Question 1

The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.

Accepted Answer

A) True 
 B)False

Question 2

The cash flows from operating activities section of the statement of cash flows includes ________.

Accepted Answer

A)  principal received 
B)  cost of raw materials 
C)  dividends paid 
D)  stock repurchases

Question 3

Table 4.3
The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the coming months of January through May. Historically, 75 percent of sales are for cash with the remaining 25 percent collected in the following month. The ending cash balance in January is $3,000. 
-The ending cash balance for February is ________. (See Table 4.3)

Accepted Answer

A)  $750 
B)  $1,750 
C)  $2,500 
D)  -$1,000

Question 4

A cash budget gives the financial manager a clear view of the timing of a firm's expected profitability over a given period.

Accepted Answer

A) True 
 B)False

Question 5

Once sales are forecasted, ________ must be generated to estimate required raw materials.

Accepted Answer

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

Question 6

Table 4.6
Income Statement
Ace Manufacturing, Inc.
For the Year Ended December 31, 2015 
-Ace Manufacturing, Inc., is preparing pro forma financial statements for 2016. The firm utilized the percent-of-sales method to estimate costs for the next year. Sales in 2015 were $2 million and are expected to increase to $2.4 million in 2016. The firm has a 40 percent tax rate.
(a) Given the 2015 income statement in Table 4.6, estimate net profit and retained earnings for 2016.
(b) If $200,000 of the cost of goods sold and $40,000 of selling expense are fixed costs; and the interest expense and dividends are not expected to change, what is he dollar effect on net income and retained earnings? What is the significance of this effect?

Accepted Answer

The answer of Table 4.6
Income Statement
Ace Manufacturing, Inc.
For the Year...

Question 7

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

Accepted Answer

A)  that it forecasts income and then expresses the various income statement items as percentages of projected income. 
B)  the assumption that the firm faces linear total revenue and total operating cost functions 
C)  the assumption that the firm's past financial condition is an accurate predictor of its future 
D)  the difficulty faced in calculation and preparation of such statements

Question 8

If transportation costs were a huge portion of a firm's expenses and the firm expected gas prices to increase greatly in the next year, then in preparing its pro forma income statement the firm should ________.

Accepted Answer

A)  use the percentage of transportation costs from last year's sales 
B)  decrease the percentage of transportation costs from the percentage of last year's sales 
C)  increase the percentage of transportation costs from the percentage of last year's sales 
D)  double the percentage of transportation costs from the percentage of last year's sales

Question 9

Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after taxes.

Accepted Answer

A) True 
 B)False

Question 10

Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.

Accepted Answer

A) True 
 B)False

Question 11

As the typical cash budget shows cash flows on a monthly basis, the information provided by the cash budget is adequate for ensuring solvency.

Accepted Answer

A) True 
 B)False

Question 12

The depreciable value of an asset, under MACRS, is ________.

Accepted Answer

A)  the full cost excluding installation costs 
B)  the full cost minus salvage value 
C)  the full cost including installation costs 
D)  the full cost including installation costs adjusted for the salvage value

Question 13

Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw 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 2015. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2014 is shown below. From your preparation of the pro forma income statement, answer the following multiple choice questions. 
-The pro forma operating expenses for 2015 are ________. (See Table 4.4)

Accepted Answer

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

Question 14

The three categories of a firm's statement of cash flows are ________.

Accepted Answer

A)  cash flow from operating activities, cash flow from investment activities, and cash flow from noncash activities 
B)  cash flow from operating activities, cash flow from noncash activities, and cash flow from financing activities 
C)  cash flow from equity activities, cash flow from investment activities, and cash flow from financing activities 
D)  cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities

Question 15

________ are projected financial statements.

Accepted Answer

A)  Pro forma statements 
B)  Statements of retained earnings 
C)  Cash budgets 
D)  Cash flow statements

Question 16

A corporation sold a fixed asset for $100,000. This is ________.

Accepted Answer

A)  an investment cash flow and a source of funds 
B)  an operating cash flow and a source of funds 
C)  an operating cash flow and a use of funds 
D)  an investment cash flow and a use of funds

Question 17

A firm plans to retire outstanding bonds in the next planning period. Which of the following gets affected?

Accepted Answer

A)  pro forma income statement and pro forma balance sheet 
B)  previous year income statement and previous year balance sheet 
C)  previous year income statement and statement of retained earnings 
D)  pro forma income statement and proxy statement

Question 18

An internal sales forecast is based on the relationships that can be observed between a firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.

Accepted Answer

A) True 
 B)False

Question 19

Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw 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 2015. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2014 is shown below. From your preparation of the pro forma income statement, answer the following multiple choice questions. 
-The pro forma net profits after taxes for 2015 are ________. (See Table 4.4)

Accepted Answer

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

Question 20

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

Exam 4: Cash Flow and Financial Planning

The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.

The cash flows from operating activities section of the statement of cash flows includes ________.

A cash budget gives the financial manager a clear view of the timing of a firm's expected profitability over a given period.

Once sales are forecasted, ________ must be generated to estimate required raw materials.

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

If transportation costs were a huge portion of a firm's expenses and the firm expected gas prices to increase greatly in the next year, then in preparing its pro forma income statement the firm should ________.

Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after taxes.

Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.

As the typical cash budget shows cash flows on a monthly basis, the information provided by the cash budget is adequate for ensuring solvency.

The depreciable value of an asset, under MACRS, is ________.

The three categories of a firm's statement of cash flows are ________.

________ are projected financial statements.

A corporation sold a fixed asset for $100,000. This is ________.

A firm plans to retire outstanding bonds in the next planning period. Which of the following gets affected?

An internal sales forecast is based on the relationships that can be observed between a firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.

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