Question 1

Cash budgets project cash inflows and outflows over a period of several years in order to help financial managers determine the best way to meet long-term financing needs.

Accepted Answer

Cash budgets typically project cash inflows and outflows over a short-term period, such as a month, quarter, or year, rather than several years, to help manage immediate liquidity and operational needs.

Question 2

A pro forma balance sheet projects the types and amounts of revenues a firm will need to execute future plans and shows the amount of additional financing needed to acquire those assets.

Accepted Answer

A pro forma balance sheet projects future assets, liabilities, and equity based on assumptions and estimates, but it does not project future revenues. A pro forma income statement would project future revenues and expenses.

Question 3

Pro forma income statements forecast the assets a firm will need in the next accounting period.

Accepted Answer

Pro forma income statements forecast a firm's projected revenues, expenses, and net income, but they do not necessarily forecast the assets the firm will need in the next accounting period. Instead, a cash budget or pro forma balance sheet would be used to forecast the assets needed.

Question 4

The burn rate is used to track how quickly a firm is increasing its current asset balances.

Accepted Answer

The burn rate is actually used to track how quickly a firm is using up its cash reserves or how quickly it is spending money. It is not specifically related to current asset balances.

Question 5

A low burn rate is an indication that the firm is losing cash at a faster rate than other firms in its industry.

Accepted Answer

A low burn rate means that the firm is spending money at a slower rate than other firms in its industry, indicating that it has a lower rate of cash usage and may be considered financially stable. Therefore, a low burn rate is not an indication that the firm is losing cash at a faster rate than other firms in its industry.

Question 6

Jane Allgood runs a seasonal nursery business in the Midwest.Given the uneven nature of her cash payments and cash receipts,she probably wouldn't receive much benefit from developing a cash budget.

Accepted Answer

Jane Allgood could benefit from developing a cash budget, as it would help her to anticipate and plan for her cash inflows and outflows during the seasonal peaks and troughs of her business. This would enable her to make better decisions about spending, investing, and obtaining financing, which could help to improve her overall financial performance and stability.

Question 7

Cash equivalents are long-term,unsecured but highly liquid assets that firms list in the fixed assets section on their balance sheet.

Accepted Answer

Cash equivalents are actually short-term, highly liquid assets that are usually listed in the current assets section on a balance sheet. They are usually considered to have a maturity of three months or less and are easily convertible into cash. Examples include treasury bills, commercial paper, and money market funds.

Question 8

The current ratio is calculated by dividing the firm's past expenses by current assets.

Accepted Answer

The current ratio is calculated by dividing the firm's current assets by current liabilities. It is a measure of a company's ability to pay off its short-term liabilities with its current assets.

Question 9

Net working capital is the difference between a firm's current assets and its fixed assets.

Accepted Answer

Net working capital is the difference between a firm's current assets and its current liabilities, not its fixed assets.

Question 10

Companies with rapidly growing sales seldom experience cash flow problems.

Accepted Answer

Companies with rapidly growing sales may experience cash flow problems due to increased expenses or delays in receiving payments from customers. Sales growth does not guarantee positive cash flow.

Question 11

A money market mutual fund is a mutual fund that pools funds from many investors and uses the funds to purchase highly liquid short-term securities.

Accepted Answer

This is a correct definition of a money market mutual fund.

Question 12

The development of pro forma income statements and balance sheets is an important step in the financial planning function performed by financial managers.

Accepted Answer

Pro forma income statements and balance sheets are important tools for financial planning because they help managers project future financial performance and identify potential areas of improvement. They are often used in budgeting, forecasting, and fundraising activities, among other applications.

Question 13

Trade credit is credit granted by sellers when they provide firms with materials,parts,or finished goods without requiring payment until some period after delivery.

Accepted Answer

Trade credit is defined as credit provided by suppliers or vendors to enable firms to purchase materials, goods, and services before payment is due. The payment is usually made within 30, 60, or 90 days after invoicing or delivery of goods.

Question 14

A cash budget is a detailed projection of cash flows that financial managers use to identify when a firm is likely to experience temporary shortages or surpluses of cash.

Accepted Answer

A cash budget is a tool used by financial managers to project cash flows and identify periods of cash shortages or surpluses.

Question 15

Pro forma statements are idealized financial statements that show the firm's average financial performance over the past 10 years.

Accepted Answer

Pro forma statements are not based on past performance, but rather on projected future performance. They are created to show the expected financial impact of a specific event or decision, such as a merger or acquisition.

Question 16

A revolving credit agreement is a guaranteed line of credit in which a bank makes a binding commitment to provide a business with funds up to a specified credit limit at any time during the term of the agreement.In exchange for the bank's commitment,the firm pays a commitment fee on the unused funds.

Accepted Answer

This statement accurately describes a revolving credit agreement.

Question 17

A high debt-to-equity ratio indicates that the firm is relying heavily on debt,or is "highly leveraged."

Accepted Answer

A high debt-to-equity ratio means that a company has a high amount of debt compared to its equity, which suggests that the company is relying heavily on debt financing and is therefore considered highly leveraged.

Question 18

Cash budgets can help financial managers determine when their firms are likely to have short-term surpluses of cash available to pay off loans or invest in other assets.

Accepted Answer

Cash budgets are utilized by financial managers to plan and monitor a company's cash inflows and outflows. By forecasting cash inflows and outflows, a cash budget can aid managers in determining when a firm will have excess cash on hand that can be used to pay off debt or invest in assets.

Question 19

Commercial paper is usually issued at a discount,meaning that it is initially sold at a lower price than the company will pay the holder when the paper comes due.

Accepted Answer

This is correct, as commercial paper is usually issued at a discounted price, meaning the initial purchase price is lower than the face value that will be paid to the holder at maturity.

Question 20

Spontaneous financing arises as a natural result of a firm's business operations without the need for special arrangements.

Accepted Answer

Spontaneous financing refers to the financing that arises as a natural result of a firm's business operations such as trade credit from suppliers or accruals from customers without the need for special arrangements like borrowing or issuing equity.

Quiz 8: Finance: Acquiring and Using Funds to Maximize Value