \text { Month } & \text { Sales } & \text { Disbursements } \\\hline \text { January } & \$ 5,000 & \$ 6,000 \\\text { February } & 6,000 & \$ 7,000 \\\text { March } & 10,000 & \$ 4,000 \\\text { April } & 10,000 & \$ 5,000 \\\text { May } & 10,000 & \$ 5,000\end{array}\end{array}$$

-The firm has a total financing requirement of_________for the period from January through May. (See Figure 4.1)

A) $0
B) $1,250
C) $750
D) $1,750

Question 67

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

A) overstate costs and understate profits.
B) understate costs and understate profits.
C) understate costs and overstate profits.
D) overstate costs and overstate profits.

Question 68

The percent-of-sales method to preparing a pro forma income statement assumes the firm has nofixed costs. Therefore, the use of the past cost and expense ratios generally tends toprofits when sales are increasing.

A) overstate
B) accurately predict
C) have no effect on
D) understate

Question 69

A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement-called the external financing required-of negative $250,000. The firm may prepare to

A) arrange for a loan of $250,000.
B) sell common stock totaling $250,000.
C) invest in marketable securities totaling $250,000.
D) do nothing; the balance sheet balances.

Question 70

The key output(s) of the short-run financial planning process are a(n)

A) sales forecast and cash budget.
B) cash budget, pro forma income statement, and pro forma balance sheet.
C) cash budget, sales forecast, and income statement.
D) income statement, balance sheet, and source and use statement.

Question 71

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$

-The external financing required in 2004 will be__________

A) $230,000
B) $195,000
C) $0
D) $240,000

Question 72

Pro forma statements are used for

A) profit planning.
B) cash budgeting.
C) credit analysis.
D) leverage analysis.

Question 73

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.

Question 74

A positive external funds requirement would indicate that the firm's financing is in excess of its needs and that funds would therefore be available for repaying debt, repurchasing stock, or increasing the dividend to stockholders.

Question 75

A firm has actual sales in November of $1,000 and projected sales in December and January of$3,000 and $4,000, respectively. The firm makes 10 percent of its sales in cash, collects 40 percent ofits sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January

A) are $2,100.
B) are $1,900.
C) are $700.
D) cannot be determined with the information provided.

Question 76

The inclusion of a monthly depreciation charge for fixed asset usage will increase the net cash flows in that period.

Question 77

Required financing and excess cash are typically viewed as short-term. Therefore, required financing may be represented by a line of credit and excess cash is assumed to be invested in a redeemable guaranteed investment certificate.

Question 78

If all customers take 15 days (one-half month) to pay their credit accounts, cash flows from sales inJune would be $150,000; May and June sales budgets are $100,000 and $200,000, respectively.

Question 79

$\text { FIGURE } 4.1$
$\text { Sportif, Inc. }$
$\begin{array}{lrr}\text { Month }&\text { Sales }&\text { Disbursements }\\\hline\text { January } & \$ 5,000 & \$ 6,000 \\\text { February } & 6,000 & \$ 7,000 \\\text { March } & 10,000 & \$ 4,000 \\\text { April } & 10,000 & \$ 5,000 \\\text { May } & 10,000 & \$ 5,000\end{array}$

-The total cash receipts for April are____________

A) $5,000
B) $9,250
C) $7,500
D) $10,000

Question 80

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
$\begin{array}{lr}\hline\text { Cash } & \$ 25,000 \\\text { Accounts receivable } & 120,000 \\\text { Inventories } & 300,000 \\& -\ldots . . . \\\quad \text { Total current assets } & \$ 445,000 \\\text { Net fixed assets } & \$ 500,000\\& -\ldots . . . \\\text { Total assets }&\$945,000\\\\\text { Liabilities and stockholders' equity }\\\hline\text { Accounts payable } & \$ 80,000 \\\text { Notes payable } & 350,000 \\\text { Accruals } & 50,000\\& -\ldots . . . \\\text { Total current liabilities } & \$ 480,000 \\\text { Long-term debts } & 150,000\\\text { Total liabilities } & \$ 630,000 \\\text { Stockholders' equity } & \\\text { Common stock } & \$ 180,000 \\\text { Retained earnings } & 135,000\\\text { Total stockholders' equity } & \$ 315,000 \\\text { Total liabilities and stockholders' equity } & \$ 945,000\end{array}$

-The pro forma total current assets amount is_________

A) $470,900
B) $500,000
C) $575,000
D) $525,000