Chapter 4 Finance

An increase in sales and/or profits means there is also an increase in cash on the balance sheet. False
An increase in sales and profits generates the necessary cash required for economic growth. False
Profit is generally adequate to finance significant growth. False
Pro forma income statements follow a sales forecast and a production plan. True
Pro forma statements are generally prepared six months to a year into the future. True
Pro forma income statements and balance sheets refer to projected financial statements. True
The generation of sales and profits ensures that there will be adequate cash on hand to meet financial obligations as they come due. False
Sales projections and the ability to accurately predict the future have a large impact on cash flow targets. True
Production planning depends upon the beginning and ending accounts receivable levels, as well as the projected monthly sales level. False
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. False
Growth in sales volume prevents a shortage of funds. False
The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold. True
It is helpful to break down the income statement into smaller monthly periods to enable evaluation of seasonal patterns of cash inflows and outflows. True
A cash budget is unnecessary under level production since we know how much will be produced every month. False
The most significant purpose of the cash budget is to plan accounts payable payments. False
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. True
The primary purpose of the cash budget is to forecast income. False
Companies generally prefer to maintain some minimum cash balance. True
A pro forma balance sheet needs data from the prior balance sheet and the cash budget. True
Generally, the pro forma income statement and balance sheet must be created before the cash budget is completed. False
A higher growth rate in sales will often require more external funds. True
An increase in accounts receivable and a decrease in accounts payable will usually reduce the amount of new external funds required. False
The percent-of-sales method for financial forecasting assumes that balance sheet accounts maintain a relatively constant relationship to sales. True
The percent-of-sales forecast is likely to be most accurate when used with cyclical companies. False
The percent-of-sales method would be more accurate under a steady sales assumption than with cyclical sales. True
An increase in sales accompanied by an increase in accounts payable will reduce the amount of new external funds required, all else being equal. True
As the dividend payout ratio declines, more external funds are required. False
A lower dividend payout ratio will decrease the firm’s need for borrowing. True
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. False
The cash budget approach to financial forecasting assumes that balance sheet accounts maintain a constant relationship to cash. False
Lower profit margins resulting from increased competition would mean a lower need for external funds. False
Level production schedules usually have the advantage of reducing overall production costs. True
A firm’s cash borrowing needs can be reduced if its inventory turnover rate can be increased. True
The finance department should work independently without input from other departments because there may be significant biases when creating pro formas False
Total production costs should be equal to cost of goods sold in the pro forma income statement. False
The percent-of-sales provides the most accurate and detailed method of forecasting necessary funds. False
The calculation of cash receipts requires a breakout of cash and credit sales and collections history. True
In using a systems approach to financial planning, it is necessary to develop a A. pro forma income statement.B. cash budget.C. pro forma balance sheet.D. All of the options. D. All of the options
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. C. a sales forecast
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. B. pro forma balance sheet
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? A. $5,625B. $4,540C. $12,800D. None of the options. A. 5,625
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? A. 1,2,3,4B. 3,2,4,1C. 2,1,3,4D. 3,2,1,4 D. 3,2,1,4
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. D. All of the options
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. B. increased borrowing by the firm to support the sales increase
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. D. All of the options
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 unitsB. 0 unitsC. 775 unitsD. 425 units C. 775 units
In order to estimate production requirements, we A. add beginning inventory to projected sales in units and subtract desired ending 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. B. add projected sales in units to desired ending inventory and subtract beginning inventory
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)? A. $7,500B. $8,000C. $7,900D. $8,100 A. $7,500
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? A. $26,976B. $69,344C. $72,800D. None of the options. D. None of the options
In calculating gross profits, a firm utilizing LIFO inventory accounting would assume that A. all sales were from current production.B. all sales were from beginning inventory.C. sales were from current production until current production was depleted, and then would use sales from beginning inventory.D. all sales were for cash. C. sales were from current production until current production was depleted, and then would use sales from beginning inventory
When the cost of raw materials is increasing, FIFO accounting A. yields higher ending inventory values than LIFO.B. produces higher unit sales than using LIFO.C. yields higher cost of goods sold than LIFO.D. All of the options. A. yields higher ending inventory values than LIFO
In calculating gross profits, a firm utilizing FIFO inventory accounting would assume that A. all sales were from current production.B. all sales were from beginning inventory.C. sales were from beginning inventory until it was depleted, and then would use sales from current production.D. all sales were for cash. C. sales were from beginning inventory until it was depleted, and then would use sales from current production
In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced A. is higher.B. is lower.C. is the same.D. can be either higher or lower. D. can be either higher or lower
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 A. change in retained earnings.B. gross profit.C. interest expense.D. prepaid expenses. A. change in retained earnings
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? A. $2,750B. $3,600C. $3,300D. $3,850 B. $3,600
In general, the larger the portion of a firm’s sales that are on credit, the A. lower will be the firm’s need to borrow.B. higher will be the firm’s need to borrow.C. more rapidly credit sales will be paid off.D. more the firm can buy raw materials on credit. B. higher will be the firm’s need to borrow
The need for an increase or decrease in short-term borrowing can be predicted by A. ratio analysis.B. trend analysis.C. a cash budget.D. an income statement. C. a cash budget
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 beginning of July? A. $1,950B. $6,500C. $4,550D. $3,500 D. $3,500
Wiggles Right forecasted sales of $5,000 in October, $4,000 in November, and $4,000 in December. All sales are on credit. 40% is collected in the month of the sale, and the remainder in the following month. How much is collected from accounts receivable in November? A. $5,400B. $4,800C. $6,000D. $4,600 D. $4,600
GS Cookie Co. forecasts cash receipts for January and February of $18,000 and $20,000, respectively. Cash Payments of $6,000 and $8,000 are expected in these two months. 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? A. $15,000B. $9,000C. $4,000D. None. GS Cookie must increase its borrowings. A. $15,000
In the construction of the cash payments schedule, the major cash payment is generally A. the general and administrative expense.B. costs associated with inventory manufactured.C. interest and dividends.D. payments for new plant and equipment. B. costs associated with inventory manufactured
The difference between total receipts and total payments is referred to as A. cumulative cash flow.B. beginning cash flow.C. net cash flow.D. cash balance. C. net cash flow
Net cash flow is equal to A. income after taxes minus depreciation.B. income after taxes minus dividends.C. cash receipts minus cash payments.D. cash receipts minus cash payments minus depreciation. C. cash receipts minus cash payments
In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the A. pro forma income statement.B. cash budget.C. prior balance sheet.D. statement of retained earnings. B. cash budget
In a cash budget, the cumulative cash balance is equal to A. net cash flow minus the beginning cash balance.B. net cash flow plus the beginning cash balance.C. the cumulative loan balance minus the ending cash balance.D. the cumulative loan balance plus the ending cash balance. B. net cash flow plus the beginning cash balance
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? A decrease in inventory.B. An increase in retained earnings.C. A decrease in accounts payable.D. A decrease in accounts receivable. C. A decrease in accounts payable
The percent-of-sales method of financial forecasting A. is more detailed than a cash budget approach.B. requires more time than a cash budget approach.C. assumes that balance sheet accounts maintain a constant relationship to sales.D. provides a month-to-month breakdown of data. C. assumes that balance sheet accounts maintain a constant relationship to sales
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? A. 32%B. 13%C. 8%D. Not enough information to determine B. 13%
In the percent-of-sales method, an increase in dividends A. will increase required new funds.B. will decrease required new funds.C. has no effect on required new funds.D. More information is needed. A. will increase required new funds
In the percent-of-sales method, if (A/S) and (L/S) both increase, A. RNF stays the same.B. RNF goes down.C. RNF goes up.D. More information is needed. D. More information is needed
In forecasting a firm’s cash needs for some future period A. the percent-of-sales method is a “broad-brush” approach.B. cash budgets are more exact than the percent-of-sales method.C. a cash budget approach can deal effectively with both level and seasonal production schedules.D. All of the options. D. All of the options
In the percent-of-sales method A. as the dividend payout ratio goes up, the required new funds also rises.B. as the dividend payout ratio rises, the required new funds declines.C. the dividend payout ratio does not affect new funds.D. None of the options. A. as the dividend payout ratio goes up, the required new funds also rises
When using the percent-of-sales method in forecasting the funds needed, which of the following is not true? A. As the dividend payout ratio increases, the required new funds also increase.B. Required new funds decrease as profit margin increases.C. Required new funds increase as the dividend payout decreases.D. As the tax rate increases, the required new funds increase. C. Required new funds increase as the dividend payout decreases
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 40% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds? A. $3,600B. $5,200C. $4,000D. BHS is in balance and no new funds are needed. A. $3,600
Firms that successfully increase their rates of inventory turnover will, among other things, A. be able to reduce their borrowing needs.B. be able to reduce their dividend payments to stockholders.C. find it more difficult to be given credit by their resource suppliers.D. have a greater need for high balances in their cash accounts. A. be able to reduce their borrowing needs
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? A. $20,000B. $16,200C. $21,400D. $10,300 A. $20,000
If the actual February 28 A/R balance 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? A. $26,000B. $14,000C. $20,000D. $35,000 A. $26,000
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? A. $14,000B. $5,000C. $17,000D. $22,000 C. $17,000
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? A. $5,000B. $10,000C. $12,000D. $4,500 A. $5,000

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