Foundations of Financial Management, 17e (Block)
Chapter 4 Financial Forecasting
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 main consideration in constructing a pro forma income statement is the costs specifically
associated with units sold during the time period.
15) 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.
16) The generation of sales and profits does not necessarily ensure there will be adequate cash on
hand to meet financial obligations as they come due.
17) It is helpful to break down the income statement into smaller monthly periods to enable
evaluation of seasonal patterns of cash inflows and outflows.
18) A cash budget is unnecessary since we know how many units will be sold and produced
every month, which is assumed to be the cash inflows and outflows.
19) The most significant purpose of the cash budget is to plan accounts payable payments.
20) The main consideration for cash payments are monthly costs associated with inventory
manufactured during the period and disbursements for general and administrative expenses,
interest payments, taxes and dividends.
21) 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.
22) The primary purpose of the cash budget is to forecast income.
23) Companies generally prefer to maintain some minimum cash balance.
24) The balance sheet represents declining changes in the corporation over time.
25) 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.
26) Generally, the pro forma income statement and balance sheet must be created before the cash
budget is completed.
27) A higher growth rate in sales will often require more external funds.
28) 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.
29) Making the pro-forma financial statements as complicated as possible is always best.
30) An increase in accounts receivable and/or a decrease in accounts payable will usually reduce
the amount of new external funds required.
31) The percent-of-sales method for financial forecasting assumes that balance sheet accounts
maintain a relatively constant relationship to sales.
32) The percent-of-sales forecast is likely to be most accurate when used with cyclical
companies.
33) The percent-of-sales method would be more accurate under a steady sales assumption than
with cyclical sales.
34) The percent-of-sales method would not result in very accurate financials if used for a tourism
company.
35) An increase in sales accompanied by an increase in accounts payable will reduce the amount
of new external funds required, all else being equal.
36) As the dividend payout ratio declines, more external funds are required.
37) A lower dividend payout ratio will decrease the firm’s need for borrowing.
38) 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.
39) 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.
40) Required new funds shows that the firms need more cash during times of company growth,
especially if sales increases.
41) The cash budget approach to financial forecasting assumes that balance sheet accounts
maintain a constant relationship to cash.
42) Lower profit margins resulting from increased competition would mean a lower need for
external funds.
43) Level production schedules usually have the advantage of reducing overall production costs.
44) The finance department should work independently without input from other departments
because there may be significant biases when creating pro forma financial statements.
45) Total production costs on the production schedule should be equal to cost of goods sold in
the pro forma income statement.
46) The percent-of-sales method provides the most accurate and detailed method of forecasting
necessary funds.
47) The calculation of cash receipts requires a breakout of cash and credit sales and cash
collections history.
48) In using a systems approach to financial planning, it is necessary to develop a
A) pro forma income statement.
B) cash budget.
C) production plan.
D) All of the options are true.
49) When developing a pro forma income statement, which of the following steps are not used?
A) Establish a marketing projection.
B) Determine a production schedule and the associated use of new material, direct labor and
overhead to arrive at gross profit.
C) Compute other expenses
D) Determine profit by completing the actual pro forma statement.
50) The key initial element in developing all pro forma statements is
A) a cash budget.
B) an income statement.
C) a sales forecast.
D) a collections schedule.
51) In the development of the pro forma financial statements, the last step in the process is the
development of the
A) cash budget.
B) pro forma balance sheet.
C) pro forma income statement.
D) capital budget.
52) 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?
A) 1,2,3,4
B) 3,2,4,1
C) 2,1,3,4
D) 3,2,1,4
53) Pro forma financial statements are
A) the most comprehensive means of financial forecasting.
B) often required by prospective creditors.
C) projections of financial statements for a future period.
D) All of the options are true.
54) A rapid rate of growth in sales may require
A) higher dividend payments to shareholders.
B) increased borrowing by the firm to support the sales increase.
C) the firm to be more lenient with credit customers.
D) sales forecasts to be made less frequently.
55) Required production during a planning period will depend on the
A) beginning inventory of products.
B) sales during the period.
C) desired level of ending inventory.
D) All of the options are true.
56) 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?
A) 750 units
B) 0 units
C) 775 units
D) 400 units
57) In order to estimate production requirements, we
A) subtract projected sales in units from desired ending inventory and add beginning inventory.
B) add projected sales in units to desired ending inventory and subtract beginning inventory.
C) add beginning inventory to desired ending inventory and divide by two.
D) add beginning inventory to desired ending inventory and subtract projected sales in units.