Question 1

One way a firm can reduce the amount of cash it needs in any month is to ________.

Accepted Answer

The answer of One way a firm can reduce the...

Question 2

In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of May, the firm had ________.

Accepted Answer

The answer of In April, a firm had an ending...

Question 3

In the development of pro forma statements, a firm that requires external funds means that its projected level of cash 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 firm that requires external funds means that its projected level of cash is not enough to cover its needs, and therefore additional funds would need to be raised through external financing such as issuing debt or equity. This would result in a decrease in available funds for repaying debt, repurchasing stock or increasing dividends.

Question 4

The primary purpose in preparing pro forma financial statements is ________.

Accepted Answer

The answer of The primary purpose in preparing pro forma...

Question 5

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 for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total expected cash receipts in January is ________.

Accepted Answer

In January, the firm expects to collect cash from sales made in November, December, and January. For November ($1,000 sales), it collects the balance two months following the sale, which is 50% (100% - 10% cash - 40% next month) = $500. For December ($3,000 sales), it collects 40% one month following the sale = $1,200. For January ($4,000 sales), it collects 10% as cash sales = $400. Adding these amounts gives $500 + $1,200 + $400 = $2,100.

Question 6

In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. At the end of August, the firm ________.

Accepted Answer

The answer of In the month of August, a firm...

Question 7

Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000 per month. The firm will make purchases of $350,000 per month during these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The firm must make a principal and interest payment on an outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of $20,000 is also due in June. All sales are for cash.
(a) Construct a cash budget for June, July, and August, assuming the firm has a
beginning cash balance of $100,000 in June.
(b) The sales projections may not be accurate due to the lack of experience by a
newly-hired sales manager. If the sales manager believes the most optimistic
and pessimistic estimates of sales are $600,000 and $400,000, respectively, what
are the monthly net cash flows and required financing or excess cash balances?

Accepted Answer

The answer of Terrel Manufacturing expects stable sales through the...

Question 8

Which of the following represents a way of coping with uncertainty in a cash budget?

Accepted Answer

Using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances is a way of coping with uncertainty in a cash budget. This approach allows for the consideration of multiple possible outcomes and the development of contingency plans to address potential cash shortages or surpluses. Option A may not account for unexpected events, Option B may not provide a complete picture of cash flows, and Option C may not reflect current changes that affect cash flows.

Question 9

In the preparation of a quarterly cash budget, the following revenue and cost information have been compiled. Prepare and evaluate a cash budget for the months of October, November, and December based on the information shown below.  ∙ The firm collects 60 percent of sales for cash and 40 percent of its sales one month later.
∙ Interest income of $50,000 on marketable securities will be received in December.
∙ The firm pays cash for 40 percent of its purchases.
∙ The firm pays for 60 percent of its purchases the following month.
∙ Salaries and wages amount to 15 percent of the preceding month's sales.
∙ Sales commissions amount to 2 percent of the preceding month's sales.
∙ Lease payments of $100,000 must be made each month.
∙ A principal and interest payment on an outstanding loan is due in December of $150,000.
∙ The firm pays dividends of $50,000 at the end of the quarter.
∙ Fixed assets costing $600,000 will be purchased in December.
∙ Depreciation expense each month of $45,000.
∙ The firm has a beginning cash balance in October of $100,000 and maintains a minimum cash balance of $200,000.

Accepted Answer

The answer of In the preparation of a quarterly cash...

Question 10

________ are projected financial statements.

Accepted Answer

Pro forma statements are a type of projected financial statement that forecast future performance based on historical data and assumptions about future events. Statements of retained earnings only show changes in a company's retained earnings account, Cash budgets are projections of expected cash inflows and outflows, and Cash flow statements show the movement of cash into and out of a business over a specific period.

Question 11

Gerry Jacobs, a financial analyst for Best Value Supermarkets, has prepared the following sales and cash disbursement estimates for the period August through December of the current year.  Ninety percent of sales are for cash, the remaining 10 percent are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a minimum cash balance of $50. The beginning cash balance in September is $25. Prepare a cash budget for the months of October, November, and December, noting any needed financing or excess cash available.

Accepted Answer

The answer of Gerry Jacobs, a financial analyst for Best...

Question 12

Development of pro forma financial statements helps a financial manager to project the amount of external financing required to support a given level of sales as well as overall financial performance of the firm in the coming year.

Accepted Answer

Pro forma financial statements are used to project the financial performance of a business for the upcoming year. By analyzing the projected income statement, balance sheet, and cash flow statement, financial managers can determine the amount of external financing that may be needed to achieve a certain level of sales and overall performance.

Question 13

Since the percentage-of-sales method assumes that all the form's costs and expenses are variable, it tends to understate profits when sales are increasing and overstate profits when sales are decreasing.

Accepted Answer

The percentage-of-sales method assumes that all costs and expenses are variable, which means that they will fluctuate in proportion to changes in sales. However, not all costs and expenses are truly variable, and some may remain fixed or semi-fixed regardless of sales levels. As a result, when sales are increasing, the percentage-of-sales method may underestimate the true amount of fixed and semi-fixed expenses, leading to an understatement of profits. Conversely, when sales are decreasing, the method may overestimate the amount of fixed and semi-fixed expenses, leading to an overstatement of profits.

Question 14

Harry's House of Hamburgers (HHH) wants to prepare a cash budget for months of September through December. Using the following information, prepare the cash budget schedule and interpret the results.
∙ Sales were $50,000 in June and $60,000 in July. Sales have been forecasted to be $65,000, $72,000, $63,000, $59,000, and $56,000 for months of August, September, October, November, and December, respectively. In the past, 10 percent of sales were on cash basis, and the collection were 50 percent in the first month, 30 percent in the second month, and 10 percent in the third month following the sales.
∙ Every four months (three times a year) $500 of dividends from investments are expected. The first dividend payment was received in January.
∙ Purchases are 60 percent of sales, 15 percent of which are paid in cash, 65 percent are paid one month later, and the rest is paid two months after purchase.
∙ $8,000 dividends are paid twice a year (in March and September).
∙ The monthly rent is $2,000.
∙ Taxes are $6,500 payable in December.
∙ A new hamburger press will be purchased in October for $2,300.
∙ $1,500 interest will be paid in November.
∙ $1,000 loan payments are paid every month.
∙ Wages and salaries are $1,000 plus 5 percent of sales in each month.
∙ August's ending cash balance is $3,000.
∙ HHH would like to maintain a minimum cash balance of $10,000.

Accepted Answer

The answer of Harry's House of Hamburgers (HHH) wants to...

Question 15

The key inputs for preparing pro forma income statements using the simplified approaches are the ________.

Accepted Answer

The key inputs for preparing pro forma income statements using the simplified approaches are the sales forecast for the coming year and financial statements for the preceding year. This is because the pro forma income statement is an estimate of the company's expected financial performance in the future, based on past performance and anticipated sales growth. Therefore, the sales forecast for the coming year provides the basis for estimating the company's future revenue, while the financial statements for the preceding year provide information on the company's historical performance and expenses, which are used to project future expenses and profitability.

Question 16

A firm plans to retire outstanding bonds in the next planning period. Which of the following gets affected?

Accepted Answer

Retiring outstanding bonds will have an impact on the pro forma income statement and pro forma balance sheet, as it will involve a repayment of debt and a reduction in interest expense. The previous year's financial statements or the statement of retained earnings are not impacted by this action, and a proxy statement does not typically include information on the retirement of bonds.

Question 17

In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the ________.

Accepted Answer

The initiation of a credit policy affects the cash budget directly because it changes the timing of cash inflows. It also impacts the pro forma balance sheet due to changes in accounts receivable. However, it does not immediately affect the pro forma income statement or the statement of retained earnings, as these are influenced by sales and expenses over time, not by the timing of cash receipts.

Question 18

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 for cash, collects 40 percent of its sales one month following the sale, and collects the balance two months following the sale. The firm's total cash receipts in November is ________.

Accepted Answer

The firm's total cash receipts in November include 10% of November sales ($1,000 * 10% = $100) since it collects 10 percent of its sales for cash. The rest of the collections are based on sales from previous months, which are not mentioned for October or earlier, so only the cash sales portion for November is counted.

Question 19

In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000, depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of $500. The ending cash balance for August totals ________.

Accepted Answer

To calculate the ending cash balance for August, we need to subtract the total cash disbursements and depreciation expense from the total cash receipts and add the beginning cash balance.

Ending Cash Balance = Beginning Cash Balance + Total Cash Receipts - Total Cash Disbursements - Depreciation Expense

Ending Cash Balance = $500 + $10,000 - $8,000 - $1,000 
Ending Cash Balance = $1,500

Therefore, the ending cash balance for August is $1,500.

Question 20

In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm had ________.

Accepted Answer

The ending cash balance in October was $35,000. With a net cash flow of $40,000 in November, the ending cash balance for November is $75,000. The minimum required is $25,000, so the excess cash balance is $75,000 - $25,000 = $50,000.

Quiz 4: Cash Flow and Financial Planning