Question 1

All of the following are true regarding the key principles of forecasting except:

Accepted Answer

This statement is false as financial statement forecasts should be comprehensive and cover all relevant aspects of the business.

Question 2

Sparky's
Sparky's sells auto parts.Provided below is selected financial information from the company's 2012 annual report:
 $\begin{array} { l r r } 
\text { Fiscalyear end } & 2012 & 2011 \
\text { (amounts in thousands of dollars) } & & \
\text { Net sales } & \$ 125,410 & \$ 106,380 \
\text { Cast of Goods Sold } & - 104,090 & -  8 9 , 3 5 5  \
\text { Grass Prafit } & \$ 21,320 & \$ 17,021 \
\text { Irventory } & \$ 31,353 & \$ 30,850
\end{array}$
-Using Sparky's financial information what is the company's inventory turnover ratio for 2012?

Accepted Answer

$\begin{array} { l c r } 
\text { For Fiscal year end } & \text { 2012 } & \text { 2011 } \
\text { (amounts in thousands of dollars) } &  \
\text { Net sales } &\$ 125,410 & \$ 106,380\
\text { Cost of Goods Sald } &  - 104,090 & - 89,355 \
\text { Grass profit } & \$ 21,320 & \$ 17,021\
\text { Inventary } & \$ 31,353 & \$ 30,850  \
\text { Inventary Turnover } & 3.35
\end{array}$
$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$ \quad $$\$ 104,090 / .5(\$ 31,353+\$ 30,850$

Question 3

Which of the following statements does not apply to preventing "garbage in,garbage out" when implementing a forecasting game plan?

Accepted Answer

This statement is inaccurate as the quantities forecasted within financial statement forecasts should not solely depend on the quantity of forecast assumptions. Other factors, such as market trends and competition, should also be taken into consideration when making forecasts.

Question 4

Card Sharks, Inc.
Card Sharks, Inc.sells baseball cards and other memorabilia.The company tries to maintain a cash balance equivalent to approximately 30 days of sales.Sales in 2011 amounted to $352,412 and the company expects growth in 2012 of 30% and in 2013 of 35%.
-Given the information provided about Card Sharks,what is the company's 2013 projected cash balance?

Accepted Answer

$\begin{array}{crcc}
&\text { Annual } &\text { Average }&\text { Days Sales }&\text { Year-end } \
&\text { Sales }&\text { Sales/Day }&\text { in Cash }&\text { Cash Bal. }\
\hline 2011&\$ 352,412 & \text { Sales/365 } & \text { Given } & \text { Sales/Day }{ }^{*} 30 \
2012&\$ 468,708 & 1,284 & 30 & \$ 38,524 \
2013&\$ 656.191 & 1,798 & 30 & \$ 53.934\
\end{array}$

Question 5

Financial statement forecasts rely on additivity within financial statements and articulation across financial statements.Given this information forecasts of future growth in inventory will most likely affect growth in:

Accepted Answer

Inventory growth will require additional funds to finance the purchase of inventory, which will likely result in an increase in accounts payable as the company will need to delay payment to suppliers in order to free up cash for inventory purchases. Growth in inventory would not directly impact accounts receivable, depreciation, or salary payable.

Question 6

The objective of forecasting is to develop:

Accepted Answer

The objective of forecasting is not to develop stand-alone financial statements or to compare to industry averages. Rather, it is to develop a set of realistic expectations for future value-relevant payoffs, such as projected revenues, expenses, profits, and cash flows. This can be useful for decision-making and evaluating investment opportunities.

Question 7

If a firm competes in a capital-intensive industry with excess capacity,all of the following are true except:

Accepted Answer

In a capital-intensive industry with excess capacity, firms are less likely to increase prices because they aim to utilize their excess capacity and avoid losing market share.

Question 8

If a company has very low operating leverage (i.e.,a low proportion of fixed costs in the cost structure)and no changes are expected in operations:

Accepted Answer

With very low operating leverage and no expected changes in operations, the proportion of fixed costs in the cost structure is low. Therefore, using common-size income statement percentages can serve as a reasonable basis for projecting future operating expenses. This is because as there are fewer fixed costs, changes in revenue will not have a significant impact on operating expenses. Thus, common-size income statement percentages can be used as a good approximation for projecting future operating expenses.

Question 9

Sparky's
Sparky's sells auto parts.Provided below is selected financial information from the company's 2012 annual report:
 $\begin{array} { l r r } 
\text { Fiscalyear end } & 2012 & 2011 \
\text { (amounts in thousands of dollars) } & & \
\text { Net sales } & \$ 125,410 & \$ 106,380 \
\text { Cast of Goods Sold } & - 104,090 & -  8 9 , 3 5 5  \
\text { Grass Prafit } & \$ 21,320 & \$ 17,021 \
\text { Irventory } & \$ 31,353 & \$ 30,850
\end{array}$
-Sparky's forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012.If these assumptions prove correct and Sparky's inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?

Accepted Answer

$\begin{array}{l}
\begin{array}{lll}
\text { Sparky's} \
\text { Selected Financial Statement data } \
\text { Fiscal year end} \
\text { (amounts in thousands of dollars)} \
\text { Net sales} \
\text { Cost of Goods Sold} \
\text { Gross profit} \
\text { Inventory} \
\text { Inventory Turnover} \
\end{array}
\begin{array}{lll}
\
\
\text { 2013forecast } & \underline{\mathbf{2 0 1 2}} & \text { 2011 } \
\
 \$ 156,763 & \$ 125,410 & \$ 106,380 \
-130,113 & -104,090 & -89,350 \
26,650 & 21,320 & 17,02 \
\$ 26,475 & \$ 31,353 & \$ 30,850\
4.5&3.35\
\end{array}
\end{array}$

Question 10

Card Sharks, Inc.
Card Sharks, Inc.sells baseball cards and other memorabilia.The company tries to maintain a cash balance equivalent to approximately 30 days of sales.Sales in 2011 amounted to $352,412 and the company expects growth in 2012 of 30% and in 2013 of 35%.
-All of the following are the fundamental bases for future payoffs to equity shareholders and share value except:

Accepted Answer

Depreciation is a non-cash expense and, therefore, does not directly contribute to the fundamental bases for future payoffs to equity shareholders and share value. The fundamental bases for future payoffs are earnings, cash flows, and dividends.

Question 11

Card Sharks, Inc.
Card Sharks, Inc.sells baseball cards and other memorabilia.The company tries to maintain a cash balance equivalent to approximately 30 days of sales.Sales in 2011 amounted to $352,412 and the company expects growth in 2012 of 30% and in 2013 of 35%.
-Given the information provided about Card Sharks,what are the company's 2013 projected annual sales?

Accepted Answer

$\begin{array}{crcc}
&\text { Annual } &\text { Average }&\text { Days Sales }&\text { Year-end } \
&\text { Sales }&\text { Sales/Day }&\text { in Cash }&\text { Cash Bal. }\
\hline 2011&\$ 352,412 & \text { Sales/365 } & \text { Given } & \text { Sales/Day }{ }^{*} 30 \
2012&\$ 468,708 & 1,284 & 30 & \$ 38,524 \
2013&\$ 656.191 & 1,798 & 30 & \$ 53.934\
\end{array}$

Question 12

When projecting operating expenses,it is important to determine the mix of fixed and variable costs; one clue suggesting the presence of fixed costs is:

Accepted Answer

A significantly smaller percentage change in cost of goods sold compared to sales suggests the presence of fixed costs, as variable costs would typically follow in proportion to sales changes.

Question 13

To ensure that the financial statements articulate,it is important that the change in the cash balance on the balance sheet each year agrees with:

Accepted Answer

The net change in cash on the projected statement of cash flows should directly correspond with the change in cash balance on the balance sheet. This is because the statement of cash flows is designed to show the inflows and outflows of cash during a given period, which will ultimately impact the cash balance on the balance sheet. Therefore, ensuring that these two items agree is crucial for the financial statements to articulate properly. Choices A, B, and D may also impact the cash balance, but they are not directly related to the change in cash balance on the balance sheet.

Question 14

Using common-size balance sheet percentages to project individual assets,liabilities,or shareholders' equity has all of the following shortcomings except:

Accepted Answer

This is because common-size percentages are a tool used to highlight the relative proportion of different balance sheet items, but they do not change the underlying relationships between assets, liabilities, and shareholder's equity. Therefore, individual components are not independent of each other in reality, even though they may appear that way when presented as common-size percentages. The other options listed are all valid shortcomings of using common-size percentages for forecasting individual balance sheet components.

Question 15

Card Sharks, Inc.
Card Sharks, Inc.sells baseball cards and other memorabilia.The company tries to maintain a cash balance equivalent to approximately 30 days of sales.Sales in 2011 amounted to $352,412 and the company expects growth in 2012 of 30% and in 2013 of 35%.
-Given the information provided about Card Sharks,what is the company's 2012 projected year-end cash balance?

Accepted Answer

$\begin{array}{crcc}
&\text { Annual } &\text { Average }&\text { Days Sales }&\text { Year-end } \
&\text { Sales }&\text { Sales/Day }&\text { in Cash }&\text { Cash Bal. }\
\hline 2011&\$ 352,412 & \text { Sales/365 } & \text { Given } & \text { Sales/Day }{ }^{*} 30 \
2012&\$ \$ 458,135 & 1255 & 30 & \$ 37,654 \
2013&\$ 618.482 & 1694 & 30 & 50.820
\end{array}$

Question 16

Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior security returns.Nichols and Wahlen's findings indicate:

Accepted Answer

Nichols and Wahlen's study showed that accurate forecasting of the sign of the change in earnings one year ahead provides the potential to earn superior security returns. There is no evidence to suggest that accurate forecasting of the other variables mentioned in the answer choices would lead to excess returns.

Question 17

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity.Which of the following types of companies would most likely be able to increase prices?

Accepted Answer

A firm in a capital-intensive industry that is expected to operate near capacity for the near future would have an advantage in increasing prices as it is likely that demand will be higher than supply, giving the company greater pricing power.

Question 18

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity.Which of the following companies would most likely not be able to increase prices in the near future?

Accepted Answer

A firm in a capital intensive industry with excess capacity is likely facing intense price competition and cannot easily raise its prices without losing market share to competitors. The other three options suggest that the firm is either operating near or at capacity, maintaining current production processes, or experiencing growth, making it more able to increase prices.

Question 19

An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that:

Accepted Answer

The inventory turnover ratio can introduce artificial volatility in ending balances, making it difficult to predict future levels of inventory with certainty. It does not necessarily result in understating or overstating inventory each year.

Question 20

Financial statement forecasts rely on additivity within financial statements and articulation across financial statements.Given this information sales growth forecasts will most likely affect growth in:

Accepted Answer

Sales growth forecasts are likely to affect the level of accounts receivables, as an increase in sales will typically result in an increase in the amount of credit extended to customers, leading to an increase in accounts receivables. Accounts payable, depreciation, and salary payable are not directly affected by sales growth forecasts.

Quiz 10: Forecasting Financial Statements