12) Which of the statements below is TRUE?
A) Cash collections are closely tied to the sales forecast as the sales forecasts are typically used
for scheduling production.
B) Financing costs include the wages paid to workers, the raw materials for manufacturing
products, the overhead (such as electricity, water, plant space, and so on), and the shipping costs
that get the product to the customer.
C) Once all the expenditures and receipts are determined, a financial manager can determine the
exact cash excess or cash shortfall in upcoming periods.
D) It is the timing and the amount of cash outflow from production that is important to the
financial manager and estimating this amount is part of the cash forecasting process.
13) Cash disbursements (expenditures) are not closely tied to the sales forecast as the sales
forecasts are not typically used for scheduling production.
14) Products, but not services, need to be available to customers at the time customers need
them.
15) Once all the expenditures and receipts are determined, a financial manager can determine the
probability of cash excess or cash shortfall in upcoming periods.
16) In accounting, the recording of the cost of goods sold occurs at the time of the sale, but the
cash flow
may take place over an extended time period.
17) Pharma Pesticides Corp. uses the sales forecast to plan production. The company produces
the bug killer “2K Spray” one month in advance of the forecasted sale. The January sales forecast
of 380 units will be scheduled for December production. However, the company also notes that
sales forecasts and actual sales can differ, and the company has a policy of having 10% in
inventory to accommodate sales above forecast. Raw materials for 2K Spray are acquired the
month ahead (in this case, November). Wages are paid in the current month of production
(December). Utilities are paid a month after production (January), and shipping is paid a month
after the sale (two months after production, February). Finally, an inventory count reveals that
there are currently 30 units on hand above the projected sales for November (at the start of
November when the raw material order is placed). Unit production costs are $500 for raw
materials, $300 for wages, $200 for utilities, and $100 for shipping. Determine the month of cash
outflow for a December production. What would you need to determine January’s cash outflow?
What would complicate this process?
18) Briefly describe the costs included in the production process.
24
Copyright © 2019 Pearson Education, Inc.
12.4 The Cash Forecast: Short-Term Deficits and Short-Term Surpluses
1) In the daily planning for cash or the cash forecast, we want to hone in on the management of
cash as it applies to the ________ of the company.
A) short-term borrowing and long-term investing
B) long-term borrowing and short-term investing
C) short-term borrowing and short-term investing
D) long-term borrowing and long-term investing
2) The goal of the daily management of cash is to have sufficient cash on hand to pay the bills
without carrying ________.
A) excess debt
B) excess sunk costs
C) excess depreciation
D) excess cash
3) Excess cash is an asset that has a/an ________ due to lost earning power for the company.
A) opportunity cost
B) cash cost
C) sunk cost
D) erosion cost
4) We can condense the items that require cash outflow into basic categories. Which of the
below is a basic category?
A) Wages (but not commissions)
B) Accounts receivable
C) Long-term financing expenses (interest payments, dividend payments, issuing costs of debt
and equity)
D) All of these
5) We can condense the items that require cash outflow into basic categories. Which of the
below is a basic category?
A) Accounts payable for materials and supplies
B) Capital expenditures
C) Wages, taxes, and other operating expenses of the business
D) All of these
6) Managers in charge of short-term cash outflow direct their attention to cash management as it
pertains to the operations of the firm, much as ________.
A) they do with their daily cash needs
B) they do with their long-term cash needs
C) they do with their capital budgeting needs
D) all of these
7) In short-term cash management as it pertains to the operations of the firm, which of the below
is NOT one of the general objectives?
A) Determining the cash surplus
B) Determining the job satisfaction level of employees
C) Determining the money the company can invest
D) Determining the cash deficit
8) Firm X cash sales for the month are $300,000 and its accounts receivable payments for the
month are $50,000. What is its total incoming cash flow for the month if its beginning cash for
the month is $50,000 and there are no other cash inflows for the month?
A) $100,000
B) $150,000
C) $300,000
D) $350,000
9) Firm Y accounts payable for the month are $150,000 and its wages and salaries for the month
are $100,000. What is its total outgoing cash flow for the month if its interest payments for the
month are $50,000 and its beginning cash for the month is $50,000, there are no other cash
outflows for the month?
A) $400,000
B) $250,000
C) $300,000
D) $350,000
10) Firm Z accounts payable for the month are $200,000 and its wages and salaries for the month
are $100,000. What is its total outgoing cash flow for the month if its interest payments for the
month are $50,000, its accounts receivable payments for the month are $100,000, and there are
no other cash outflows for the month?
A) $250,000
B) $450,000
C) $350,000
D) Cannot tell because we do not know the beginning cash for the month.
11) Firm W cash sales for the month are $150,000 and its accounts receivable payments for the
month are $100,000. What is its total incoming cash flow for the month if its beginning cash for
the month is $50,000, its wages and salaries for the month are $50,000 and there are no other
cash inflows for the month?
A) $150,000
B) $200,000
C) $250,000
D) Cannot tell because we do not know the beginning cash for the month.
12) Firm E cash sales in January are $100,000, its accounts receivable payments for January are
$100,000, its beginning cash for January is $50,000, and there are no other cash inflows for
January. Its accounts payable payments for the January are $100,000 and its wages and salaries
for January are $100,000, and its interest payments for January are $50,000. What is its net cash
flow for January if there are no other cash flows?
A) $50,000
B) -$50,000
C) $150,000
D) -$150,000
13) The following information is for Missouri, Inc. for the month of June: cash sales of
$300,000; accounts receivable payments of $100,000; accounts payable payments of $250,000;
wages and salaries of $150,000; and, interest payments of $50,000. There are no other cash
inflows or outflows for the month of June and its beginning monthly cash balance is $100,000.
What is the firm’s ending cash balance for June?
A) $0
B) $50,000
C) $100,000
D) $150,000
14) Which of the statements below is FALSE?
A) A simple monthly cash flow estimate allows managers to anticipate periods when the
company may need to borrow and periods when the company will have excess cash for
investing.
B) There is a problem in managing cash if sales are low for several months, causing a negative
balance and delaying payments to suppliers or employees.
C) There are four basic ways to handle cash surpluses: Savings; Unsecured Loans (Commercial
Paper, Trade Credit, or Banker’s Acceptance); Secured Loans (Using Accounts Receivable or
Inventories); and Other Sources (Letters of Credit).
D) By far the simplest way to cover a cash deficit is to take money out of one’s savings
account—provided, of course, that one has sufficient savings to cover the necessary transfer.
15) Which of the following is NOT a possible advantage to holding marketable securities?
A) Price appreciation
B) Dividends
C) Interest earnings
D) All of the above are potential advantages to owning marketable securities.
16) Clayton Incorporated’s cash sales in January are $150,000, its accounts receivable payments
for January are $300,000, its beginning cash for January is $75,000, and there are no other cash
inflows for January. Its accounts payable payments for January are $250,000 and its wages and
salaries for January are $300,000, and its interest payments for January are $25,000. What is its
net cash flow for January if there are no other outflows?
A) -$100,000
B) $40,000
C) $15,000
D) -$125,000
17) A line of credit is a secured bank loan whereby the bank agrees to lend a company up to a
specific amount of cash, at the discretion of the company. In other words, it is just a pre-arranged
loan.
18) Often a bank will require a company to pay off its line of credit (return the balance to zero)
and keep it there for a specific period of time each year. For example, a requirement might be
that the line of credit remains at a zero balance for at least one sixty-day period each year. This is
called the clean-up period.
19) A line of credit does not resemble a personal credit card.
20) A line of credit is unsecured, that is, there is no pledge of specific assets backing the loan.
But companies can pledge assets against borrowed funds. These are called secured loans.
21) Banker’s acceptances are financial assets sold by a company directly to investors, like bonds
and common stock, but with very short maturity dates, while commercial paper is for self-
liquidating inventories.
22) One method a company may use to handle a cash shortfall is to draw cash from savings.
23) A marketable security is an unsecured bank loan whereby the bank agrees to lend a company
up to a specific amount of cash, at the discretion of the company.
24) A company’s cash sales in January are $200,000, its accounts receivable payments for
January are $100,000, its beginning cash for January is $50,000, and there are no other cash
inflows for January. Its accounts payable payments for January are $200,000 and its wages and
salaries for January are $100,000, and its interest payments for January are $50,000. What is its
net cash flow for January if there are no other outflows for January?
25) When a company has excess funds, it has four options. Describe these options. What is the
simplest thing to do with excess cash?
26) Describe some uses of excess cash.
27) A company’s cash sales for May are $300,000, its accounts receivable payments for May are
$200,000, its beginning cash for May is $50,000, and there are no other cash inflows for May. Its
accounts payable payments for May are $250,000, its wages and salaries for May are $100,000,
its interest payments for May are $50,000, and there are no other outflows for May. What is the
company’s ending cash balance for May?
1) An aspect of ________ is forecasting operating cash flow and ultimately the profitability of
the company in the coming period.
A) short-term financial planning
B) medium-term financial planning
C) long-term financial planning
D) short-term financial investing
2) An aspect of short-term financial planning is forecasting operating cash flow and ultimately
the profitability of the company in the coming period. This type of financial planning typically
uses forecasted ________.
A) earnings
B) income statements
C) working capital statements
D) all of these
3) An aspect of short-term financial planning is forecasting operating cash flow and ultimately
the profitability of the company in the coming period. This type of financial planning typically
uses forecasted ________.
A) balance sheets
B) income statements
C) statements of cash flow
D) all of these
4) There are a variety of ways to produce pro forma statements, but they usually rely on two
primary inputs. One of these primary inputs is ________.
A) the projected sales for the current year
B) the projected sales for the past year
C) the prior year’s financial statements
D) this year’s financial statements
5) There are a variety of ways to produce pro forma statements, but they usually rely on two
primary inputs. One of these primary inputs is ________.
A) the projected sales for the coming year
B) the projected sales for the past year
C) next year’s financial statements
D) this year’s financial statements
6) A pro forma statement sets out the financial predictions of a company on an ________ basis—
that is, it projects future performance based on a set of operating and sales assumptions.
A) “all or nothing”
B) “as if”
C) “as a matter of fact”
D) all of these
7) Which of the statements below is FALSE?
A) We use the prior year’s financial statements to find the relationship or relative percentage of
each line (accounting category) to either the sales revenue or the total assets of the firm.
B) Forecasted accounting statements are called pro formas for short.
C) We use the projected sales for the past year as the starting point for all the income statement
lines.
D) Forecasted accounting statements are called pro forma financial statements.
8) Which of the below does a pro forma statement tell us?
A) For every sales dollar, it tells us what percentage went to produce the product.
B) For every sales dollar, it tells us what percentage ends up as net income.
C) For every sales dollar, it tells us how much shareholders received in dividends.
D) Pro forma statements provide the information identified in all of the above choices.
9) Which of the below does a pro forma statement tell us?
A) For every sales dollar, it tells us what percentage went to produce the product.
B) For every dollar in cost, it tells us what percentage ends up as net income.
C) For every sales dollar, it tells us how much shareholders received in stock splits.
D) Pro forma statements provide the information identified in all of the above choices.
10) To estimate the firm’s potential performance for the coming year, we typically start with the
sales forecast from the ________ and prepare a pro forma income statement using the
percentages of the ________ for each category.
A) finance department; prior year
B) marketing department; prior year
C) marketing department; next year
D) sales department; current year
11) When developing a pro forma income statement, depreciation, unlike sales, tends to
________ each year with the Modified Asset Cost Recovery System (MACRS).
A) go up
B) remain the same
C) increase exponentially
D) go down
12) Which is NOT true of depreciation as found in the pro forma statement?
A) Depreciation, unlike sales, tends to go down each year with the Modified Asset Cost
Recovery System (MACRS).
B) Unless there is a change to investments in plant, property and equipment increasing the
depreciation line item, using the same percentage as that of the previous year may prove
erroneous.
C) The finance manager should keep constant the pro forma income statement to accommodate
for the actual estimate of depreciation for the coming year based on the capital budget of the
company.
D) All of these statements are NOT true.
13) If the company has some fixed costs, as sales increase then a/an ________ of sales dollars
flows to the bottom line if these costs are truly fixed and do not vary with production or sales.
A) lower percentage
B) higher percentage
C) equal percentage
D) much lower percentage
14) An adjustment in the pro forma statement may be necessary for ________ expenses in line
with known changes to these expenses that may not correspond directly with sales or production.
A) cash
B) credit
C) selling, general, and administrative
D) cash and credit
15) As applied to the pro forma balance sheet, which of the statements below is FALSE?
A) The company looks at the prior year’s balance sheet and finds each line’s percentage of total
assets.
B) The company forecasts the coming year’s total assets based on expected changes such as the
completion of capital projects, desired levels of certain accounts such as cash and inventories,
and additional borrowing for dividend purposes.
C) If a large capital project will be completed in the coming year and the Plant, Property and
Equipment line will grow significantly, its percentage of total assets should increase.
D) Financing a capital project may require additional debt financing, causing the percentage of
long-term debt to rise above its prior year’s percentage of total assets.
16) When estimating the impact of a capital project on a pro forma balance sheet, one should
note that financing can come from a variety of sources. The resources can include new debt,
increases in current liability accounts, and cash retained through operations.
17) Pro forma statements are tools used by the company to forecast its profitability and
obligations for the coming year.
18) Pro forma statements are tools used by the company to help highlight areas that the company
needs to avoid as part of its short-term financial planning.
19) A pro forma statement sets out the financial predictions of a company on an “as if” basis—
that is, it projects future performance based on a set of operating and sales facts.
20) A pro forma statement uses the prior year’s financial statements to find the relationship or
relative percentage of each line (accounting category) to either the sales revenue or the total
assets of the firm.
21) Pro forma statements are tools used by the company to monitor its profitability and
obligations for the previous and/or current year.
22) When estimating the impact of a capital project on a pro forma balance sheet, one should
note that financing can come from a variety of sources. The resources can include increases in
current assets and long-term assets.
23) What does a pro forma statement do? On what inputs does a pro forma statement rely?
24) Name three things that a pro forma income statement can tell us.