Financial Forecasting 88 Questions

Financial Forecasting Multiple Choice Questions 1. In using a systems approach to financial planning, it is necessary develop a A. pro forma income statement. B. cash budget. C. pro forma balance sheet. D. all of these. 2. The key initial element in developing pro forma statements is A. a cash budget. B. an income statement. C. a sales forecast. D. a collections schedule. 3. In the development of the pro forma financial statements, the last step in the process is the development of the: A. cash budget B. pro forma balance sheet C. pro forma income statement D. capital budget 4. Depending upon the state of the economy, Ables Manufacturing Corp. expects to sell the following number of prefabricated buildings. The probability of each state is indicated. What is the expected value of the total sales projection? A. $5,625 B. $4,540 C. $12,800 D. none of these 4-1 Chapter 04 - Financial Forecasting 5. In developing the pro forma income statement we follow four important steps: 1) compute other expenses, 2) determine a production schedule, 3) establish a sales projection, 4) determine profit by completing the actual pro forma statement. What is the correct order for these four steps? A. 1,2,3,4 B. 3,2,4,1 C. 2,1,3,4 D. 3,2,1,4 6. Pro forma financial statements are A. the most comprehensive means of financial forecasting. B. often required by prospective creditors. C. projections of financial statements for a future period. D. all of these. 7. A rapid rate of growth in sales may require A. higher dividend payments to shareholders. B. increased borrowing by the firm to support the sales increase. C. the firm to be more lenient with credit customers. D. sales forecasts to be made less frequently. 8. Required production during a planning period will depend on the A. beginning inventory of products. B. sales during the period. C. desired level of ending inventory. D. all of these. 4-2 Chapter 04 - Financial Forecasting 9. 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? A. 750 units B. -0-units C. 775 units D. 425 units 10. In order to estimate production requirements, we A. add beginning inventory to projected sales in units and subtract desired ending inventory. B. add projected sales in units to desired ending inventory and subtract beginning inventory. C. add beginning inventory to desired ending inventory and divide by two. D. add beginning inventory to desired ending inventory and subtract projected sales in units. 11. 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)? A. $7,500 B. $8,000 C. $7,900 D. $8,100 12. 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 your net dollar sales projection for this year? A. $26,976 B. $69,344 C. $72,800 D. None of these 4-3 Chapter 04 - Financial Forecasting 13. A firm utilizing LIFO inventory accounting would, in calculating gross profits, assume that A. all sales were from current production. B. all sales were from beginning inventory. C. sales were from current production until current production was depleted, and then use sales from beginning inventory. D. all sales were for cash. 14. When the cost of raw materials is increasing, FIFO accounting A. yields higher ending inventory values than LIFO. B. produces higher unit sales than using LIFO. C. yields higher cost of goods sold than LIFO. D. All of these. 15. A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume that A. all sales were from current production. B. all sales were from beginning inventory. C. sales were from beginning inventory until it was depleted, and then use sales from current production. D. all sales were for cash. 16. In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced A. is higher. B. is lower. C. is the same. D. can be either higher or lower. 17. The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for: A. change in retained earnings. B. gross profit. C. interest expense. D. prepaid expenses. 4-4 Chapter 04 - Financial Forecasting 18. A firm has beginning inventory of 400 units at a cost of $12 each. Production during the period was 700 units at $13 each. If sales were 800 units, what is the value of the ending inventory using LIFO? A. $2,750 B. $3,600 C. $3,300 D. $3,850 19. In general, the larger the portion of a firm's sales that are on credit, the A. lower will be the firm's need to borrow. B. higher will be the firm's need to borrow. C. more rapidly credit sales will be paid off. D. more the firm can buy raw materials on credit. 20. The need for an increase or decrease in short-term borrowing can be predicted by A. ratio analysis. B. trend analysis. C. a cash budget. D. an income statement. 21. A firm has forecasted sales of $4,500 in April, $3,000 in May and $5,000 in June. All sales are on credit. 30% is collected the month of sale and the remainder the following month. What will be the balance in accounts receivable at the beginning of July? A. $1,950 B. $6,500 C. $4,550 D. $3,500 4-5 Chapter 04 - Financial Forecasting 22. Wiggles Right forecasted sales of $5,000 in October, $4,000 in November and $4,000 in December. All sales are on credit. 40% is collected the month of sale and the remainder the following month. How much is collected from accounts receivable in November? A. $5,400 B. $4,800 C. $6,000 D. $4,600 23. GS Cookie Co. forecasts cash receipts for January and February of $18,000 and $20,000, respectively. Cash Payments of $6,000 and $8,000 are expected in these two months. GS Cookie's cash balance at the beginning of January was $5,000, a level that it attempts to maintain. At the beginning of the year, GS Cookie has a $15,000 balance outstanding on its line of credit at the local bank. Based on its cash budget, how much of the line of credit can GS Cookie repay in January and February? A. $15,000 B. $9,000 C. $4,000 D. None, GS Cookie must increase its borrowings. 24. In the construction of the cash payments schedule, the major cash payment is generally A. the general and administrative expense. B. costs associated with inventory manufactured. C. interest and dividends. D. payments for new plant and equipment. 25. The difference between total receipts and total payments is referred to as A. cumulative cash flow. B. beginning cash flow. C. net cash flow. D. cash balance. 4-6 Chapter 04 - Financial Forecasting 26. Net cash flow is equal to: A. income after taxes minus depreciation. B. income after taxes minus dividends. C. cash receipts minus cash payments. D. cash receipts minus cash payments minus depreciation. 27. In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the: A. pro forma income statement. B. cash budget. C. prior balance sheet. D. statement of retained earnings. 28. In a cash budget, the cumulative cash balance is equal to: A. net cash flow minus the beginning cash balance. B. net cash flow plus the beginning cash balance. C. cumulative loan balance minus the ending cash balance. D. cumulative loan balance plus the ending cash balance. 29. Which of the following is most likely to increase the final number for notes payable in the pro forma balance sheet? A. decrease in inventory. B. increase in retained earnings. C. decrease in accounts payable. D. decrease in accounts receivable. 30. The percent-of-sales method of financial forecasting A. is more detailed than a cash budget approach. B. requires more time than a cash budget approach. C. assumes that balance sheet accounts maintain a constant relationship to sales. D. provides a month-to-month breakdown of data. 4-7 Chapter 04 - Financial Forecasting 31. A firm has targeted a 20% growth in sales this year. Last year's cash as a percent of sales was 10%, accounts receivable 30%, and inventory 25%. What percentage growth in current liabilities is required to support the growth in sales under the percent-of-sales forecasting method? A. 32% B. 13% C. 8% D. Not enough information to tell 32. In the percent-of-sales method, an increase in dividends A. will increase required new funds. B. will decrease required new funds. C. has no effect on required new funds. D. more information is needed. 33. In the percent-of-sales method, if (A/S) and (L/S) both increase: A. RNF stays the same. B. RNF goes down. C. RNF goes up. D. more information is needed. 34. In forecasting a firm's cash needs for some future period A. the percent-of-sales method is a "broad-brush" approach. B. cash budgets are more exact than the percent-of-sales method. C. a cash budget approach can deal effectively with both level and seasonal production schedules. D. all of these. 35. In the percent-of-sales method A. as the dividend payout ratio goes up, the required new funds also rise. B. as the dividend payout ratio rises, required new funds decline. C. the dividend payout ratio does not affect new funds. D. None of these. 4-8 Chapter 04 - Financial Forecasting 36. When using the percent-of-sales method in forecasting funds needed, which of the following is not true? A. As the dividend payout ratio decreases, the required new funds also increase. B. Required new funds decrease as profits margins increase. C. Required new funds increase as the dividend payout decreases. D. As the tax rate increases, the required new funds increase. 37. BHS Inc. determines that sales will rise from $400,000 to $550,000 next year. Spontaneous assets are 60% of sales and spontaneous liabilities are 40% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds? A. $3,600 B. $5,200 C. $4,000 D. BHS is in balance and no new funds are needed. 38. Firms that successfully increase their rates of inventory turnover will, among other things, A. be able to reduce their borrowing needs. B. be able to reduce their dividend payments to stockholders. C. find it more difficult to be given credit by their resource suppliers. D. have a greater need for high balances in their cash accounts. 39. If Excel Inc. has projected sales of $30,000 in January, $20,000 in February, and $20,000 in March; 80% of sales are on credit; 20% are collected in the month of sale and 80% are collected the month after, what are cash receipts in March? A. $20,000 B. $16,200 C. $21,400 D. $10,300 4-9 Chapter 04 - Financial Forecasting 40. If the actual December 31st A/R balance was $12,000; projected sales in March are $50,000; 70% of sales are on credit; 60% of credit sales are collected in the month of sale and 40% are collected in the month after the sale, what is the projected A/R balance on the proforma balance sheet for the end of March? A. $26,000 B. $14,000 C. $20,000 D. $35,000 41. 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? A. $14,000 B. $5,000 C. $17,000 D. $22,000 42. 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? A. $5,000 B. $10,000 C. $12,000 D. $4,500 True / False Questions 43. An increase in sales and/or profits means there is also an increase in cash on the balance sheet. True False 44. An increase in sales and profits generates the necessary cash required for economic growth. True False 4-10 Chapter 04 - Financial Forecasting 45. Profit is generally adequate to finance significant growth. True False 46. Pro forma income statements follow a sales forecast and production plan. True False 47. Pro forma statements are generally prepared six months to a year into the future. True False 48. Pro forma income statements and balance sheets refer to projected financial statements. True False 49. The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due. True False 50. Sales projections and the ability to accurately predict the future have a large impact on cash flow targets. True False 51. Production planning depends upon the beginning and ending accounts receivable levels, as well as the projected monthly sales level. True 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. True False 4-11 Chapter 04 - Financial Forecasting 53. The main consideration in constructing the pro forma income statement is the costs specifically associated with the units sold during the period. True False 54. Growth in sales volume prevents a shortage of funds. True False 55. The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold. True False 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 False 57. A cash budget is unnecessary under level production since we know how much will be produced every month. True False 58. When sales volume varies from month to month it is not advisable to use level production. True False 59. The primary purpose of the cash budget is to plan accounts payable payments. True 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 False 4-12 Chapter 04 - Financial Forecasting 61. The primary purpose of the cash budget is to forecast income. True False 62. Companies generally prefer to maintain some minimum cash balance. True False 63. A pro forma balance sheet needs data from the prior balance sheet and the cash budget. True False 64. Generally, the pro forma income statement and balance sheet must be created before the cash budget is completed. True False 65. A higher growth rate in sales will often require more external funds. True False 66. An increase in accounts receivable and a decrease in accounts payable will reduce the amount of new external funds required. True False 67. The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a constant relationship to sales. True False 68. The percent-of-sales forecast is likely to be most accurate when used with cyclical companies. True False 4-13 Chapter 04 - Financial Forecasting 69. The percent-of-sales method would be more accurate under a steady sales assumption than cyclical sales. True False 70. An increase in sales accompanied by an increase in accounts payable will reduce the amount of new external funds required. True False 71. As the dividend payout ratio declines more external funds are required. True False 72. A lower dividend payout ratio will decrease the firm's need for borrowing. True False 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. True False 74. The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash. True False 75. Lower profit margins resulting from increased competition would mean a lower need for external funds. True False 4-14 Chapter 04 - Financial Forecasting 76. Level production schedules usually have the advantage of reducing overall production costs. True False 77. A firm's cash borrowing needs can be reduced if its inventory turnover rate can be increased. True False 78. The finance department should work independently without the input of other departments because there may be significant biases when creating proformas. True False 79. Total production costs should be equal to cost of goods sold in the proforma income statement. True False 80. The percent-of-sales provides the most accurate and detailed method of forecasting necessary funds. True False 81. The calculation of cash receipts requires a breakout of cash and credit sales and collections history. True False 4-15 Chapter 04 - Financial Forecasting 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 pro forma income statement ____ cost of goods sold ____ cash budgets ____ pro forma balance sheet ____ percent-of-sales method ____ 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? 4-16 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. 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? 4-17 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? 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. 4-18 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. 4-19