Question 1

Historically, electricity has a $500,000 fixed component and 4% of sales variable component. Next year's sales are forecasted to be $10,000,000. The electricity budget would be
A) $1,000,000.
B) $750,000.
C) $1,200,00.
D) $900,000.

Accepted Answer

The electricity budget consists of a fixed component of $500,000 and a variable component that is 4% of the forecasted sales ($10,000,000). The variable component is $10,000,000 * 4% = $400,000. Therefore, the total electricity budget is $500,000 + $400,000 = $900,000.

Question 2

If a firm expects short-term cash surpluses it can plan
A) short-term borrowing.
B) short-term lending.
C) leverage decisions.
D) long-term investments.

Accepted Answer

If a firm expects short-term cash surpluses, it can plan for short-term lending to earn interest on the surplus funds.

Question 3

Historically, in the retail jewelry industry, cost of goods sold averages 40% of sales. If next year's sales are expected to be $1,600,000, the gross profit forecast would be
A) $960,000.
B) $1,100,000.
C) $640,000.
D) $800,000.

Accepted Answer

Gross profit is calculated as sales minus cost of goods sold. If cost of goods sold is 40% of sales, then it is $640,000 (40% of $1,600,000). Therefore, the gross profit is $1,600,000 - $640,000 = $960,000.

Question 4

A firm has actual sales in November of $1,000 and projected sales in December and January of$3,000 and $4,000, respectively. The firm makes 10 percent of its sales in cash, collects 40 percent ofits sales one month following the sale, and collects the balance two months following the sale. The firm's total cash receipts in November
A) are $100.
B) are $700.
C) are $1,000.
D) cannot be determined with the information provided.

Accepted Answer

The answer of A firm has actual sales in November...

Question 5

Under the judgmental approach for developing a pro forma balance sheet, the "plug" figurerequired to bring the statement into balance may be called the
A) accounts receivable.
B) cash balance.
C) retained earnings.
D) external financing required.

Accepted Answer

The "plug" figure needed to balance a pro forma balance sheet under the judgmental approach represents the amount of external financing required to cover any gaps between projected assets and liabilities. Therefore, option D, external financing required, is the best choice. Options A, B, and C are not correct because they do not accurately represent the purpose of the "plug" figure.

Question 6

$$\begin{array}{l}
\text { Sportif, Inc. }\
\begin{array} { l r l } 
\text { Month } & \text { Sales } & \text { Disbursements } \
\hline \text { January } & \$ 5,000 & \$ 6,000 \
\text { February } & 6,000 & \$ 7,000 \
\text { March } & 10,000 & \$ 4,000 \
\text { April } & 10,000 & \$ 5,000 \
\text { May } & 10,000 & \$ 5,000
\end{array}
\end{array}$$
-The firm has a total financing requirement of_________for the period from January through May. (See Figure 4.1)
A) $0
B) $1,250
C) $750
D) $1,750

Accepted Answer

The firm has a total financing requirement of $1,250 for the period from January through May. This is because the firm's total sales for the period are $41,000, and its total disbursements are $27,500. Therefore, the firm's net cash flow for the period is $13,500. However, the firm has a total financing requirement of $1,250 because it has a negative cash flow of $1,250 in January.

Question 7

In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to
A) overstate costs and understate profits.
B) understate costs and understate profits.
C) understate costs and overstate profits.
D) overstate costs and overstate profits.

Accepted Answer

Past cost and expense ratios are based on historical data. In a period of rising sales, these ratios are likely to underestimate the actual costs and expenses that will be incurred. This is because costs and expenses tend to increase at a slower rate than sales. As a result, using past cost and expense ratios will lead to an overstatement of costs and an understatement of profits.

Question 8

The percent-of-sales method to preparing a pro forma income statement assumes the firm has nofixed costs. Therefore, the use of the past cost and expense ratios generally tends toprofits when sales are increasing.
A) overstate
B) accurately predict
C) have no effect on
D) understate

Accepted Answer

The answer of The percent-of-sales method to preparing a pro...

Question 9

A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement-called the external financing required-of negative $250,000. The firm may prepare to
A) arrange for a loan of $250,000.
B) sell common stock totaling $250,000.
C) invest in marketable securities totaling $250,000.
D) do nothing; the balance sheet balances.

Accepted Answer

A negative external financing required indicates that the firm has excess funds, which can be invested in marketable securities.

Question 10

The key output(s) of the short-run financial planning process are a(n)
A) sales forecast and cash budget.
B) cash budget, pro forma income statement, and pro forma balance sheet.
C) cash budget, sales forecast, and income statement.
D) income statement, balance sheet, and source and use statement.

Accepted Answer

The key output of the short-run financial planning process are a cash budget, pro forma income statement, and pro forma balance sheet. The cash budget provides a detailed forecast of cash inflows and outflows, while the pro forma income statement and balance sheet project the company's financial performance and position, based on the assumptions made in the cash budget. Together, these three statements help the company to plan and manage its finances in the short term.

Question 11

A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2004.   Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions.

A.   The firm estimates sales of $1,000,000.
B.    The firm maintains a cash balance of $25,000.
C.   Accounts receivable represents 15 percent of sales. D.   Inventory represents 35 percent of sales.
E.    A new piece of mining equipment costing $150,000 will be purchased in 2004.
 
Total depreciation for 2004 will be $75,000.
F. 	Accounts payable represents 10 percent of sales.
G.   There will be no change in notes payable, accruals, and common stock.
H.   The firm plans to retire a long term note of $100,000. I. 	Dividends of $45,000 will be paid in 2004.
J. 	The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2003
Assets
$\begin{array}{lr}
\hline\text { Cash } & \$ 25,000 \
\text { Accounts receivable } & 120,000 \
\text { Inventories } & 300,000 \
& -\ldots . . . \
\quad \text { Total current assets } & \$ 445,000 \
\text { Net fixed assets } & \$ 500,000\& -\ldots . . . \\text { Total assets }&\$945,000\\
\text { Liabilities and stockholders' equity }\\hline\text { Accounts payable } & \$ 80,000 \
\text { Notes payable } & 350,000 \
\text { Accruals } & 50,000\& -\ldots . . . \
\text { Total current liabilities } & \$ 480,000 \
\text { Long-term debts } & 150,000\
\text { Total liabilities } & \$ 630,000 \
\text { Stockholders' equity } & \
\text { Common stock } & \$ 180,000 \
\text { Retained earnings } & 135,000\\text { Total stockholders' equity } & \$ 315,000 \
\text { Total liabilities and stockholders' equity } & \$ 945,000
\end{array}$
-The external financing required in 2004 will be__________
A) $230,000
B) $195,000
C) $0
D) $240,000

Accepted Answer

The answer of A financial manager at General Talc Mines...

Question 12

Pro forma statements are used for
A) profit planning.
B) cash budgeting.
C) credit analysis.
D) leverage analysis.

Accepted Answer

The answer of Pro forma statements are used for
A) profit...

Question 13

One basic weakness of the simplified pro-forma approaches lies in the assumption that certain variables, such as cash, accounts receivable, and inventories, can be forced to take on certain "desired" values.

Accepted Answer

Simplified pro-forma approaches rely on assumptions that may not accurately reflect real-world conditions, and trying to force certain variables to conform to desired values can lead to inaccurate projections and flawed decision-making.

Question 14

A positive external funds requirement would indicate that the firm's financing is in excess of its needs and that funds would therefore be available for repaying debt, repurchasing stock, or increasing the dividend to stockholders.

Accepted Answer

A positive external funds requirement means that the firm's financing needs exceed its available funds, indicating a need for external financing such as issuing stocks or bonds. It does not indicate a surplus of funds available for debt repayment, stock repurchase, or dividend increase.

Question 15

A firm has actual sales in November of $1,000 and projected sales in December and January of$3,000 and $4,000, respectively. The firm makes 10 percent of its sales in cash, collects 40 percent ofits sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January
A) are $2,100.
B) are $1,900.
C) are $700.
D) cannot be determined with the information provided.

Accepted Answer

In January, the firm will collect 10% of January sales ($4,000 * 10% = $400), 40% of December sales ($3,000 * 40% = $1,200), and 50% of November sales ($1,000 * 50% = $500). Total cash receipts in January = $400 + $1,200 + $500 = $2,100.

Question 16

The inclusion of a monthly depreciation charge for fixed asset usage will increase the net cash flows in that period.

Accepted Answer

The monthly depreciation charge for fixed asset usage is a non-cash expense, meaning it does not involve an actual outflow of cash. Therefore, it does not increase the net cash flows in that period. In fact, it reduces the net income, which in turn can reduce the amount of taxes owed, increasing the cash flow indirectly.

Question 17

Required financing and excess cash are typically viewed as short-term. Therefore, required financing may be represented by a line of credit and excess cash is assumed to be invested in a redeemable guaranteed investment certificate.

Accepted Answer

Required financing and excess cash are indeed short-term in nature and can be managed using tools such as a line of credit for required financing and a redeemable guaranteed investment certificate for excess cash management.

Question 18

If all customers take 15 days (one-half month) to pay their credit accounts, cash flows from sales inJune would be $150,000; May and June sales budgets are $100,000 and $200,000, respectively.

Accepted Answer

If customers take 15 days to pay, half of May's sales ($50,000) and half of June's sales ($100,000) would be collected in June, totaling $150,000.

Question 19

$\text { FIGURE } 4.1$
$\text { Sportif, Inc. }$
$\begin{array}{lrr}\text { Month }&\text { Sales }&\text { Disbursements }\\hline
\text { January } & \$ 5,000 & \$ 6,000 \
\text { February } & 6,000 & \$ 7,000 \
\text { March } & 10,000 & \$ 4,000 \
\text { April } & 10,000 & \$ 5,000 \
\text { May } & 10,000 & \$ 5,000
\end{array}$
-The total cash receipts for April are____________
A) $5,000
B) $9,250
C) $7,500
D) $10,000

Accepted Answer

The total cash receipts for April are equal to the sales for April, which is $10,000.

Question 20

A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2004.   Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions.

A.   The firm estimates sales of $1,000,000.
B.    The firm maintains a cash balance of $25,000.
C.   Accounts receivable represents 15 percent of sales. D.   Inventory represents 35 percent of sales.
E.    A new piece of mining equipment costing $150,000 will be purchased in 2004.
Total depreciation for 2004 will be $75,000.
F. 	Accounts payable represents 10 percent of sales.
G.   There will be no change in notes payable, accruals, and common stock.
H.   The firm plans to retire a long term note of $100,000. I. 	Dividends of $45,000 will be paid in 2004.
J. 	The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2003
Assets
$\begin{array}{lr}
\hline\text { Cash } & \$ 25,000 \
\text { Accounts receivable } & 120,000 \
\text { Inventories } & 300,000 \
& -\ldots . . . \
\quad \text { Total current assets } & \$ 445,000 \
\text { Net fixed assets } & \$ 500,000\& -\ldots . . . \\text { Total assets }&\$945,000\\
\text { Liabilities and stockholders' equity }\\hline\text { Accounts payable } & \$ 80,000 \
\text { Notes payable } & 350,000 \
\text { Accruals } & 50,000\& -\ldots . . . \
\text { Total current liabilities } & \$ 480,000 \
\text { Long-term debts } & 150,000\
\text { Total liabilities } & \$ 630,000 \
\text { Stockholders' equity } & \
\text { Common stock } & \$ 180,000 \
\text { Retained earnings } & 135,000\\text { Total stockholders' equity } & \$ 315,000 \
\text { Total liabilities and stockholders' equity } & \$ 945,000
\end{array}$
-The pro forma total current assets amount is_________
A) $470,900
B) $500,000
C) $575,000
D) $525,000

Accepted Answer

The answer of A financial manager at General Talc Mines...

Quiz 4: Financial Planning and Forecasting

Historically, electricity has a $500,000 fixed component and 4% of sales variable component. Next year's sales are forecasted to be $10,000,000. The electricity budget would be

If a firm expects short-term cash surpluses it can plan

Historically, in the retail jewelry industry, cost of goods sold averages 40% of sales. If next year's sales are expected to be $1,600,000, the gross profit forecast would be

Under the judgmental approach for developing a pro forma balance sheet, the "plug" figurerequired to bring the statement into balance may be called the

In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to

The percent-of-sales method to preparing a pro forma income statement assumes the firm has nofixed costs. Therefore, the use of the past cost and expense ratios generally tends toprofits when sales are increasing.

A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement-called the external financing required-of negative $250,000. The firm may prepare to

The key output(s) of the short-run financial planning process are a(n)

Pro forma statements are used for

One basic weakness of the simplified pro-forma approaches lies in the assumption that certain variables, such as cash, accounts receivable, and inventories, can be forced to take on certain "desired" values.

A positive external funds requirement would indicate that the firm's financing is in excess of its needs and that funds would therefore be available for repaying debt, repurchasing stock, or increasing the dividend to stockholders.

The inclusion of a monthly depreciation charge for fixed asset usage will increase the net cash flows in that period.

Required financing and excess cash are typically viewed as short-term. Therefore, required financing may be represented by a line of credit and excess cash is assumed to be invested in a redeemable guaranteed investment certificate.

If all customers take 15 days (one-half month) to pay their credit accounts, cash flows from sales inJune would be $150,000; May and June sales budgets are $100,000 and $200,000, respectively.