11
54) Gerentology Associates, a highly profitable company, is considering two growth strategies, one that
will achieve sales growth of 20% in one year, and the other that will achieve 20% growth in sales, but over
a 4-year time frame. Assuming Gerentology Associates uses the percent of sales method, which of the
following statements is true?
A) Discretionary financing needed will be much greater for the 4-year growth strategy.
B) Discretionary financing needed could be much less for the 4-year growth strategy due to retained
earnings.
C) The asset balances at the end of 4 years for strategy two will be much greater than the asset balances
required at the end of year one for strategy one.
D) Discretionary financing needed could be much greater for the slow growth strategy because interest
charges will accumulate on the company‘s debt.
Keywords: Discretionary Financing Needed, Retained Earnings
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
55) The first step involved in predicting financing needs is
A) forecasting the firm’s sales revenues and expenses over the planning period.
B) estimating the levels of investment in current and fixed assets that are necessary to support the
projected sales.
C) determining the firm’s financing needs throughout the planning period.
D) estimating the cost of debt.
Keywords: Financial Forecasting
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
56) A sales forecast for the coming year would reflect
A) any past trend which is expected to continue.
B) the influence of any events that might materially affect that trend.
C) both A and B.
D) neither A nor B.
Keywords: Sales Forecast
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
12
57) The “percentage” used in the percent of sales calculation can come
A) from the most recent financial statement item as a percent of current sales.
B) from an average computed over several years.
C) from an analyst’s judgment.
D) from any of the above or a combination of the above.
Keywords: Percent of Sales Method
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
58) Spontaneous sources of financing include
A) accounts payable and accrued expenses.
B) notes payable and mortgages payable.
C) long-term debt and capital leases.
D) common stock and paid-in capital.
Keywords: Spontaneous Liabilities
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
59) A discretionary form of financing would be
A) notes payable.
B) accounts payable.
C) accrued expenses.
D) A and B
Keywords: Discretionary Financing
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
60) Which of the following is a spontaneous source of financing?
A) accrued expenses
B) notes payable
C) common stock
D) paid-in-capital
Keywords: Spontaneous Liabilities
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
13
61) All of the following are useful purposes of pro forma financial statements EXCEPT
A) they provide a useful tool for analyzing the effects of a firm’s forecasts on its financial performance.
B) they satisfy the SEC requirement for audited financial disclosure.
C) they can be used to control, or monitor a firm’s progress for a planning period.
D) they serve as a benchmark to compare actual results to planned activities.
Keywords: Pro Forma Financial Statements
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
62) Which of the following statements would NOT be a valid use of pro forma financial statements?
A) to determine a firm‘s needs for financing
B) to enhance a firm’s ability to offer shareholders guaranteed operating results
C) to analyze the effects of a firm’s forecasts on its financial performance
D) to serve as a benchmark when comparing actual results to planned activities
Keywords: Pro Forma Financial Statements
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
63) Which of the following is the initial and most important step in the preparation of pro forma financial
statements?
A) Estimate the levels of investment in current and fixed assets.
B) Determine the rate of interest that will be required for borrowed funds.
C) Project the firm’s sales revenues for the planning period.
D) Approximate the cost of raw materials.
Keywords: Pro Forma Financial Statements, Sales Forecast
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
64) The “percent of sales method” is a method of preparing pro forma financial statements. All of the
following would be examples of how the “percent of sales method” is developed EXCEPT:
A) Forecast expenses by applying a percent of projected sales, using last year’s expenses as a percent of
last year’s sales.
B) Forecast assets by applying a percent of projected sales, using current year’s assets as a percent of
current year’s sales.
C) Approximate liabilities by applying a percent of projected sales, using the last five-year average of
liabilities as a percent of sales.
D) Forecast retained earnings by applying a percent of projected sales, using current year’s retained
earnings as a percent of current year’s sales.
Keywords: Percent of Sales Method, Retained Earnings
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
14
65) Use the “percent of sales method” of preparing pro forma financial statements to determine the
projection for next year’s accounts receivable. Make the following assumptions: current year’s sales are
$45,450,000; current year’s cost of goods sold is $26,950,000; sales are expected to rise by 20%. The firm’s
investment in accounts receivable in the current year is $8,600,000. The firm’s marginal tax rate is 35%.
What is the projection for next year’s accounts receivable?
A) $11,345,000
B) $10,320,000
C) $9,575,000
D) $8,772,000
Keywords: Percent of Sales Method, Accounts Receivable
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
66) Use the “percent of sales method” of preparing pro forma financial statements to determine the
projection for next year’s inventory. Make the following assumptions: current year’s sales are $27,800,000;
current year’s cost of goods sold is $17,528,000; sales are expected to rise by 30%. The firm’s investment in
inventory in the current year is $5,890,200. What is the projection for next year’s inventory?
A) $7,657,260
B) $6,981,250
C) $5,845,500
D) $4,526,600
Keywords: Percent of Sales Method, Inventory
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
67) Discretionary financing needs will be lower if ________. Assume “all else equal.”
A) the dividend payout ratio is raised
B) the firm’s net profit margin increases
C) sales increase
D) fixed assets are currently at full capacity
Keywords: Discretionary Financing Needed
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
15
68) Discretionary financing needs will be higher if ________. Assume “all else equal.“
A) the firm’s net profit margin increases
B) sales decline
C) the dividend payout ratio is raised
D) excess capacity exists for fixed assets
Keywords: Discretionary Financing Needed
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
69) Use the “percent of sales method” of preparing pro forma financial statements to determine the
projection for next year’s accounts payable. Make the following assumptions: current year’s sales are
$27,800,000; current year’s cost of goods sold is $17,528,000; sales are expected to rise by 30%. The firm’s
investment in accounts payable in the current year is $2,218,500. What is the projection for next year’s
accounts payable?
A) $2,127,000
B) $3,781,750
C) $2,884,050
D) $4,184,000
Keywords: Percent of Sales Method, Accounts Payable
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
70) Use the “percent of sales method” of preparing pro forma financial statements to determine the
projection for next year’s cost of goods sold. Make the following assumptions: current year’s sales are
$27,800,000; current year’s cost of goods sold is $17,528,000; sales are expected to rise by 30%. What is the
projection for next year’s cost of goods sold?
A) $20,481,000
B) $21,138,900
C) $21,459,200
D) $22,786,400
Keywords: Percent of Sales Method, Cost of Goods Sold
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
16
71) Spontaneous sources of funds refers to all of the below EXCEPT
A) accruals.
B) a bank loan.
C) accounts payable.
D) common stock.
Keywords: Spontaneous Liabilities
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
72) What differentiates “discretionary financing needs” from “external financing needs”?
A) assets
B) retained earnings
C) sales
D) spontaneous liabilities
Keywords: Discretionary Financing Needed, External Financing Needed
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
73) Which of the following is a limitation of the “percent of sales method” of preparing pro forma
financial statements?
A) A firm’s investment in accounts receivable is seldom related to sales volume.
B) Not all assets and liabilities increase or decrease as a constant percent of sales.
C) Inventory levels are seldom affected by changes in sales volume.
D) The dividend payout ratio may change from one year to the next.
Keywords: Percent of Sales Method
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
74) At a minimum, the sales forecast for the coming year would reflect
A) any future trend in sales that is expected to begin in the new year.
B) the influence of any anticipated events that might materially affect the sales trend.
C) Both of the above are correct.
D) Neither of the above is correct.
Keywords: Sales Forecast
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
17
75) All of the following are examples of sources of discretionary financing EXCEPT
A) bank loans.
B) notes payable.
C) trade credit.
D) common stock.
Keywords: Discretionary Financing Sources
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
76) Predicting a firm’s future financial needs includes all of the following steps EXCEPT
A) review of the firm’s sales revenues and expenses over all past planning periods.
B) estimation of investment levels for current and fixed assets.
C) determination of the firm’s financing needs for the period.
D) estimation of projected sales and expenses.
Keywords: Forecasting
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
77) CraftCo, Inc.’s projected sales for the first six months of 2012 are given below:
Jan.
$500,000
April
$490,000
Feb.
$740,000
May
$740,000
Mar.
$380,000
June
$610,000
40% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and
the remaining 10% are collected in the second month following the sale. Cost of goods sold is 60% of
sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the
month of the sale. Total other cash expenses are $40,000/month. The company‘s cash balance as of
February 28, 2012 will be $25,000. Excess cash will be used to retire short-term borrowing (if any).
CraftCo, Inc. has no short term borrowing as of February 28, 2012. Assume that the interest rate on short–
term borrowing is 1% per month. The company must have a minimum cash balance of $15,000 at the
beginning of each month. What is CraftCo, Inc.’s projected cash balance at the end of March 2012?
A) $301,000
B) $329,000
C) $352,000
D) $361,000
Keywords: Cash Budget
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
18
78) Plato Industries’ projected sales for the first six months of 2012 are given below:
Jan.
$250,000
April
$300,000
Feb.
$340,000
May
$350,000
Mar.
$280,000
June
$380,000
20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and
the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of
sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the
month of the sale. Total other cash expenses are $70,000/month. The company‘s cash balance as of
February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato
has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The
company must have a minimum cash balance of $40,000 at the beginning of each month. Plato’s projected
EBIT for March 2012?
A) $42,000
B) $23,000
C) ($28,000)
D) ($60,000)
Keywords: EBIT, Pro Forma Income Statement
Learning Obj.: L.O. 14.1
AACSB: Analytical Thinking
79) What is the primary tool for short-term financial forecasting?
A) pro forma income statement
B) pro forma balance sheet
C) pro forma cash budget
D) capital budgeting
Keywords: Short-term Financial Forecasting, Pro Forma Cash Budget
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking
19
80) Using the 2012 financial statements for DRE Corporation and this additional information, prepare a
pro forma income statement and balance sheet for the year 2013. Determine the discretionary financing
needed (DFN) and assume that if the DFN is positive, the company will increase long-term debt, and if
DFN is negative, the company will pay back some long-term debt.
Sales for next year (2013) are expected to increase by $300,000 to $1,800,000. The firm is running efficiently
and at full capacity so that all assets and spontaneous liabilities are expected to increase proportionally
with sales. The dividend payout ratio for 2013 will be 40%.
DRE Corporation
2012 Financial Statements
Income Statement ($)
Sales
1,500,000
Net Income
250,000
Balance Sheet ($)
Cash
400,000
Accounts Receivable
450,000
Inventory
350,000
Property, Plant, & Equipment
650,000
Total Assets
1,850,000
Accounts Payable
200,000
Short Term Notes Payable
250,000
Long-term Debt
550,000
Common Stock
200,000
Retained Earnings
650,000
Total Liabilities and Equity
1,850,000
20
Copyright © 2017 Pearson Education, Inc.
Answer:
Income Statement ($)
Sales
1,800,000
Net Income
300,000
(250,000/1,500,000) ×1,800,000
Balance Sheet ($)
Cash
480,000
Accounts Receivable
540,000
Inventory
420,000
Property, Plant, & Equipment
780,000
Total Assets
2,220,000
Accounts Payable
240,000
Short Term Notes Payable
250,000
Long-term Debt
550,000
(DFN = $2,220,000 – $2,070,000 =
$150,000 added to Long-term Debt)
Common Stock
200,000
Retained Earnings
830,000
(650,000 + (300,000 ∗ (1-.40)))
Total Liabilities and Equity
2,070,000
(Plus $150,000 in additional
Long-term Debt)
Accounts Payable
240,000
Short Term Notes Payable
250,000
Long-term Debt
700,000
(DFN= $2,220,000 – $2,070,000 =
$150,000 added to Long-term Debt)
Common Stock
200,000
Retained Earnings
830,000
(650,000 + (300,000) ∗ (1-.40)))
Total Liabilities and Equity
2,220,000
Diff: 2 Page Ref: 467-469
Keywords: Discretionary Financing Needed, Percent of Sales Method, Pro Forma Financial Statements
Learning Obj.: L.O. 14.1
AACSB: Reflective Thinking