Economics Chapter 4 1 Using Systems Approach Financial Planning Necessary

Chapter 04 Test Bank – Static Key

1. Financial forecasting is used to develop the exact future outcome, otherwise it is useless to a company.

2. An increase in sales and/or profits means there is also an increase in cash on the balance sheet.

3. An increase in sales and profits generates the necessary cash required for economic growth of a

company.

4. The longer the financial forecast (i.e. 5 to 10 years), the better for the company.

5. Profit is generally adequate to finance significant growth.

6. Pro forma income statements follow the creation of the sales forecast and production plan.

7. Pro forma statements are generally prepared six months to a year into the future.

8. Pro forma income statements and balance sheets refer to projected financial statements.

9. The generation of sales and profits ensures that there will be adequate cash on hand to meet financial

obligations as they come due.

10. Sales projections and the ability to accurately predict the future have a large impact on cash flow

expectations.

11. Production planning depends upon the beginning and ending accounts receivable levels, as well as the

projected monthly sales level.

12. If Wiggle 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.

13. Growth in sales volume prevents a shortage of cash funds.

14. The value of ending inventory should be equal to beginning inventory plus total production costs minus

cost of goods sold, all from the same time frame.

15. It is helpful to break down the income statement into smaller monthly periods to enable evaluation of

seasonal patterns of cash inflows and outflows.

16. A cash budget is unnecessary since we know how much units will be sold and produced every month,

which is assumed to be the cash inflows and outflows.

17. The most significant purpose of the cash budget is to plan accounts payable payments.

18. 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.

19. The primary purpose of the cash budget is to forecast income.

20. Companies generally prefer to maintain some minimum cash balance.

21. A pro forma balance sheet needs data from the prior balance sheet, pro forma income statement, and

cash flow in order for it to be complete.

22. Generally, the pro forma income statement and balance sheet must be created before the cash budget

is completed.

23. A higher growth rate in sales will often require more external funds.

24. The purpose of pro-forma financial statements is so that cash is never left short and a financial outlook

of the firm is created and analyzed.

25. Making the pro-forma financial statements as complicated as possible is always best.

26. An increase in accounts receivable and/or a decrease in accounts payable will usually reduce the

amount of new external funds required.

27. The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a

relatively constant relationship to sales.

28. The percent-of-sales forecast is likely to be most accurate when used with cyclical companies.

29. The percent-of-sales method would be more accurate under a steady sales assumption than with

cyclical sales.

30. The percent-of-sales method would not result in very accurate financials if used for a tourism company.

31. An increase in sales accompanied by an increase in accounts payable will reduce the amount of new

external funds required, all else being equal.

32. As the dividend payout ratio declines, more external funds are required.

33. A lower dividend payout ratio will decrease the firm’s need for borrowing.

34. 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.

35. A firm that is currently operating at 100% of capacity has an increase in sales. For every percentage

increase in sales, the same percentage increase will be needed in current assets and current liabilities.

36. Required new funds shows that the firms need more cash during times of company growth, especially if

sales increases.

37. The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a

constant relationship to cash.

38. Lower profit margins resulting from increased competition would mean a lower need for external funds.

39. Level production schedules usually have the advantage of reducing overall production costs.

40. The finance department should work independently without input from other departments because

there may be significant biases when creating pro forma financial statements.

41. Total production costs on the production schedule should be equal to cost of goods sold in the pro

forma income statement.

42. The percent-of-sales provides the most accurate and detailed method of forecasting necessary funds.

43. The calculation of cash receipts requires a breakout of cash and credit sales and cash collections

history.

Topic: Projected cash budgets

44. In using a systems approach to financial planning, it is necessary to develop a

Topic: Financial planning models

45. The key initial element in developing all pro forma statements is

46. In the development of the pro forma financial statements, the last step in the process is the

development of the

47. 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 pro forma income statement

What is the correct order for these four steps?

48. Pro forma financial statements are

49. A rapid rate of growth in sales may require

50. Required production during a planning period will depend on the

Topic: Financial planning and forecasting

51. 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?

52. In order to estimate production requirements, we

53. 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)?

54. 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 MG

Lighting net dollar sales projection for this year?

Topic: Sales forecasts

55. In calculating gross profits, a firm utilizing LIFO inventory accounting would assume that

56. When the cost of raw materials is increasing, FIFO accounting

57. In calculating gross profits, a firm utilizing FIFO inventory accounting would assume that

58. In financial statements, the number of units shown to be sold is ___________ than the number of the

units produced.

Topic: Pro forma statements

59. The pro forma income statement is important to the overall process of constructing the pro forma

balance sheet because it allows us to determine a value for

60. 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?

61. In general, a firm with higher amounts of sales on credit has

62. The need for an increase or decrease in short-term borrowing can be predicted by

63. 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 in the month of the sale, and the remainder in the following month. How much cash

is collected in June?

64. 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 in the month of the sale, and the remainder in the following month. What will be the

balance in accounts receivable at the end of June?

65. Wiggles Right forecasted inventory purchases of $5,000 in October, $4,000 in November, and $4,000

in December. All purchases are on credit. 40% is paid in the month of the purchase, and the remainder is

paid in the following month. How much cash is paid in November?

66. GS Cookie Co. forecasts cash receipts for January and February of $18,000 and $20,000, with cash

payments of $6,000 and $8,000, respectively.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?

Topic: Projected cash budgets

67. GS Cookie Co. forecasts cash receipts for January and February of $18,000 and $20,000, with cash

payments of $6,000 and $8,000, respectively. 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 combined?

68. In the construction of the cash payments schedule, the major cash payment is generally

69. The difference between total receipts and total payments is referred to as

70. Net cash flow is equal to

71. In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to

turn to the

72. In a cash budget, the cumulative cash balance is equal to

73. Which of the following is most likely to increase the final number for notes payable for short-term

borrowing needs in the pro forma balance sheet?

74. The percent-of-sales method of financial forecasting

75. 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?

76. In the percent–of-sales method, an increase in dividends

77. In the percent–of-sales method, if (A/S) and (L/S) both increase,

78. In forecasting a firm’s cash needs for some future period

79. When using the percent–of-sales method in forecasting the funds needed, which of the following is not

true?

80. 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 30% of sales. BHS has an 8% profit margin and a 40%

dividend payout ratio. What is the level of required new funds?

81. Firms that successfully increase their inventory turnover ratio will, among other things,

82. If Excel Inc. has projected sales of $30,000 in January, $20,000 in February, and $20,000 in March,

where 80% of sales are on credit, 20% are collected in the month of sale, and 80% are collected the month

after, what are the cash receipts in March?

83. If the actual A/R at the end of February was $12,000 and projected sales in March are $50,000, where

70% of sales are on credit, 60% of credit sales are collected in the month of the sale, and 40% are

collected in the month after the sale, what is the projected A/R balance on the pro forma balance sheet for

the end of March?

84. If the actual A/R at the end of February was $12,000 and projected sales in March are $50,000, where

70% of sales are on credit, 60% of credit sales are collected in the month of the sale, and 40% are

collected in the month after the sale, what amount of cash is collected during March?

85. If projected net cash outflow for November is ($10,000), the beginning cash balance is $4,000, the

minimum cash balance is $3,000, and the beginning loan balance is $8,000, what will be the cumulative

loan balance at the end of November?

86. If projected net cash outflow for November is ($10,000) and the beginning cash balance is $4,000,

which is the minimum cash balance required by the bank, what amount of loan would be needed for

November?

87. If projected net cash outflow for January is ($6,500), the beginning cash balance is $16,000, the

minimum cash balance is $5,000, and the beginning loan balance is $4,500, what will be the cash balance

on the pro forma cash budget at the end of January?

88. If projected net cash outflow for January is ($6,500), the beginning cash balance is $16,000, the

minimum cash balance is $5,000, and the beginning loan balance is $4,500, what will be cumulative

amount of loan at the end of January?

Chapter 04 Test Bank – Static Summary