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Chapter 04 - Financial Forecasting
1. An increase in sales and/or profits means there is also an increase in cash on the balance
sheet.
2. An increase in sales and profits generates the necessary cash required for economic
growth.
3. Profit is generally adequate to finance significant growth.
4. Pro forma income statements follow a sales forecast and production plan.
Chapter 04 - Financial Forecasting
5. Pro forma statements are generally prepared six months to a year into the future.
6. Pro forma income statements and balance sheets refer to projected financial statements.
7. The generation of sales and profits ensures that there will be adequate cash on hand to meet
financial obligations as they come due.
8. Sales projections and the ability to accurately predict the future have a large impact on cash
flow targets.
Chapter 04 - Financial Forecasting
9. Production planning depends upon the beginning and ending accounts receivable levels, as
well as the projected monthly sales level.
10. 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.
11. The main consideration in constructing the pro forma income statement is the costs
specifically associated with the units sold during the period.
12. Growth in sales volume prevents a shortage of funds.
Chapter 04 - Financial Forecasting
13. The value of ending inventory should be equal to beginning inventory plus total
production costs minus cost of goods sold.
14. It is helpful to break down the income statement into smaller monthly periods to enable
evaluation of seasonal patterns of cash inflows and outflows.
15. A cash budget is unnecessary under level production since we know how much will be
produced every month.
16. When sales volume varies from month to month it is not advisable to use level
production.
Chapter 04 - Financial Forecasting
17. The primary 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.
Chapter 04 - Financial Forecasting
21. A pro forma balance sheet needs data from the prior balance sheet and the cash budget.
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. An increase in accounts receivable and a decrease in accounts payable will reduce the
amount of new external funds required.
Chapter 04 - Financial Forecasting
25. The percent-of-sales method for financial forecasting assumes that balance sheet accounts
maintain a constant relationship to sales.
26. The percent-of-sales forecast is likely to be most accurate when used with cyclical
companies.
27. The percent-of-sales method would be more accurate under a steady sales assumption than
cyclical sales.
28. An increase in sales accompanied by an increase in accounts payable will reduce the
amount of new external funds required.
Chapter 04 - Financial Forecasting
29. As the dividend payout ratio declines more external funds are required.
30. A lower dividend payout ratio will decrease the firm's need for borrowing.
31. 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.
32. The cash budget approach to financial forecasting assumes that balance sheet accounts
maintain a constant relationship to cash.
Chapter 04 - Financial Forecasting
33. Lower profit margins resulting from increased competition would mean a lower need for
external funds.
34. Level production schedules usually have the advantage of reducing overall production
costs.
35. A firm's cash borrowing needs can be reduced if its inventory turnover rate can be
increased.
36. The finance department should work independently without the input of other departments
because there may be significant biases when creating proformas.
Chapter 04 - Financial Forecasting
37. Total production costs should be equal to cost of goods sold in the proforma income
statement.
38. The percent-of-sales provides the most accurate and detailed method of forecasting
necessary funds.
39. The calculation of cash receipts requires a breakout of cash and credit sales and
collections history.
40. In using a systems approach to financial planning, it is necessary develop a
Chapter 04 - Financial Forecasting
41. The key initial element in developing pro forma statements is
42. In the development of the pro forma financial statements, the last step in the process is the
development of the:
Chapter 04 - Financial Forecasting
43. 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?
Chapter 04 - Financial Forecasting
44. 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?
45. Pro forma financial statements are
46. A rapid rate of growth in sales may require
Chapter 04 - Financial Forecasting
47. Required production during a planning period will depend on the
48. 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?
49. In order to estimate production requirements, we
Chapter 04 - Financial Forecasting
50. 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)?
Chapter 04 - Financial Forecasting
51. 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?
52. A firm utilizing LIFO inventory accounting would, in calculating gross profits, assume
that
Chapter 04 - Financial Forecasting
53. When the cost of raw materials is increasing, FIFO accounting
54. A firm utilizing FIFO inventory accounting would, in calculating gross profits, assume
that
55. In financial statements, the number of units shown in cost of goods sold as compared to
the number of the units actually produced
Chapter 04 - Financial Forecasting
56. 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:
57. 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?
58. In general, the larger the portion of a firm's sales that are on credit, the
Chapter 04 - Financial Forecasting
59. The need for an increase or decrease in short-term borrowing can be predicted by
60. 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?
