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26) Cash disbursements include ________.
A) amortization expense
B) rent payments
C) depreciation expense
D) depletion
27) A projected excess cash balance for the month may be ________.
A) financed with short-term securities
B) financed with long-term securities
C) invested in marketable securities
D) invested in long-term securities
28) If a firm expects short-term cash surpluses, it can plan ________.
A) long-term investments
B) short-term borrowing
C) short-term investments
D) leverage decisions
29) A firm has actual sales in November of $1,000 and projected sales in December and January
of $3,000 and $4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40
percent of its sales one month following the sale, and collects the balance two months following
the sale. The firm's total cash receipts in January is ________.
A) $400
B) $2,100
C) $2,000
D) $3,300
30) In April, a firm had an ending cash balance of $35,000. In May, the firm had total cash
receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance
required by the firm is $25,000. At the end of May, the firm had ________.
A) an excess cash balance of $25,000
B) an excess cash balance of $0
C) required financing of $10,000
D) required financing of $25,000
31) In October, a firm had an ending cash balance of $35,000. In November, the firm had a net
cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of
November, the firm had ________.
A) an excess cash balance of $50,000
B) an excess cash balance of $75,000
C) required total financing of $15,000
D) required total financing of $5,000
32) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of
$8,000, depreciation expense of $1,000, and a beginning cash balance of $500. The ending cash
balance for August totals ________.
A) $1,500
B) $5,500
C) $2,500
D) $3,500
33) In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of
$8,000, depreciation expense of $1,000,and a beginning cash balance of $500. At the end of
August, the firm wants a minimum cash balance of $3,000. At the end of August, the firm
________.
A) required total financing of $500
B) had an excess cash balance of $5,500
C) had an excess cash balance of $500
D) required total financing of $2,500
34) Which of the following represents a way of coping with uncertainty in a cash budget?
A) careful estimation of cash budgets outputs
B) developing a pro forma income statement to forecast sales and then express the various
income statement items as percentage of projected sales
C) always using the prior year's data for estimates of the future
D) using scenario analysis, or "what if" approach, to analyze cash flows under a variety of
circumstances
35) Gerry Jacobs, a financial analyst for Best Value Supermarkets, has prepared the following
sales and cash disbursement estimates for the period August through December of the current
year.
Ninety percent of sales are for cash, the remaining 10 percent are collected one month later. All
disbursements are on a cash basis. The firm wishes to maintain a minimum cash balance of $50.
The beginning cash balance in September is $25. Prepare a cash budget for the months of
October, November, and December, noting any needed financing or excess cash available.
36) Terrel Manufacturing expects stable sales through the summer months of June, July, and
August of $500,000 per month. The firm will make purchases of $350,000 per month during
these months. Wages and salaries are estimated at $60,000 per month plus 7 percent of sales. The
firm must make a principal and interest payment on an outstanding loan in June of $100,000. The
firm plans a purchase of a fixed asset costing $75,000 in July. The second quarter tax payment of
$20,000 is also due in June. All sales are for cash.
(a) Construct a cash budget for June, July, and August, assuming the firm has a
beginning cash balance of $100,000 in June.
(b) The sales projections may not be accurate due to the lack of experience by a
newly-hired sales manager. If the sales manager believes the most optimistic
and pessimistic estimates of sales are $600,000 and $400,000, respectively, what
are the monthly net cash flows and required financing or excess cash balances?
47
37) In the preparation of a quarterly cash budget, the following revenue and cost information
have been compiled. Prepare and evaluate a cash budget for the months of October, November,
and December based on the information shown below.
∙ The firm collects 60 percent of sales for cash and 40 percent of its sales one month later.
∙ Interest income of $50,000 on marketable securities will be received in December.
∙ The firm pays cash for 40 percent of its purchases.
∙ The firm pays for 60 percent of its purchases the following month.
∙ Salaries and wages amount to 15 percent of the preceding month's sales.
∙ Sales commissions amount to 2 percent of the preceding month's sales.
∙ Lease payments of $100,000 must be made each month.
∙ A principal and interest payment on an outstanding loan is due in December of $150,000.
∙ The firm pays dividends of $50,000 at the end of the quarter.
∙ Fixed assets costing $600,000 will be purchased in December.
∙ Depreciation expense each month of $45,000.
∙ The firm has a beginning cash balance in October of $100,000 and maintains a minimum
cash balance of $200,000.
48
Copyright © 2019 Pearson Education, Inc.
Answer:
The firm has excess cash during the three month period and can invest the excess cash in
marketable securities.
Diff: 2
Topic: Preparing The Cash Budget
Learning Obj.: LG 4
Learning Outcome: F-25
AACSB: Reflective Thinking
49
38) Harry's House of Hamburgers (HHH) wants to prepare a cash budget for months of
September through December. Using the following information, prepare the cash budget
schedule and interpret the results.
∙ Sales were $50,000 in June and $60,000 in July. Sales have been forecasted to be $65,000,
$72,000, $63,000, $59,000, and $56,000 for months of August, September, October, November,
and December, respectively. In the past, 10 percent of sales were on cash basis, and the
collection were 50 percent in the first month, 30 percent in the second month, and 10 percent in
the third month following the sales.
∙ Every four months (three times a year) $500 of dividends from investments are expected.
The first dividend payment was received in January.
∙ Purchases are 60 percent of sales, 15 percent of which are paid in cash, 65 percent are paid
one month later, and the rest is paid two months after purchase.
∙ $8,000 dividends are paid twice a year (in March and September).
∙ The monthly rent is $2,000.
∙ Taxes are $6,500 payable in December.
∙ A new hamburger press will be purchased in October for $2,300.
∙ $1,500 interest will be paid in November.
∙ $1,000 loan payments are paid every month.
∙ Wages and salaries are $1,000 plus 5 percent of sales in each month.
∙ August's ending cash balance is $3,000.
∙ HHH would like to maintain a minimum cash balance of $10,000.
50
Copyright © 2019 Pearson Education, Inc.
Answer: Cash Budget
No financing required. The company may invest the excess cash in marketable securities.
Diff: 2
Topic: Preparing The Cash Budget
Learning Obj.: LG 4
Learning Outcome: F-25
AACSB: Reflective Thinking
51
Copyright © 2019 Pearson Education, Inc.
4.4 Profit planning: pro forma statements
1) Profit planning's main focus is on the firm's cash receipts and disbursements throughout the
year.
2) Compared to the short-term focus of cash planning, profit planning has a broader emphasis
that encapsulates the firm's overall financial position.
3) Firms construct pro forma financial statements by studying past relationships between key
accounts on the income statement and balance sheet and making judgments about whether those
relationships will continue in the near future.
4) The two main inputs required to construct pro forma financial statements are the ________.
A) actual financial statements and cash budget from the prior year
B) actual financial statements for the last two years
C) actual financial statements from last year and the sales forecast for the next year
D) the cash budget from last year and the sales forecast for the next year
5) Development of pro forma financial statements helps a financial manager to project the
amount of external financing required to support a given level of sales as well as overall financial
performance of the firm in the coming year.
6) The primary purpose in preparing pro forma financial statements is ________.
A) for cash planning
B) to ensure the ability to pay dividends
C) for risk analysis
D) for profit planning
7) ________ are projected financial statements.
A) Pro forma statements
B) Statements of retained earnings
C) Cash budgets
D) Cash flow statements
1) Since the percentage-of-sales method assumes that all the form's costs and expenses are
variable, it tends to understate profits when sales are increasing and overstate profits when sales
are decreasing.
2) The key inputs for preparing pro forma income statements using the percent-of-sales method
are the ________.
A) sales forecast for the preceding year and financial statements for the coming year
B) sales forecast for the coming year and the cash budget for the preceding year
C) sales forecast for the coming year and financial statements for the preceding year
D) cash budget for the coming year and sales forecast for the preceding year
3) In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method)
when preparing pro forma financial statements will tend to ________.
A) overstate costs and overstate profits
B) overstate costs and understate profits
C) understate costs and overstate profits
D) understate costs and understate profits
4) The percentage-of-sales method of preparing pro forma income statements assumes that
________.
A) sales are fixed
B) all costs inversely vary with sales
C) all costs are independent
D) all costs are variable
5) The percent-of-sales method of developing a pro forma income statement forecasts sales and
other line items as a ________.
A) percentage of projected sales
B) percentage of average sales over a period
C) percentage of projected total assets
D) percentage of average total assets over a period
6) The best way to adjust for the presence of fixed costs when preparing a pro forma income
statement is ________.
A) to proportionately vary the fixed costs with the change in sales
B) to adjust for projected fixed-asset outlays
C) to disproportionately vary the costs with the change in sales
D) to break the firm's historical costs into fixed and variable components
7) The percent-of-sales method to prepare a pro forma income statement assumes a firm has no
fixed costs. Therefore, the use of the past cost and expense ratios generally tends to ________
profits when sales are increasing.
A) accurately predict
B) overstate
C) understate
D) have no effect on
8) For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma
income statement tends to ________.
A) overestimate profits when sales are increasing
B) underestimate profits when sales are increasing
C) underestimate profits when assets are increasing
D) overestimate profits when assets are increasing
Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year ended
December 31, 2019, for Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2019 will be $4,500,000. Interest expense is to
remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during
2019. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2018 is
shown below. From your preparation of the pro forma income statement, answer the following
multiple choice questions.
9) The pro forma net profits after taxes for 2019 are ________. (See Table 4.4)
A) $272,550
B) $207,000
C) $122,550
D) $57,000
10) The pro forma cost of goods sold for 2019 is ________. (See Table 4.4)
A) $3,500,000
B) $3,750,000
C) $3,825,000
D) $4,000,000
11) The pro forma operating expenses for 2019 are ________. (See Table 4.4)
A) $150,000
B) $200,000
C) $210,000
D) $225,000
12) The amount that will transfer from the 2019 income statement to the 2019 balance sheet as
an addition to retained earnings is ________. (See Table 4.4)
A) $150,000
B) $57,000
C) $122,550
D) $272,550
13) Income Statement
Huddleston Manufacturing Company
For the Year Ended December 31, 2018
Huddleston Manufacturing estimates its sales in 2019 will be $3 million. Interest expense is
expected to remain unchanged at $70,000, and the firm plans to pay cash dividends of $140,000
during 2019. Use the percent-of-sales method to prepare a pro forma income statement for the
year ended December 31, 2019, based on the 2018 income statement shown above.
Table 4.6
Income Statement
Ace Manufacturing, Inc.
For the Year Ended December 31, 2018
14) Ace Manufacturing, Inc., is preparing pro forma financial statements for 2019. The firm
utilized the percent-of-sales method to estimate costs for the next year. Sales in 2018 were $2
million and are expected to increase to $2.4 million in 2019. The firm has a 40 percent tax rate.
(a) Given the 2018 income statement in Table 4.6, estimate net profit and retained earnings
for 2019.
(b) If $200,000 of the cost of goods sold and $40,000 of selling expense are fixed costs; and
the interest expense and dividends are not expected to change, what is he dollar effect on net
income and retained earnings? What is the significance of this effect?
(b)
1) One basic weakness of the simplified pro forma approaches lies in the assumption that certain
variables, such as cash, accounts receivable, and inventories, can be forced to take on certain
"desired" values.
