Financial Forecasting 45-88 Answer Key

Chapter 04 - Financial Forecasting 45. Profit is generally adequate to finance significant growth. FALSE 46. Pro forma income statements follow a sales forecast and production plan. TRUE 47. Pro forma statements are generally prepared six months to a year into the future. TRUE 48. Pro forma income statements and balance sheets refer to projected financial statements. TRUE 49. The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due. FALSE 4-38 Chapter 04 - Financial Forecasting 50. Sales projections and the ability to accurately predict the future have a large impact on cash flow targets. TRUE 51. Production planning depends upon the beginning and ending accounts receivable levels, as well as the projected monthly sales level. FALSE 52. 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. FALSE 53. The main consideration in constructing the pro forma income statement is the costs specifically associated with the units sold during the period. TRUE 4-39 Chapter 04 - Financial Forecasting 54. Growth in sales volume prevents a shortage of funds. FALSE 55. The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold. TRUE 56. It is helpful to break down the income statement into smaller monthly periods to enable evaluation of seasonal patterns of cash inflows and outflows. TRUE 57. A cash budget is unnecessary under level production since we know how much will be produced every month. FALSE 4-40 Chapter 04 - Financial Forecasting 58. When sales volume varies from month to month it is not advisable to use level production. FALSE 59. The primary purpose of the cash budget is to plan accounts payable payments. FALSE 60. 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. TRUE 61. The primary purpose of the cash budget is to forecast income. FALSE 4-41 Chapter 04 - Financial Forecasting 62. Companies generally prefer to maintain some minimum cash balance. TRUE 4-42 Chapter 04 - Financial Forecasting 63. A pro forma balance sheet needs data from the prior balance sheet and the cash budget. TRUE 64. Generally, the pro forma income statement and balance sheet must be created before the cash budget is completed. FALSE 65. A higher growth rate in sales will often require more external funds. TRUE 66. An increase in accounts receivable and a decrease in accounts payable will reduce the amount of new external funds required. FALSE 67. The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a constant relationship to sales. TRUE 4-43 Chapter 04 - Financial Forecasting 68. The percent-of-sales forecast is likely to be most accurate when used with cyclical companies. FALSE 69. The percent-of-sales method would be more accurate under a steady sales assumption than cyclical sales. TRUE 70. An increase in sales accompanied by an increase in accounts payable will reduce the amount of new external funds required. TRUE 71. As the dividend payout ratio declines more external funds are required. FALSE 4-44 Chapter 04 - Financial Forecasting 72. A lower dividend payout ratio will decrease the firm's need for borrowing. TRUE 73. Compared to a firm operating at 100% of capacity, firms that are operating at less than full capacity will require greater new external funds when sales increase. FALSE 74. The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash. FALSE 75. Lower profit margins resulting from increased competition would mean a lower need for external funds. FALSE 4-45 Chapter 04 - Financial Forecasting 76. Level production schedules usually have the advantage of reducing overall production costs. TRUE 77. A firm's cash borrowing needs can be reduced if its inventory turnover rate can be increased. TRUE 78. The finance department should work independently without the input of other departments because there may be significant biases when creating proformas. FALSE 79. Total production costs should be equal to cost of goods sold in the proforma income statement. FALSE 4-46 Chapter 04 - Financial Forecasting 80. The percent-of-sales provides the most accurate and detailed method of forecasting necessary funds. FALSE 81. The calculation of cash receipts requires a breakout of cash and credit sales and collections history. TRUE Matching Questions 82. Match the following with the items below: 1. The determination of the relationships of various asset and liability accounts to sales and the corresponding changes that result in the asset and liability accounts when sales volume changes 2. A projection of future asset, liability, and stockholders' equity levels 3. Projection of anticipated sales, expenses and income 4. A series of monthly or quarterly detailed plans that indicate cash receipts, cash payments, and the necessary borrowing requirements to meet the firm's financial requirements 5. During a given time period, those costs specifically associated with units sold 4-47 pro forma income statement 3 cost of goods sold 5 cash budgets 4 pro forma balance sheet 2 percent-of-sales method 1 Chapter 04 - Financial Forecasting Essay Questions 83. Ellis Sport Shop projects the following sales: Seventy percent of Ellis' sales are on credit with 60 percent of receivables collected in the month after the sale and the rest of receivables collected in the second month after the sale. February sales were $60,000 and March sales were $70,000. In the past Ellis' bad debt percentage has been 0 and is expected to continue. a) Prepare a monthly schedule of cash receipts for April-June. b) What is the balance of Receivables at the end of June? 4-48 Chapter 04 - Financial Forecasting 84. Eddie's Bar and Restaurant Supplies expects its revenues and payments for the first part of the year to be: Eighty percent of the firm's sales are on credit. Past experience shows that 40 percent of accounts receivable are collected in the month after sale, and the remainder is collected in the second month after sale. Prepare a schedule of cash receipts for March, April and May. Eddie's pays its payments in the following month. Eddie's had a cash balance of $2,000 on March 1, which is also its minimum required cash balance. There is an outstanding loan of $6,000 on March 1. Prepare a cash budget for March, April, and May. Collections: 4-49 Chapter 04 - Financial Forecasting 85. Frank's Sporting Goods projects sales for the second quarter of 20XX to be as follows: April $100,000 May $120,000 June $110,000 20% of Frank's sales are for cash, 70% of accounts receivable are collected one month following the sale, and the rest are collected two months following the sale. January sales were $40,000, February sales were $60,000, and March sales were $80,000. a) Prepare a monthly schedule of cash receipts for the second quarter of 20XX. b) What is the balance in accounts receivable at the end of June? Collections: 4-50 Chapter 04 - Financial Forecasting 86. During 20XX, Baker Company and Baumer Company made the following identical purchases: 100 units @ $12.50 200 units @ $10.50 200 units @ $11.00 100 units @ $12.00 Each company sold 500 units, but Baker uses LIFO inventory valuation and Baumer uses FIFO inventory valuation. Assume there was no beginning inventory. Calculate ending inventory and cost of goods sold for each company. How will the difference in cost of goods sold affect net income? Lower cost of goods sold under FIFO generates a higher gross margin and net income, other things being equal. 4-51 Chapter 04 - Financial Forecasting 87. The Amber Magic Shoppe has forecast its sales revenues and purchases for the last 5 months of 200x to be as follows: 65% of sales are on credit. On the basis of past experience, 50% of the accounts receivable are collected the month after the sale and the remainder are collected 2 months after the sale. Purchases are paid 30 days after they are incurred. The firm had a cash balance of $5,000 as of September 30th, and its minimum required cash balance is $4,000. It had no beginning loan balance. Prepare a cash budget for October, November and December. 4-52 Chapter 04 - Financial Forecasting 4-53 Chapter 04 - Financial Forecasting 88. The following is the balance sheet for 2010 for Marbell Inc. Sales for 2010 were $500,000. Sales for 2011 have been projected to increase by 10%. Assuming that Marbell Inc. is operating below capacity, calculate the amount of new funds required to finance this growth. Marbell has an 8% return on sales and 80% is paid out as dividends. Increased sales = 10% (500,000) = $50,000 New Sales level = 500,000 + 50,000 = $550,000 4-54