Question 1

The best way to adjust for the presence of fixed costs when using a simplified approach for pro forma income statement preparation is to break the firm's historical costs into fixed, semi-variable, and variable components and make the forecast using this relationship.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

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 3

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

Accepted Answer

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 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

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 6

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

Accepted Answer

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

Question 7

The use of past cost and expense ratios generally tends to overstate profits when sales are increasing and understate profits when sales are decreasing.

Accepted Answer

A) True 
 B)False

Question 8

Pro forma statements are used for

Accepted Answer

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

Question 9

The primary purpose in preparing pro forma financial statements is

Accepted Answer

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

Question 10

Of the following, generally the easiest to estimate are

Accepted Answer

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

Question 11

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.

Accepted Answer

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

Question 12

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

Accepted Answer

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 13

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

Accepted Answer

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

Question 14

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

Accepted Answer

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

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

If all purchases of goods for sale are on 45 day (one and one-half months) credit terms with the supplier, cash flows to purchases in June would be $425,000; March, April, May, and June purchases budgets are $350,000, $400,000, $450,000, and $450,000, respectively.

Accepted Answer

A) True 
 B)False

Question 17

Pro forma statements provide the financial manager with the amount, if any, of external financingrequired to support a given level of sales as well as a basis for analyzing in advance the level ofprofitability and overall financial performance of the firm in the coming year.

Accepted Answer

A) True 
 B)False

Question 18

Generally, firms that are subject to high degrees of operating uncertainty, relatively short production cycles, or both tend to use a shorter planning horizon.

Accepted Answer

A) True 
 B)False

Question 19

Strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions.

Accepted Answer

A) True 
 B)False

Question 20

Sales forecasts, cash budgets, and pro forma financial statements are the key outputs of financial planning.

Accepted Answer

A) True 
 B)False

Exam 4: Financial Planning and Forecasting

The best way to adjust for the presence of fixed costs when using a simplified approach for pro forma income statement preparation is to break the firm's historical costs into fixed, semi-variable, and variable components and make the forecast using this relationship.

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 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

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

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

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

The use of past cost and expense ratios generally tends to overstate profits when sales are increasing and understate profits when sales are decreasing.

Pro forma statements are used for

The primary purpose in preparing pro forma financial statements is

Of the following, generally the easiest to estimate are

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.

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

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.

If all purchases of goods for sale are on 45 day (one and one-half months) credit terms with the supplier, cash flows to purchases in June would be $425,000; March, April, May, and June purchases budgets are $350,000, $400,000, $450,000, and $450,000, respectively.

Pro forma statements provide the financial manager with the amount, if any, of external financingrequired to support a given level of sales as well as a basis for analyzing in advance the level ofprofitability and overall financial performance of the firm in the coming year.

Generally, firms that are subject to high degrees of operating uncertainty, relatively short production cycles, or both tend to use a shorter planning horizon.

Strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions.

Sales forecasts, cash budgets, and pro forma financial statements are the key outputs of financial planning.