Deck 4: Financial Forecasting

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

The primary purpose of the cash budget is to forecast income.

Question 9

Profit is generally adequate to finance significant growth.

Question 10

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

Question 11

Companies generally prefer to maintain some minimum cash balance.

Question 12

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.

Question 13

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

Question 14

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

Question 15

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

Question 16

The primary purpose of the cash budget is to allow the firm to anticipate the need for outside funding or excess funds to be invested.

Question 17

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

Question 18

Growth in sales volume prevents a shortage of cash funds.

Question 19

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

Question 20

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

Question 21

An increase in sales accompanied by an increase in accounts payable will reduce the amount of new external funds required, all else being equal.

Question 22

The percent-of-sales method would not result in very accurate financials if used for a tourism company.

Question 23

The percent-of-sales forecast is likely to be most accurate when used with cyclical companies.

Question 24

The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash.

Question 25

The percent-of-sales method would be more accurate under a steady sales assumption than with cyclical sales.

Question 26

A lower dividend payout ratio will decrease the firm's need for borrowing.

Question 27

Required new funds shows that the firms need more cash during times of company growth, especially if sales increases.

Question 28

A pro forma balance sheet needs data from the prior balance sheet, pro forma income statement, and cash flow in order for it to be complete.

Question 29

Making the pro-forma financial statements as complicated as possible is always best.

Question 30

Level production schedules usually have the advantage of reducing overall production costs.

Question 31

Compared to a firm operating at 100% of capacity, firms that are operating at less than full capacity will require greater new external funds when sales increase.

Question 32

The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a relatively constant relationship to sales.

Question 33

The purpose of pro-forma financial statements is so that cash is never left short and a financial outlook of the firm is created and analyzed.

Question 34

As the dividend payout ratio declines, more external funds are required.

Question 35

The finance department should work independently without input from other departments because there may be significant biases when creating pro forma financial statements.

Question 36

Generally, the pro forma income statement and balance sheet must be created before the cash budget is completed.

Question 37

An increase in accounts receivable and/or a decrease in accounts payable will usually reduce the amount of new external funds required.

Question 38

A firm that is currently operating at 100% of capacity has an increase in sales. For every percentage increase in sales, the same percentage increase will be needed in current assets and current liabilities.

Question 39

A higher growth rate in sales will often require more external funds.

Question 40

Lower profit margins resulting from increased competition would mean a lower need for external funds.

Question 41

Required production during a planning period will depend on the

A) beginning inventory of products.
B) sales during the period.
C) desired level of ending inventory.
D) All of the options are true.

Question 42

In using a systems approach to financial planning, it is necessary to develop a

A) pro forma income statement.
B) cash budget.
C) production plan.
D) All of the options are true.

Question 43

The pro forma income statement is important to the overall process of constructing the pro forma balance sheet because it allows us to determine a value for

A) change in retained earnings.
B) gross profit.
C) interest expense.
D) prepaid expenses.

Question 44

A rapid rate of growth in sales may require

A) higher dividend payments to shareholders.
B) increased borrowing by the firm to support the sales increase.
C) the firm to be more lenient with credit customers.
D) sales forecasts to be made less frequently.

Question 45

Total production costs on the production schedule should be equal to cost of goods sold in the pro forma income statement.

Question 46

In financial statements, the number of units shown to be sold is ___________ than the number of the units produced.

A) higher.
B) lower.
C) the same.
D) either higher or lower.

Question 47

Pro forma financial statements are

A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) All of the options are true.

Question 48

When the cost of raw materials is increasing, FIFO accounting

A) yields higher ending inventory values than LIFO.
B) produces higher unit sales than using LIFO.
C) yields higher cost of goods sold than LIFO.
D) All of the options are true.

Question 49

In order to estimate production requirements, we

A) subtract projected sales in units from desired ending inventory and add beginning inventory.
B) add projected sales in units to desired ending inventory and subtract beginning inventory.
C) add beginning inventory to desired ending inventory and divide by two.
D) add beginning inventory to desired ending inventory and subtract projected sales in units.

Question 50

In developing the pro forma income statement, we follow four important steps: 1) Compute other expenses
2) Determine a production schedule
3) Establish a sales projection
4) Determine profit by completing the pro forma income statement
What is the correct order for these four steps?

A) 1,2,3,4
B) 3,2,4,1
C) 2,1,3,4
D) 3,2,1,4

Question 51

The percent-of-sales provides the most accurate and detailed method of forecasting necessary funds.

Question 52

In calculating gross profits, a firm utilizing FIFO inventory accounting would assume that

A) all sales were from the current production.
B) all sales were from the beginning inventory.
C) sales were from the beginning inventory until it was depleted, and then sales were from the current production.
D) all sales were for cash.

Question 53

In the development of the pro forma financial statements, the last step in the process is the development of the

A) cash budget.
B) pro forma balance sheet.
C) pro forma income statement.
D) capital budget.

Question 54

A firm has beginning inventory of 400 units at a cost of $12 each. Production during the period was 700 units at $13 each. If sales were 800 units, what is the value of the ending inventory using LIFO?

A) $2,750
B) $3,600
C) $3,300
D) $3,850

Question 55

MG Lighting had sales of 500 units at $100 per unit last year. The marketing manager projects a 15 percent decrease in unit volume this year because a 10 percent price increase is needed to pass rising costs through to customers. Returned merchandise will represent 3.2 percent of total sales. What is MG Lighting net dollar sales projection for this year?

A) $26,976
B) $69,344
C) $72,800
D) $45,254

Question 56

A firm has beginning inventory of 450 units at a cost of $10 each. Production during the period was 500 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?

A) $7,500
B) $8,000
C) $7,900
D) $8,100

Question 57

The calculation of cash receipts requires a breakout of cash and credit sales and cash collections history.

Question 58

In calculating gross profits, a firm utilizing LIFO inventory accounting would assume that

A) all sales were from the current production.
B) all sales were from the beginning inventory.
C) sales were from the current production until current production was depleted, and then sales were from the beginning inventory.
D) all sales were for cash.

Question 59

The key initial element in developing all pro forma statements is

A) a cash budget.
B) an income statement.
C) a sales forecast.
D) a collections schedule.

Question 60

XYZ Co. has forecasted June sales of 400 units and July sales of 700 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production?

A) 750 units
B) 0 units
C) 775 units
D) 400 units

Question 61

A firm has targeted a 20% growth in sales this year. Last year's cash as a percent of sales was 10%, accounts receivable 30%, and inventory 25%. What percentage growth in current liabilities is required to support the growth in sales under the percent-of-sales forecasting method?

A) 32%
B) 13%
C) 8%
D) Not enough information to determine

Question 62

In the percent-of-sales method, if (A/S) and (L/S) both increase,

A) RNF stays the same.
B) RNF goes down.
C) RNF goes up.
D) More information is needed.

Question 63

A firm has forecasted sales of $4,500 in April, $3,000 in May, and $5,000 in June. All sales are on credit. 30% is collected in the month of the sale, and the remainder in the following month. What will be the balance in accounts receivable at the end of June?

A) $1,950
B) $6,500
C) $4,550
D) $3,500 

Question 64

Net cash flow is equal to

A) income after taxes minus depreciation.
B) income after taxes minus dividends.
C) cash receipts minus cash payments.
D) cash receipts minus cash payments minus depreciation.

Question 65

GS Cookie Co. forecasts cash receipts for January and February of $18,000 and $20,000, with cash payments of $6,000 and $8,000, respectively. GS Cookie's cash balance at the beginning of January was $5,000, a level that it attempts to maintain. At the beginning of the year, GS Cookie has a $15,000 balance outstanding on its line of credit at the local bank. Based on its cash budget, how much of the line of credit can GS Cookie repay in January and February combined?

A) $12,000
B) $15,000
C) $4,000
D) $17,000

Question 66

In a cash budget, the cumulative cash balance is equal to

A) net cash flow minus the beginning cash balance.
B) net cash flow plus the beginning cash balance.
C) the cumulative loan balance minus the ending cash balance.
D) the cumulative loan balance plus the ending cash balance.

Question 67

The need for an increase or decrease in short-term borrowing can be predicted by

A) ratio analysis.
B) trend analysis.
C) a cash budget.
D) an income statement.

Question 68

When using the percent-of-sales method in forecasting the funds needed, which of the following is not true?

A) Required new funds increase as sales decrease.
B) Required new funds decrease as profit margin increases.
C) Required new funds increase as assets increase.
D) As the tax rate increases, the required new funds increase.

Question 69

A firm has forecasted sales of $4,500 in April, $3,000 in May, and $5,000 in June. All sales are on credit. 30% is collected in the month of the sale, and the remainder in the following month. How much cash is collected in June?

A) $1,500
B) $5,250
C) $4,050
D) $3,600

Question 70

In the construction of the cash payments schedule, the major cash payment is generally

A) the general and administrative expense.
B) costs associated with manufacturing inventory.
C) interest and dividends.
D) payments for new plant and equipment.

Question 71

BHS Inc. determines that sales will rise from $400,000 to $550,000 next year. Spontaneous assets are 60% of sales, and spontaneous liabilities are 30% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds?

A) $18,600
B) $138,600
C) $3,600
D) No new funds are needed

Question 72

In general, a firm with higher amounts of sales on credit has

A) lower needs to borrow.
B) higher needs to borrow.
C) more rapidly collection of credit sales.
D) more ability to buy raw materials on credit.

Question 73

Which of the following is most likely to increase the final number for notes payable for short-term borrowing needs in the pro forma balance sheet?

A) A decrease in inventory.
B) An increase in retained earnings.
C) A decrease in accounts payable.
D) A decrease in accounts receivable.

Question 74

The percent-of-sales method of financial forecasting

A) is more detailed than a cash budget approach.
B) requires more time than a cash budget approach.
C) assumes that balance sheet accounts maintain a constant relationship to sales.
D) provides a month-to-month breakdown of data.

Question 75

In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the

A) pro forma income statement.
B) cash budget.
C) prior balance sheet.
D) statement of retained earnings.

Question 76

In the percent-of-sales method, an increase in dividends

A) will increase required new funds.
B) will decrease required new funds.
C) has no effect on required new funds.
D) More information is needed.

Question 77

GS Cookie Co. forecasts cash receipts for January and February of $18,000 and $20,000, with cash payments of $6,000 and $8,000, respectively.GS Cookie's cash balance at the beginning of January was $5,000, a level that it attempts to maintain. At the beginning of the year, GS Cookie has a $15,000 balance outstanding on its line of credit at the local bank. Based on its cash budget, how much of the line of credit can GS Cookie repay in January?

A) $12,000
B) $15,000
C) $4,000
D) None

Question 78

In forecasting a firm's cash needs for some future period

A) the percent-of-sales method is a "broad-brush" approach.
B) cash budgets are more exact than the percent-of-sales method.
C) a cash budget approach can deal effectively with both level and seasonal production schedules.
D) All of the options.

Question 79

Wiggles Right forecasted inventory purchases of $5,000 in October, $4,000 in November, and $4,000 in December. All purchases are on credit. 40% is paid in the month of the purchase, and the remainder is paid in the following month. How much cash is paid in November?

A) $5,400
B) $4,800
C) $6,000
D) $4,600

Question 80

The difference between total receipts and total payments is referred to as

A) cumulative cash flow.
B) beginning cash flow.
C) net cash flow.
D) cash balance.