Question 1

Growth in sales volume prevents a shortage of funds.

Accepted Answer

The answer of Growth in sales volume prevents a shortage...

Question 2

Profit is generally adequate to finance significant growth.

Accepted Answer

Profit may not always be sufficient to finance significant growth. Companies may need to seek external sources of funding such as loans or issuing stocks to fuel their growth.

Question 3

The main consideration in constructing the pro forma income statement is the costs specifically associated with the units sold during the period.

Accepted Answer

The pro forma income statement focuses on projecting future income and expenses, and a key component is estimating the costs directly tied to the units expected to be sold, as these affect gross profit and overall financial performance.

Question 4

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

Accepted Answer

The primary purpose of the cash budget is to plan and track cash inflows and outflows in order to ensure that there is enough cash available to meet financial obligations and cover operating expenses. While accounts payable payments are part of the cash outflows that need to be considered in a cash budget, they are not the primary purpose of the budget.

Question 5

If Product 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.

Accepted Answer

To calculate the production needed, we need to add the desired ending inventory to the projected sales and subtract the beginning inventory:

300 units = (400 projected sales + 200 desired ending inventory) - 100 beginning inventory

So the correct answer is B, not A.

Question 6

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

Accepted Answer

Sales projections are used to forecast future revenue, which in turn affects cash flow targets. Accurately predicting the future helps with budgeting and allocating resources for future expenses.

Question 7

When sales volume varies from month to month it is not advisable to use level production.

Accepted Answer

The answer of When sales volume varies from month to...

Question 8

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.

Accepted Answer

The cash budget helps the firm anticipate its cash inflows and outflows, which allows it to determine if it will need additional funds (such as a loan) to cover any shortfalls or if it will have excess funds that could potentially be invested. This helps the firm plan its cash management and make informed financial decisions.

Question 9

The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold.

Accepted Answer

The answer of The value of ending inventory should be...

Question 10

A cash budget is unnecessary under level production since we know how much will be produced every month.

Accepted Answer

A cash budget is still necessary under level production because it helps to determine the amount of cash required for operating expenses, investments, capital expenditures, and other financial obligations. Even though the production levels remain constant, the cash flows can fluctuate due to changes in inventory levels, accounts receivable, and accounts payable. Therefore, a cash budget is important for effective cash management and financial planning.

Question 11

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

Accepted Answer

Breaking down the income statement into smaller monthly periods allows for better analysis of seasonal patterns and cash flow management.

Question 12

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

Accepted Answer

Production planning primarily depends on projected sales demand, inventory levels, and production capacity, not directly on accounts receivable levels. Accounts receivable impacts cash flow, not production planning directly.

Question 13

If projected net cash flow for November is ($10,000); beginning cash balance is $4,000; minimum cash balance is $3,000; beginning loan balance is $8,000, what will be the cumulative loan balance at the end of November?

Accepted Answer

The projected net cash flow is negative $10,000, and the beginning cash balance is $4,000, resulting in a cash deficit of $6,000. To maintain the minimum cash balance of $3,000, an additional $9,000 is needed ($6,000 deficit + $3,000 minimum balance). Adding this to the beginning loan balance of $8,000 results in a cumulative loan balance of $17,000.

Question 14

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

Accepted Answer

An increase in sales and profits does not necessarily mean an increase in cash. It depends on factors such as the timing of payments from customers, inventory levels, and operating expenses. It is possible for a company to have increased sales and profits, but still have a decrease in cash due to these other factors.

Question 15

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

Accepted Answer

The answer of An increase in sales and profits generates...

Question 16

Pro forma income statements follow a sales forecast and production plan.

Accepted Answer

Pro forma income statements are a financial projection tool that follows a sales forecast and production plan. It provides information on the projected expenses, revenues, and profits of a company based on certain assumptions.

Question 17

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

Accepted Answer

Generating sales and profits does not necessarily ensure adequate cash on hand because profits are an accounting concept that includes non-cash items. Cash flow, which is the actual inflow and outflow of cash, is what determines the ability to meet financial obligations.

Question 18

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

Accepted Answer

Pro forma statements are financial projections that are typically prepared for future periods, usually six months to a year ahead. They are created to provide estimates of the potential financial impact of planned transactions, such as mergers, acquisitions, or new product launches.

Question 19

If projected net cash flow for January is ($6,500); beginning cash balance is $16,000; minimum cash balance is $5,000; beginning loan balance is $4,500, what will be the cash balance on the proforma cash budget at the end of January?

Accepted Answer

Beginning cash balance + Projected net cash flow - Minimum cash balance = Ending cash balance$16,000 + ($6,500) - $5,000 = $10,000

Question 20

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

Accepted Answer

Pro forma statements are based on projected financial data and are commonly used in financial planning and analysis. They can be used to test different scenarios and assumptions, and can help businesses and investors make informed decisions about future investments and operations.

Quiz 4: Financial Forecasting