Question 1

Level production schedules usually have the advantage of reducing overall production costs.

Accepted Answer

Level production schedules distribute production evenly over a period of time, allowing for better utilization of resources and manpower, reducing the need for overtime or hiring temporary workers, and lowering overall production costs.

Question 2

In order to estimate production requirements, we

Accepted Answer

We need to know how much products we need to produce to meet the sales demand while maintaining a desired inventory level. Therefore, we need to add the projected sales in units to the desired ending inventory and subtract the beginning inventory. This will give us the production requirement for the given period. Option A is incorrect as it subtracts projected sales from desired ending inventory which are both quantities that need to be produced/maintained. Option C takes the average of beginning and desired ending inventory which does not give an accurate estimate of production requirements. Option D subtracts sales from inventory which is not what is required to estimate production requirements.

Question 3

A firm has beginning inventory of 450 units at a cost of $10 each. Production during the period was 500 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?

Accepted Answer

Old inventory (450 units at $10) $ 4,500
Plus new production (500 units at $12) $ 6,000
Available $10,500
Less ending inventory (250 units at $12) $ 3,000
Cost of goods sold $ 7,500

Question 4

The calculation of cash receipts requires a breakout of cash and credit sales and cash collections history.

Accepted Answer

Cash receipts can be calculated by separating cash and credit sales and analyzing the history of cash collections.

Question 5

The percent-of-sales method provides the most accurate and detailed method of forecasting necessary funds.

Accepted Answer

The percent-of-sales method is a quick and simple method of forecasting funds needed, but it may not provide the most accurate or detailed forecast. Other methods, such as the regression analysis method, may provide more detailed and accurate forecasts.

Question 6

Pro forma financial statements are

Accepted Answer

All of the options are true. Pro forma financial statements are comprehensive financial forecasts that are often required by prospective creditors to assess a company's ability to repay its debts. These projections take into account potential changes in revenue, expenses, and other financial metrics, and can be useful in evaluating the impact of proposed business decisions on a company's financial outcomes.

Question 7

A rapid rate of growth in sales may require

Accepted Answer

A rapid rate of growth in sales may require increased borrowing by the firm to support the sales increase. This is because higher demand for goods may require the firm to increase production, hire more employees, and invest in new equipment or inventory. To finance these investments, the firm may need to borrow money from lenders or issue new debt. Higher dividend payments or being more lenient with credit customers are not necessarily related to a rapid growth in sales. Sales forecasts should actually be made more frequently during a period of rapid growth to ensure the firm can keep up with demand.

Question 8

MG Lighting had sales of 500 units at $100 per unit last year. The marketing manager projects a 15 percent decrease in unit volume this year because a 10 percent price increase is needed to pass rising costs through to customers. Returned merchandise will represent 3.2 percent of total sales. What is MG Lighting net dollar sales projection for this year?

Accepted Answer

Unit volume 500 × 0.85 425
Price $100 × 1.10 × $110
Total Sales $46,750
Returns (3.2%) 1,496
Net Sales $45,254

Question 9

When developing a pro forma income statement, which of the following steps are not used?

Accepted Answer

Establishing a marketing projection is not a direct step in developing a pro forma income statement. A pro forma income statement focuses on projecting future revenue, costs, and expenses to estimate future profits, rather than on marketing projections.

Question 10

XYZ Co. has forecasted June sales of 400 units and July sales of 700 units. The company maintains ending inventory equal to 125% of next month's sales. June beginning inventory reflects this policy. What is June's required production?

Accepted Answer

+ Projected sales 400 units
+ Desired ending inventory 875 (1.25 × 700)
− Beginning inventory 500 (1.25 × 400)
Units to be produced 775

Question 11

The finance department should work independently without input from other departments because there may be significant biases when creating pro forma financial statements.

Accepted Answer

The finance department should work collaboratively with other departments to ensure that pro forma financial statements are accurate and representative of the entire organization. By working with other departments, the finance team can gain valuable insight into future revenue and expense projections, as well as any potential risks or opportunities that may affect the organization's financial performance. This collaborative approach can help to minimize biases and ensure that pro forma financial statements are based on sound assumptions and comprehensive data.

Question 12

When the cost of raw materials is increasing, FIFO accounting

Accepted Answer

When the cost of raw materials is increasing, FIFO accounting yields higher ending inventory values than LIFO. This is because FIFO assigns the most recent costs to the inventory which makes the older, lower valued inventory remain in the inventory. This leads to a higher overall value of the inventory as compared to LIFO which assigns the most recent costs to the cost of goods sold (COGS).

Question 13

In the development of the pro forma financial statements, the last step in the process is the development of the

Accepted Answer

The last step in developing pro forma financial statements is typically the creation of the pro forma balance sheet. This statement shows the projected financial position of the company at a specific point in time, taking into account projected assets, liabilities, and equity. The cash budget, pro forma income statement, and capital budget may be developed earlier in the process and inform the projections included in the pro forma balance sheet.

Question 14

Total production costs on the production schedule should be equal to cost of goods sold in the pro forma income statement.

Accepted Answer

Total production costs on the production schedule include the costs associated with producing goods during a specific period, while cost of goods sold (COGS) on the pro forma income statement reflects the cost of the goods that were actually sold during that period. These figures can differ due to changes in inventory levels.

Question 15

In using a systems approach to financial planning, it is necessary to develop a

Accepted Answer

A systems approach to financial planning involves creating comprehensive plans that integrate various components of financial operations, including pro forma income statements, cash budgets, and production plans, to ensure all aspects of the financial health of a business are considered and aligned.

Question 16

Required production during a planning period will depend on the

Accepted Answer

Required production during a planning period will depend on the beginning inventory of products, sales during the period, and the desired level of ending inventory. All of these factors play a role in determining how much production is required to meet demand while also maintaining adequate inventory levels. Therefore, Option D is the best choice.

Question 17

Lower profit margins resulting from increased competition would mean a lower need for external funds.

Accepted Answer

Lower profit margins resulting from increased competition would mean a higher need for external funds because the company would have less money available for investment and growth.

Question 18

In calculating gross profits, a firm utilizing LIFO inventory accounting would assume that

Accepted Answer

LIFO (Last-in, First-out) inventory accounting assumes that the most recently acquired inventory is sold first, so when calculating gross profits, LIFO would assume sales were from the current production until the current production was depleted, and then sales were from the beginning inventory. This means that the cost of goods sold would be based on the most recent inventory purchases, which would result in a higher cost of goods sold and lower gross profits compared to other inventory accounting methods.

Question 19

The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash.

Accepted Answer

The cash budget approach focuses solely on the inflows and outflows of cash and does not take into account the relationship between cash and balance sheet accounts. Therefore, the assumption that balance sheet accounts maintain a constant relationship to cash is not a part of the cash budget approach.

Question 20

The key initial element in developing all pro forma statements is

Accepted Answer

A sales forecast is the key initial element in developing all pro forma statements because it provides an estimate of future sales or revenue, which is necessary for creating projections for other financial statements like the income statement, cash flow statement, and balance sheet. Without a sales forecast, it would be difficult to estimate the other financial projections accurately.

Quiz 4: Financial Forecasting