Question 1

An internal sales forecast is based on the relationships that can be observed between the firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.

Accepted Answer

An internal sales forecast is typically based on the company's own historical sales data, trends, and internal factors, rather than external economic indicators.

Question 2

The primary purpose in preparing pro forma financial statements is

Accepted Answer

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

Question 3

The number and type of intervals in the cash budget depend on the nature of the business. The more seasonal and uncertain a firm's cash flows, the greater the number of intervals and the shorter time intervals.

Accepted Answer

A firm with seasonal and uncertain cash flows requires more frequent and shorter intervals to effectively manage its cash flow. This allows for better forecasting, and helps the company avoid cash shortages or surpluses. However, a firm with more stable and predictable cash flows may only require fewer and longer intervals.

Question 4

A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.

Accepted Answer

A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash receipts in each period, not cash disbursements.

Question 5

Cash budget is a statement of the firm's planned inflows and outflows of cash that is used to estimate its long-term cash requirement.

Accepted Answer

A cash budget is used to estimate a firm's short-term cash requirements, typically covering a period of one year or less.

Question 6

Cash planning involves the preparation of the firm's cash budget. Without adequate cash regardless of the level of profits any firm could fail.

Accepted Answer

Cash is the lifeblood of the firm and without adequate cash, the firm may not be able to meet its obligations even if it is profitable. Cash planning through the preparation of a cash budget can help a firm ensure that it has enough cash to meet its expenses and invest in growth opportunities.

Question 7

The cash budget gives the financial manager a clear view of the timing of the firm's expected profitability over a given period.

Accepted Answer

The cash budget focuses on the timing of cash inflows and outflows, not profitability, which is more related to the income statement.

Question 8

Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS).

Accepted Answer

Cash budgets and pro forma statements are primarily used for internal financial planning and decision making. While the IRS may require some financial statements for tax purposes, they do not specifically require cash budgets or pro forma statements.

Question 9

The key aspects of the financial planning process are

Accepted Answer

The financial planning process involves analyzing an individual's financial situation to determine short and long-term financial goals. Cash planning involves creating a budget and managing cash flow, while profit planning involves analyzing income sources and expenses to maximize profits. Therefore, the key aspects of financial planning are cash planning and profit planning. Investment planning and financing are important components of financial planning, but they are not considered the key aspects.

Question 10

In cash budgeting, other cash receipts are cash receipts expected to result from sources other than sales. Items such as interest and dividend income, proceeds from the sale of equipment, depreciation expense, and stock and bond sales proceeds are examples of other cash receipts.

Accepted Answer

Depreciation expense is not a cash receipt; it is a non-cash accounting entry. Other items like interest, dividends, and sales proceeds are cash receipts.

Question 11

________ generally reflect(s) the anticipated financial impact of planned long-term actions.

Accepted Answer

Strategic financial plans are designed to reflect the long-term impact of planned actions on a company's finances. The other options may provide insight into a company's financials, but they do not necessarily consider long-term planning in the same way that strategic financial plans do.

Question 12

The ________ is a financial projection of the firm's short-term cash surpluses or shortages.

Accepted Answer

A cash budget is a financial projection that outlines a company's expected inflows and outflows of cash over a specific period. It helps the firm to identify potential cash surpluses or deficits, and to plan accordingly. The other options, operating financial plan, strategic financial journal, and capital assets journal, are not directly related to short-term cash projections.

Question 13

The sales forecast, cash budget, and pro forma financial statements are the key outputs of the short-run (operating) financial planning.

Accepted Answer

The answer of The sales forecast, cash budget, and pro...

Question 14

The primary purpose in preparing a cash budget is

Accepted Answer

The primary purpose of preparing a cash budget is to plan and forecast the cash inflows and outflows for a specific period, usually a month or a year. It helps businesses plan for any potential cash shortfalls and make informed decisions about when to make purchases or investments. While a cash budget can be useful for profit planning and risk analysis, its primary purpose is cash planning. Estimating sales is not the primary purpose of a cash budget, as it is based on past sales data and not future projections.

Question 15

In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments.

Accepted Answer

Depreciation is a non-cash expense and is tax-deductible. As a result, it reduces taxable income and, as a result, reduces tax payments. In cash budgeting, the effect of depreciation is critical because it reduces taxes paid, resulting in increased cash flow.

Question 16

In general, firms that are subject to a high degree of ________, relatively short production cycles, or both tend to use shorter planning horizons.

Accepted Answer

Firms that face high levels of operating uncertainty or have short production cycles tend to use shorter planning horizons because it is difficult to predict future demand or shifts in the market. These firms may need to adjust their plans and strategies more frequently, making longer planning horizons less useful.

Question 17

Which of the following would be the least likely to utilize pro forma financial statements or a cash budget?

Accepted Answer

Investors are less likely to use pro forma financial statements or a cash budget because they are generally more interested in historical financial data and current performance rather than future projections. Top and middle management are likely to use pro forma statements and cash budgets for planning and decision-making purposes, while lenders typically require pro forma financial statements and cash budgets to assess a borrower's ability to repay a loan.

Question 18

Since depreciation and other non-cash charges represent a scheduled write-off of an earlier cash outflow, they should NOT be included in the cash budget.

Accepted Answer

Depreciation and other non-cash charges do not affect cash inflows or outflows, as they are not actual cash transactions. Therefore, they should not be included in the cash budget, which only considers the actual cash flows entering and leaving the company.

Question 19

Pro forma statements are used for

Accepted Answer

Pro forma statements are projections of future financial statements based on certain assumptions and are used primarily for profit planning purposes. They are not used for cash budgeting, credit analysis, or leverage analysis.

Question 20

________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, and both the mix and major sources of financing.

Accepted Answer

Long-term financial plans are designed to consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, and both the mix and major sources of financing. These plans typically cover a period of three to five years and help companies to align their strategic goals with their financial resources. Short-term financial plans, on the other hand, usually cover a period of one year or less and focus on day-to-day cash management. Pro-forma statements are financial projections that companies use to estimate future earnings and cash flows, while cash budgeting is a tool used to plan and control cash inflows and outflows in the short term.

Quiz 4: Cash Flow and Financial Planning