Deck 3: Financial Planning and Pro Forma Financial Statements

Question 1

If customers pay their invoices on average in 30 days and the company is projecting a 12% increase in its sales revenue next year from its current level of $5,657,500, how much more will it be carrying in accounts receivable next year?

A) $3,100
B) $94,292
C) $55,800
D) $93,000
E) $1,131,500

Answer 1

C

Question 2

An increase in accumulated depreciation is

A) Not a source of cash inflow or outflow
B) A source of cash inflow from financing activities
C) A source of cash outflow from financing activities
D) A source of cash inflow from operating activities
E) A. source of cash outflow from operating activities

Answer 2

A

Question 3

Pizza is generally considered a recession proof commodity offering. Which of the following will have the greatest impact on a pizza chain's sales?

A) Bargaining power of customers
B) Competitive pressure
C) General economic conditions
D) Availability of resources
E) Competitive product innovation

Answer 3

B

Question 4

A business can purchase Machine "A" for $70,000. Cost per unit output would be $15. It could purchase Machine "B" for $127,000. Cost per unit would be $12. Both machines are depreciated on a straight-line basis over 10 years. The product retails for $20 and sells 40,000 units. If sales are expected to increase by 15% next year, which machine is the better financial choice?

A) Machine A as it has a lower price
B) Machine B as it has a lower unit cost
C) The machines provide the same financial equivalent
D) Machine A as it provides a higher income
E) Machine B as it provides a higher income

Question 5

The Company receives 20% of its monthly sales immediately in cash, 70% in the following month and the balance in the month after that. If it had sales of $1.2 million in April, $1 million in May, $1.4 million in June and $1.3 million in July, how much cash is received from its customers in July?

A) $1.1 million
B) $1.24 million
C) $1.34 million
D) $960,000
E) $1.94 million

Question 6

If sales increased by 12%, and EBIT increased by 5%, which of the following is a possible reason?

A) Operating expenses increased
B) Liabilities increased
C) Shares were diluted
D) Income tax rates increased
E) Volumes sold decreased

Question 7

CapiCal Enterprises Hydro contract specifies that over each three-month billing period, the Company will pay a flat fee for electrical consumption until a specified level is reached. Then CapiCal will be invoiced for each additional kilowatt hour of electricity consumed. This type of expense is called a

A) Direct cost
B) Indirect cost
C) Variable cost
D) Mixed cost
E) Allocated cost

Question 8

The best way to apply the concept of operating leverage is to realize that

A) High fixed costs compared to variable costs will always produce a higher EBIT
B) Higher variable costs compared to fixed costs will always produce higher EBIT
C) High fixed costs compared to variable costs will provide greater losses as sales decline than the reverse
D) High variable costs compared to fixed costs will provide greater income as sales increase rather than the reverse
E) High variable costs relative to fixed costs will provide greater losses as sales decline rather than the reverse

Question 9

Company XYZ makes insect repellent and pays $3000 for rent, $32,000 for raw materials, $70,000 for salaries, $12,000 for depreciation and $15,000 for spray bottles. Variable costs are

A) $15,000
B) $47,000
C) $70,000
D) $85,000
E) $117,000

Question 10

Fran Tex, a family-owned corporation, with 120,000 shares outstanding and projected net income after taxes of $3,024,000 has been approached by Mercury Textile to merge. Mercury Textile has 3 1/2 million shares outstanding and a projected net income after tax of $14,700,000. It wants to give Fran Tex shareholders 5.8 Mercury shares for each Fran Tex share. Assume Mercury Textile shares will be newly issued. What will be the EPS of the combined companies?

A) $0.74
B) $1.06
C) $4.20
D) $4.22
E) $25.20

Question 11

The disadvantage in holding cash balances, is that cash

A) Is not easily transferred electronically
B) Cannot be used to pay offshore invoices
C) Cannot be easily secured against theft
D) Can be easily counterfeited
E) Earns no, or low, return for the business

Question 12

Which of the following usually increases as sales revenue increases?

A) Long-term liabilities
B) Depreciation
C) Accrued salaries
D) Capital assets
E) Accounts receivable

Question 13

The primary role of pro forma statements is to

A) Model the external impacts on a course of action
B) Predict the financial outcome of a course of action
C) Allocate resources to business aims and objectives
D) Represent the financial impact of courses of action
E) Identify the financial gaps between clients and their implementation

Question 14

The opening Cash balance in July for Markel Ltd. is expected to be $50,000. Sales revenue for July, August and September is projected at $400,000, $450,000 and $420,000 of which 80% are on credit. 60% of credit sales are collected in the month following the sale and the rest in the month after that. Collections from the previous quarter, will add $280,000 to July and $60,000 to August. Rent, salaries and taxes are $260,000 per month. Accounts payable are equal to 30% of sales and are paid in the month following. Payables from the previous quarter equal $120,000. What is the projected closing Cash balance for Markel at the end of the quarter?

A) ($261,000)
B) $29,000
C) $79,000
D) $199,000
E) $599,000

Question 15

Repayment of a mortgage is

A) A source of cash inflow from financing activities
B) A source of cash outflow from financing activities
C) A source of cash inflow from investment activities
D) A source of cash outflow from investment activities
E) The source of cash outflow from operating activities

Question 16

The opening balance of accounts receivable in October is $255,000. Sales for the month are forecast to be $600,000 of which 55% are on credit. If customers pay in full in one month, what cash will be received from customers in October?

A) $270,000
B) $525,000
C) $585,000
D) $384,750
E) $465,000

Question 17

Primrose Ltd. is considering a new issue of common shares to implement a share for share exchange to acquire 100% ownership of Avalanche Industries. Primrose has 5 million shares outstanding and Avalanche has 2,500,000 shares outstanding. Primrose's net income after tax is $50 million. Avalanche industries has a net income after tax of $8 million. The merger will result in

A) Diluted earnings per share of $3.20 a share for Avalanche
B) Diluted earnings per share of $10.00 a share for Primrose
C) Diluted earnings per share of $7.73 a share for Primrose
D) Diluted earnings per share of $16.80 a share for Avalanche
E) No diluted earnings per share for either company

Question 18

A Cash budget is a document that is prepared

A) According to the accrual method of accounting
B) On the basis of the accounting matching principal
C) Based on book values of assets
D) To meet external auditing requirements
E) To reflect the timing of Cash flows

Question 19

In which of the following aspects of business planning do Pro Forma Financial Statements play a key role?

A) Communicating the business plan to stakeholders
B) Collecting data required to formulate the businesses of options
C) Evaluating and selecting the most suitable business option
D) Setting the teams and objectives of the business
E) Identifying the business options available to the business

Question 20

Top Printing Company has credit sales of $500,000 in June, $700,000 in July, $850,000 in August, and $500,000 in September. It collects 50% of its credit sales in the month following the sale and 25% in each of the months thereafter. What is Top Printing's cash collection in September?

A) $725,000
B) $1,225,000
C) $688,000
D) $1,288,000
E) $975,000

Question 21

Which of the following best describes the contribution margin?

A) It refers to the selling price less the fixed cost per unit.
B) It refers to the selling price divided by the fixed cost per unit.
C) It refers to the selling price less the variable cost per unit.
D) IIt refers to the selling price divided by the variable cost per unit.
E) It refers to the selling price divided by the difference between the selling price and the fixed cost per unit.

Question 22

The TruGlass Bottle Company manufactures glass bottles for the beverage industry. Which of the following statements is correct about its breakeven point?

A) The breakeven point refers to the amount of breakage and spoilage in the factory.
B) The breakeven point refers to quantity of sales that generates neither a profit or a loss.
C) The breakeven point refers to the last straw for the company's bankers.
D) The breakeven point refers to the profit or loss generated by an amount of sales.
E) The breakeven point refers to the sales needed to match the variable cost per unit plus the fixed costs.

Question 23

YPad is priced at $500 per unit and has the following cost structure: factory variable manufacturing costs per unit $100; factory fixed costs total $1,000,000; sales commissions are 10% of selling price; delivery expenses to retail stores are 5% of selling price; management salaries total $3,000,000; head office rent $200,000 per year; interest on bank loan is $50,000 per month. What is the breakeven point in units for the YPad?

A) 2,769,231 units.
B) 6,461,538
C) 6,538,462
D) 7,076,923
E) 7,384,615

Question 24

Timmy's Toys expects to make purchases of $181,775. It anticipates an opening inventory of $65,225 and closing inventory of $19,000. If its Sales Revenue is $365,030, what will the Company's cost of goods sold be?

A) $247,000
B) $346,030
C) $266,000
D) $228,000
E) $183,255

Question 25

Trekker Trash and Recycling is expected to have receivables of $1,234,000 in January, $989,700 in February and $1,020,000 in March. The company's pattern of cash collections is 60% in the month following the sale, and 40% in the month after that. How much will Trekker collect from its receivables in March?

A) 1,001,820
B) 1,007,880
C) 1,020,000
D) 1,087,420
E) 1,136,280

Question 26

Mandrake Manufacturing had sales revenue for the second quarter of $936,000. Cost of Goods Sold was $520,000. The company is expecting a manufacturing cost increase of 5%. It is increasing its average selling price from $180 this year to $195 next year and expecting a sales volume decrease of 5%. What is the company's projected gross profit for the coming year?

A) $468,000
B) $417,300
C) $444,600
D) $495,300
E) $494,000

Question 27

Sales for RAJ Inc. from March to June were $190,000, $200,000, $323,000 and $340,000, respectively. 10% are cash sales and 80% of the invoices are paid the next month, and the rest the month after that. RAJ Inc.'s operating expenses for March through June are $165,000, $185,000, $270,000 and $285,000, respectively, of which salaries and rent, comprising $100,000 are paid immediately, and the rest are paid in the next month. If RAJ had a cash shortfall of $50,000 at the end of April, what is RAJ Inc.'s net cash balance at the end of June?

A) [$23,700]
B) [$20,300]
C) [$300]
D) $18,700
E) $68,700

Question 28

The disadvantage associated with simulations, is that

A) The ease of generating different pro forma statements can preclude a critical look at underlying assumptions
B) A single assumption often drives in the range of results produced for all the variables
C) Because of data reduction, an insufficient range of alternatives is produced
D) Information overload occurs as too many meaningless alternatives are generated for each set of inputs
E) The analysis cannot handle the variety of imports from different stakeholders

Question 29

Bennoit Legal Services Ltd. is expecting to accrue salaries of $37,725. Accumulated Depreciation for all capital assets will be $45,000. Bennoit will end the next year with a bank overdraft of a $26,365. Inventory is estimated at $19,000. The original cost for the building is $150,000 and for the furniture is $60,000. Accounts Payable is projected to be $21,350. Common shares are valued at $75,000. In reviewing the pro forma balance sheet, it can be concluded that the company is

A) In a stable financial position
B) Is depending heavily on long-term debt to grow
C) Experiencing a liquidity problem
D) Overinvested in current assets
E) Experiencing a high level of growth

Question 30

The advantage of the Percent of Sales Method of creating pro forma statements is in its ability to

A) Accommodate changing relationships between expenses and revenue
B) Be created with ease and speed
C) Model actual changes in the competitive environment
D) Provide projections reflecting major shareholder beliefs and aims
E) Reliably bring to management's attention key financing issues

Question 31

Argo Heating Ltd. manufactures air conditioners. For 100,000 air conditioners, direct material, direct labour, and direct overhead was $2,000,000, $6,000,000, and $ 4,000,000 respectively. The air conditioners sell for $280 each. Factory rent was $400,000 and advertising was another $500,000. Management salaries totalled $2,000,000. Which of the following is the breakeven point for Argo Heating?

A) 10,357 units
B) 18,125 units
C) 24,167 units
D) 42,857 units
E) 75,000 units

Question 32

Athabasca Inc. has a closing inventory of $1,501,610. The company's sales revenue is $5,460,400. It purchased $1,200,000 worth of goods. Starting inventory is $3,578,234. The amount of goods available for sale was

A) $4,778,234
B) $1,501,610
C) $1,200,000
D) $3,276,624
E) $3,958,790

Question 33

A financing gap refers to

A) The undisclosed project for which a portion of retained earnings is reserved
B) Estimates included in pro forma statements which have no basis in hard data
C) Financing requirements not identified in the pro forma statements
D) A value added to liabilities to balance the pro forma balance sheet
E) A reserve for bad debt

Question 34

In September, Sales Revenue for a company totaled $660,000 of which 40% was collected. The Company issued 50,000 preferred shares at $45 each. A down payment of $1,125,000 was proposed on the purchase of a building and electronic equipment to be operational by year-end. Salary expense in September, totaled $250,000 of which 10% were accrued. Three months of rent were prepaid for a total of $156,000. August's expenses were paid. $150,000 of corporate taxes was deferred to the next quarter. Accounts Receivable was reduced by $360,000. The credit line of $120,000 was paid off at the beginning of the month, saving $986 of interest for the period. Amortization expense totaled $40,000. In September

A) Operating activities produced a net cash inflow of $363,000
B) Investment activities produced a net cash outflow of $1,125,000
C) Financing activities produced a net cash inflow of $2,130,000
D) Financing activities produced a net cash inflow of $2,130,986
E) Operating activities produced a net cash outflow of $3,000

Question 35

Dressler Antiques Ltd. reported retained earnings of ($125,000) on the balance sheet for the year just ended. The company is projecting a net income after tax of $1,620,000 for the coming year. Dressler has 500,000 preferred shares outstanding and 3 million common shares outstanding Both pay a dividend of $.35 per share. What is the projected balance of the Company's retained earnings at the end of the coming year?

A) $270,000
B) $345,000
C) $395,000
D) $1,320,000
E) $1,495,000

Question 36

Abbey Lane Breweries had sales revenue of $64,000, Cost of Goods Sold of $25,600, Commission Sales Expenses of $16,000, Customer Delivery Expenses of $3,200, Other Miscellaneous Expenses of $7,200. If Sales are targeted to go up by 7% using the Percent-of-Sales Method, what will EBT for the coming year be?

A) $41,088
B) $19,200
C) $12,000
D) $38,400
E) $13,344

Question 37

A caterer has 20% cash sales. Half of the credit sales are paid by customers with credit cards and is reimbursed by the financial institutions in the month following the sale after first deducting a fee of 2 percent of gross credit card sales. The rest is invoiced with an equal amount collected in each of three months starting the month after the sales, net of 1.5% loss due to bad debts. If the caterer has sales of $48,000 in May, her first month of business, and $53,000 in June, how much cash will she receive in June?

A) $35,720
B) $49,790
C) $37,790
D) $34,720
E) $45,320

Question 38

When Jacob Jawad had completed Spiro Tech's pro forma cash flow, he noticed a cash deficit for three months of the year, which, he perceived, was due to poor inventory planning. He adjusted the date of selected purchase orders on his electronic spreadsheet until he was satisfied that the deficits were eliminated or minimized in the target months. And Jawad was performing

A) Scenario Analysis
B) Sensitivity Analysis
C) Fraudulent Accounting
D) Drilling Down
E) Account Profiling

Question 39

The breakeven chart for Denim Inc.'s new Wholly Bluejean line shows the net income line intersecting the zero line at 250,000 units. At this number of units, the total cost line reads $80,000,000 and the sales line reads $90,000,000. The jeans are expected to sell for $250. What conclusion can be drawn from this information?

A) The breakeven chart cannot be right.
B) The breakeven point is 40,000 units.
C) The breakeven point is 250,000 units.
D) The breakeven point is 320,000 units.
E) The breakeven point is 360,000 units.

Question 40

The Block Defender video game sells for $50 and costs $10 to manufacture. Fixed costs were $5,000,000. Which of the following statements is correct?

A) The contribution margin ratio is 20% and the breakeven point is 5,000,000 units.
B) The contribution margin ratio is 20% and the breakeven point is 6,250,000 units.
C) The contribution margin ratio is 80% and the breakeven point is 5,000,000 units.
D) The contribution margin ratio is 80% and the breakeven point is 6,250,000 units.
E) The contribution margin ratio is 500% and the breakeven point is 1,000,000 units.

Question 41

The Perimeter Security Company has completed a pro forma cash flow projection that indicates a weakening cash position over the next two years. Which of the following actions would further worsen Perimeter's cash position over time?

A) Sell non-current assets.
B) Increase cash sales by customers.
C) Reduce payment times to suppliers.
D) Increase the dividend payment.
E) Increase inventory purchases.

Question 42

Canadian Auto Industries Ltd. (CAI) is considering entering the electric car business because it has access to the latest government research data on a new kind of electric battery. Which of the following situations would most like convince CAI to stop developing a new electric car.

A) The pro forma financial statements indicate CAI must borrow$100,000,000 start the new electric car business.
B) The pro forma financial statements indicate CAI will generate negative cash flows for the first three years of the new electric car business.
C) The pro forma financial statements indicate CAI must make a new investment of $100,000,000 to generate new profits of $3,000,000.
D) The pro forma financial statements indicate CAI's financial position at the end of five years will show a doubling of assets.
E) The pro forma financial statements indicate CAI will show a 50% increase in the amount of debt outstanding.

Question 43

Catarpillar Ltd. and Butterfly Inc. have operating leverages of 40% and 50% respectively. Which of the following statements is most likely to be true?

A) Butterfly has a higher variable cost structure than Catarpillar.
B) Catarpillar has a higher variable cost structure than Butterfly.
C) Butterfly has a higher variable and fixed cost structure than Catarpillar.
D) Butterfly has a higher fixed cost structure than Catarpillar.
E) Catarpillar has a higher fixed cost structure than Butterfly.

Question 44

Which of the following steps can be omitted when planning and developing a set of pro forma financial statements?

A) Identify the factors that will affect the pro forma statements.
B) Forecast which competitors will cut prices.
C) Forecast the sales for the period.
D) Forecast the remaining elements of the financial statements.
E) Prepare the pro forma financial statements.