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

The statement is correct. A cash budget for a business with more seasonal and uncertain cash flows will have more intervals and shorter time intervals to accurately project and manage cash flows.

Question 2

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

Accepted Answer

The answer of Sales forecasts, cash budgets, and pro forma...

Question 3

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

Accepted Answer

Strategic financial plans are indeed long-term financial actions that are planned with the anticipation of their financial impact.

Question 4

In cash budgeting, other cash receipts are cash receipts expected to result from sources other than sales. Items such as interest and dividends, proceeds from the sale of equipment, depreciation, and stock and bond sales proceeds are examples of other cash receipts.

Accepted Answer

Depreciation is a non-cash expense and does not result in cash receipts. Other items like interest, dividends, and proceeds from sales are considered cash receipts.

Question 5

A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.

Accepted Answer

A firm's net cash flow is the mathematical difference between the firm's cash receipts and its cash disbursements in each period.

Question 6

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 gross profit forecast would be $1,200,000.

Accepted Answer

Gross profit is calculated as sales minus the cost of goods sold. If the cost of goods sold is 75% of sales, then the gross profit would be 25% of sales. Therefore, the gross profit forecast would be $400,000, not $1,200,000.

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

Since the historically observed cost of goods sold is 75% of sales, we can calculate the cost of goods sold forecast by multiplying next year's expected sales by 0.75:

$1,600,000 x 0.75 = $1,200,000

Therefore, the answer is A: True.

Question 8

Firms that have a good understanding of their cost structures will use the percentage-of-sales approach when budgeting, but make adjustments to the historical ratios to better reflect current conditions.

Accepted Answer

Firms will use the percentage-of-sales approach, but they will make adjustments to the historical ratios to account for changes in their cost structure and business environment.

Question 9

To deal with the uncertainty of forecasts, managers will often do scenario analysis; managers will forecast both pessimistic and optimistic scenarios along with the base case.

Accepted Answer

Scenario analysis involves creating multiple forecasts, including pessimistic and optimistic scenarios, to account for uncertainty and potential changes in external factors. The base case forecast is also included to provide a more balanced view of potential outcomes.

Question 10

Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Canada Customs and Revenue Agency.

Accepted Answer

Cash budgets and pro forma statements are primarily used for internal financial planning and management, not typically required by tax authorities like the Canada Customs and Revenue Agency.

Question 11

Since amortization and other non-cash charges represent a scheduled write-off of an earlier cash outflow, they should NOT be included in the cash budget.

Accepted Answer

Amortization and other non-cash charges do not affect cash flow and are not actual cash outflows, therefore they should not be included in a cash budget.

Question 12

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

The best way to adjust for the presence of fixed costs when using a simplified approach for pro forma income statement preparation is to assume that fixed costs will remain constant and only adjust for changes in variable and semi-variable costs. Breaking historical costs into fixed, semi-variable, and variable components can be a more complex approach for forecasting and may not be necessary for a simplified pro forma statement.

Question 13

Due to the no fixed costs assumption in the percent-of-sales method, the use of cost and expense ratios generally tends to understate profits when sales are increasing and overstate profits when sales are decreasing.

Accepted Answer

This is because the cost and expense ratios will remain constant despite changes in sales, which will result in a proportionally smaller or larger amount of expenses being allocated to a larger or smaller sales base.

Question 14

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

Accepted Answer

The answer of An internal sales forecast is based on...

Question 15

One basic weakness of the simplified pro-forma approaches lies in the assumption that the firm's past financial condition is an accurate indicator of its future.

Accepted Answer

The statement is true as past financial condition may not necessarily reflect the future performance of the firm, as it may face changes in competition, economic conditions, or internal factors that can impact its financial performance.

Question 16

The excess cash balance is the amount available for investment by the firm if the desired minimum cash balance is less than the period's ending cash.

Accepted Answer

This statement is true. If the desired minimum cash balance is less than the period's ending cash, then the excess cash balance is the difference between the two amounts and can be used for investment by the firm.

Question 17

A cash budget is a statement of the firm's planned inflows and outflows of cash that is used to estimate its long-term cash requirement.

Accepted Answer

A cash budget is used to estimate a firm's short-term cash requirements, typically covering a period of one year or less.

Question 18

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

Accepted Answer

The cash budget focuses on cash inflows and outflows, not on revenue recognition or expense matching, which are part of accrual accounting.

Question 19

Historically, electricity has a $300,000 fixed component and 5% of sales variable component. Next year's sales are forecasted to be $10,000,000, and an electricity budget of $800,000.

Accepted Answer

The fixed component is $300,000, and the variable component is 5% of sales. Next year's sales are forecasted to be $10,000,000, so the variable component will be $500,000. The total electricity budget is therefore $300,000 + $500,000 = $800,000, which matches the given budget.

Question 20

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

Accepted Answer

The answer of The cash budget gives the financial manager...

Quiz 4: Financial Planning and Forecasting