Question 1

Profit is generally adequate to finance significant growth.

Accepted Answer

While profits can be used to fund growth, significant growth often requires additional sources of financing such as debt or equity investment.

Question 2

The generation of sales and profits does not necessarily ensure there will be adequate cash on hand to meet financial obligations as they come due.

Accepted Answer

Cash flows can be affected by a variety of factors such as timing differences between when cash is received and when expenses are paid, changes in inventory levels, and investments in fixed assets. Therefore, it is essential to manage cash flows effectively to ensure the business can meet its financial obligations.

Question 3

The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due.

Accepted Answer

Generating sales and profits does not necessarily ensure adequate cash on hand because profits are an accounting concept that includes non-cash items. Cash flow, which is the actual inflow and outflow of cash, is what determines the ability to meet financial obligations.

Question 4

The most significant purpose of the cash budget is to plan accounts payable payments.

Accepted Answer

The most significant purpose of the cash budget is to plan cash inflows and outflows and to ensure that the company has enough cash on hand to meet its financial obligations, including accounts payable payments. However, planning accounts payable payments is just one aspect of cash budgeting, not its primary purpose.

Question 5

A cash budget is unnecessary since we know how many units will be sold and produced every month, which is assumed to be the cash inflows and outflows.

Accepted Answer

While it is true that a business may be able to estimate their cash inflows and outflows based on their sales and production figures, a cash budget is still a useful tool for planning and managing cash flow. A cash budget allows a business to anticipate and plan for expected cash outflows, such as the purchase of inventory or payment of bills, and to identify potential cash shortages or surpluses. Additionally, unexpected events or changes in sales or production can affect a business's cash position, making a cash budget an important tool for monitoring and adjusting cash flow throughout the year.

Question 6

Financial forecasting is used to develop the exact future outcome, otherwise it is useless to a company.

Accepted Answer

Financial forecasting is based on assumptions and can never be 100% accurate. Its purpose is to give a general idea of what may happen in the future and help a company make informed decisions.

Question 7

Pro forma income statements follow the creation of the sales forecast and production plan.

Accepted Answer

Pro forma income statements are based on the sales forecast and production plan, so they follow their creation.

Question 8

Production planning depends upon the beginning and ending accounts receivable levels, as well as the projected monthly sales level.

Accepted Answer

Production planning primarily depends on projected sales demand, inventory levels, and production capacity, not directly on accounts receivable levels. Accounts receivable impacts cash flow, not production planning directly.

Question 9

If Wiggle Corp has beginning inventory of 100 units, projected sales of 400 units, and desired ending inventory of 200 units, production must be planned for 300 units.

Accepted Answer

To determine the production planning, we need to calculate the net requirements which would be:
Projected Sales + Desired Ending Inventory – Beginning Inventory = Net Requirements
400 + 200 - 100 = 500
Therefore, the production planning should be for 500 units, not 300 units.

Question 10

An increase in sales and/or profits means there is also an increase in cash on the balance sheet.

Accepted Answer

An increase in sales and/or profits does not necessarily mean there is an increase in cash on the balance sheet. It depends on factors such as the timing of revenue recognition, credit sales, inventory levels, and expenses. Cash flow must also be considered, as profits may be affected by non-cash items such as depreciation and amortization.

Question 11

The main consideration in constructing a pro forma income statement is the costs specifically associated with units sold during the time period.

Accepted Answer

The pro forma income statement focuses on projected revenues and expenses, including costs directly tied to the units expected to be sold, to estimate future profitability.

Question 12

The main consideration for cash payments are monthly costs associated with inventory manufactured during the period and disbursements for general and administrative expenses, interest payments, taxes and dividends.

Accepted Answer

Cash payments are a key factor in managing monthly expenses related to inventory production and general administrative expenditures, such as taxes, interest payments, and dividends.

Question 13

Growth in sales volume prevents a shortage of cash funds.

Accepted Answer

Growth in sales volume can actually lead to a shortage of cash funds if the company's cash inflows from sales do not keep pace with the immediate cash outflows required for production, inventory, and other operating expenses.

Question 14

An increase in sales and profits generates the necessary cash required for economic growth of a company.

Accepted Answer

An increase in sales and profits does not automatically generate the necessary cash since profits are an accounting measure and do not directly equate to cash flow. Cash flow depends on the timing of cash receipts and payments, and a company can be profitable but still face cash shortages if its cash outflows outpace its cash inflows.

Question 15

Sales projections and the ability to accurately predict the future have a large impact on cash flow expectations.

Accepted Answer

Sales projections help businesses estimate the amount of revenue they will generate in the future, which affects their cash flow expectations. If projections are inaccurate, cash flow expectations may not be met, leading to financial difficulties.

Question 16

The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold, all from the same time frame.

Accepted Answer

This formula accurately reflects how to calculate the ending inventory value, as it accounts for the initial inventory, adds the costs of producing additional goods, and subtracts the cost of goods that were sold, all within the same accounting period.

Question 17

The longer the financial forecast (i.e. 5 to 10 years), the better for the company.

Accepted Answer

Longer financial forecasts can be more speculative and less accurate due to the increased uncertainty over time, making shorter-term forecasts generally more reliable for decision-making.

Question 18

Pro forma income statements and balance sheets refer to projected financial statements.

Accepted Answer

Pro forma income statements and balance sheets are used for projecting future financial statements.

Question 19

It is helpful to break down the income statement into smaller monthly periods to enable evaluation of seasonal patterns of cash inflows and outflows.

Accepted Answer

Breaking down the income statement into smaller monthly periods can help identify seasonal patterns of cash inflows and outflows. It allows for a more detailed analysis of the company's financial performance and helps in making informed business decisions.

Question 20

Pro forma statements are generally prepared six months to a year into the future.

Accepted Answer

Pro forma statements are financial statements that forecast future financial performance based on certain assumptions. They are typically prepared for a period of six months to a year into the future, hence the statement is true.

Quiz 4: Financial Forecasting