Question 1

When projecting financial statements, one would first __________ , and then proceed to __________.
A)project the balance sheet; forecast sales
B)forecast sales; project the income statement
C)forecast sales; project the balance sheet
D)forecast sales; project the statement of cash flows

Accepted Answer

Forecasting sales is typically the first step in financial projection as it drives many other components of the financial statements. After forecasting sales, projecting the income statement is a logical next step because it directly reflects the impact of sales on revenue and expenses.

Question 2

When long-term financial planning efforts set cash as a percentage of sales or as a fixed dollar amount for planning purposes, the projected cash flow statement is said to be a __________ forecasting statement.
A)dynamic
B)passive
C)conservative
D)checking

Accepted Answer

The answer of When long-term financial planning efforts set cash...

Question 3

Which of the following is a forecasting method used to project financial statements?
A)percent-of-sales method
B)percent-of-expenses method
C)return on equity method
D)additional funds needed method

Accepted Answer

The percent-of-sales method is commonly used to project financial statements by estimating future revenues, and then applying various ratios to project future expenses and other line items, resulting in pro forma statements. The other methods listed (percent-of-expenses, return on equity, and additional funds needed) are not directly focused on projecting financial statements.

Question 4

Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm's AFN?
A)$200,000
B)$600,000
C)$840,000
D)$960,000

Accepted Answer

To calculate AFN, we need to first calculate the increase in assets due to the projected increase in sales. To do this, we use the equation:
Increase in assets = (Sales increase * Asset/Sales ratio)

The asset/sales ratio is calculated as Asset/Sales = $7 million / $10 million = 0.7.

The increase in sales is given as 20%, so the increase in assets is: 
$10 million x 0.2 x 0.7 = $1.4 million

Next, we need to calculate the increase in spontaneous liabilities, which is given as $200,000.

We also know that the firm paid out $200,000 as dividends in the most recent year, and the payout ratio will continue in the upcoming years. So, we can calculate the amount of additional funds needed as:
Additional funds needed = Increase in assets - Increase in spontaneous liabilities - Dividends 
Additional funds needed = $1.4 million - $200,000 - $200,000 = $1 million

Therefore, the firm's AFN is $1 million, or choice C.

Quiz 9: Projecting Financial Statements

When projecting financial statements, one would first , and then proceed to .

When long-term financial planning efforts set cash as a percentage of sales or as a fixed dollar amount for planning purposes, the projected cash flow statement is said to be a __________ forecasting statement.

Which of the following is a forecasting method used to project financial statements?