Question 1

The number and type of intervals in the cash budget depend on the nature of the business. The more seasonal and uncertain a firm's cash flows, the greater the number of intervals and the shorter the time intervals.

Accepted Answer

A) True 
 B)False

Question 2

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_____________

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

$$\begin{array}{l}
\text { Sportif, Inc. }\
\begin{array} { l r l } 
\text { Month } & \text { Sales } & \text { Disbursements } \
\hline \text { January } & \$ 5,000 & \$ 6,000 \
\text { February } & 6,000 & \$ 7,000 \
\text { March } & 10,000 & \$ 4,000 \
\text { April } & 10,000 & \$ 5,000 \
\text { May } & 10,000 & \$ 5,000
\end{array}
\end{array}$$
-The firm has a total financing requirement of_________for the period from January through May. (See Figure 4.1)

Accepted Answer

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

Question 5

Cash dividends declared but not paid would be shown on the cash budget as a cash outflow in the month of declaration.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

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 7

Historically, in the rural retail grocery industry, cost of goods sold averages 75% of sales. If next year's sales are expected to be $1,600,000, the cost of goods sold forecast would be $1,200,000.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

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

Question 10

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)

Accepted Answer

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 11

If all purchases of goods for sale are on two-month credit terms with the supplier, cash flows topurchases in June would be $400,000; March, April and May purchases budgets are $350,000,$400,000 and $450,000, respectively

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

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

Question 13

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

Accepted Answer

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 14

The most common cash disbursement are

Accepted Answer

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

Generally, firms that are growing rapidly

Accepted Answer

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

Question 16

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

Accepted Answer

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 17

The required total financing figures in the cash budget refer to the monthly changes in borrowing.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

The timing of when revenue is earned and the matching of expenses to these revenues are critical inputs to the cash budget.

Accepted Answer

A) True 
 B)False

Question 20

Key inputs to short-term financial planning are

Accepted Answer

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

Exam 4: Financial Planning and Forecasting

The number and type of intervals in the cash budget depend on the nature of the business. The more seasonal and uncertain a firm's cash flows, the greater the number of intervals and the shorter the time intervals.

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

Cash dividends declared but not paid would be shown on the cash budget as a cash outflow in the month of declaration.

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

Historically, in the rural retail grocery industry, cost of goods sold averages 75% of sales. If next year's sales are expected to be $1,600,000, the cost of goods sold forecast would be $1,200,000.

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

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

If all purchases of goods for sale are on two-month credit terms with the supplier, cash flows topurchases in June would be $400,000; March, April and May purchases budgets are $350,000,$400,000 and $450,000, respectively

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

The most common cash disbursement are

Generally, firms that are growing rapidly

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

The required total financing figures in the cash budget refer to the monthly changes in borrowing.

The timing of when revenue is earned and the matching of expenses to these revenues are critical inputs to the cash budget.

Key inputs to short-term financial planning are