Chapter 3 financial forecasting with true false PDF

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Chapter 03 Test Bank 1. The percent-of-sales approach to financial forecasting works well for forecasting the income statement but is not useful for forecasting the balance sheet.

FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

2. An advantage of the percent-of-sales approach to financial forecasting is that effective forecasts can be prepared without consulting historical financial statements. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

3. The forecast for retained earnings on the 2019 balance sheet can be determined as 2018 retained earnings plus projected 2019 after-tax earnings less projected 2019 dividends. TRUE Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

4. An annual financial forecast for 2017 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2017. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

5. All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

6. All else equal, increasing the assumed collection period in a financial forecast will decrease external funding required. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

7. Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

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8. A drawback of forecasting using spreadsheets is that typical spreadsheet programs are not equipped to deal with the circularity involving interest expense and debt. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

9. Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs. FALSE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

10. Cash flow forecasts are less informative than pro forma financial statements. TRUE Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

11. You are estimating your company’s external financing needs for the next year. At the end of next year, you expect that owners’ equity will be $80 million, total assets will amount to $170 million, and total liabilities will be $70 million. How much will your firm need to borrow, or otherwise acquire, from outside sources during the next year? A. $20 million B. $70 million C. $150 million D. $160 million E. $180 million F. None of the options are correct. Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

12.You are estimating your company’s external financing needs for the next year. Your first-pass pro forma financial statements showed a large financing deficit for next year. Which of the following changes to your company’s operating plan would reduce the financing deficit if incorporated in revised pro forma financial statements? A. Increase the sales growth rate B. Increase cost of goods sold as a percentage of sales C. Reduce the collection period D. Increase the dividend payout ratio E. None of the options are correct. Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

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13. To estimate Missed Places, Inc.’s (MP) external financing needs, the CFO needs to figure out how much equity her firm will have at the end of next year. At the end of the most recent fiscal year, MP’s retained earnings were $158,000. The Controller has estimated that over the next year, gross profits will be $360,700, earnings after tax will total $23,400, and MP will pay $12,400 in dividends. What are the estimated retained earnings at the end of next year? A. $169,000 B. $170,400 C. $181,400 D. $506,300 E. $518,700 F. None of the options are correct. 158,000 + 23,400 − 12,400 = $169,000 Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

14. The most common approach to developing pro forma financial statements is called the

A. cash budget method. B. financial planning method. C. seasonality approach. D. percent-of-sales method. E. market-oriented approach. F. None of the options are correct. Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

15. Which of the following are viable techniques to cope with the uncertainty inherent in realistic financial projections? I. Simulation II. Ad hoc adjustments III. Scenario analysis IV. Sensitivity analysis A. II and IV only B. III and IV only C. II, III, and IV only D. I, II, and III only E. I, III, and IV only F. I, II, III, and IV Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

16. Which one of the following statements is correct concerning the cash balance of a firm? A. Most firms attempt to maintain a zero cash balance at all times. B. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C. Most firms attempt to maximize the cash balance at all times. D. A cumulative cash deficit on a cash budget indicates the need to acquire additional funds. E. The ending cash balance must equal the minimum desired cash balance. Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

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17. Assume each month has 30 days and AmDocs has a 60-day accounts receivable period. During the second calendar quarter of the year (April, May, and June), AmDocs will collect payment for the sales it made during which of the months listed below? A. October, November, and December B. November, December, and January C. December, January, and February D. January, February, and March E. February, March, and April Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

18. The Limited collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect

A. 60 percent of February sales. B. 15 percent of April sales. C. 60 percent of March sales. D. 15 percent of March sales. E. 25 percent of February sales. Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

19. Steve has estimated the cash inflows and outflows for his sporting goods store for next year. The report that he has prepared summarizing these cash flows is called a A. pro forma income statement. B. sales projection. C. cash budget. D. receivables analysis. E. credit analysis. F. None of the options are correct. Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

20. You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much will our sales grow? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained? A. I and IV only B. II and III only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

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21. Ruff Wear expects sales of $560, $650, $670, and $610 for the months of May through August, respectively. The firm collects 20 percent of sales in the month of sale, 70 percent in the month following the month of sale, and 8 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August? A. $621 B. $628 C. $633 D. $639 E. $643 August collections = 0.20($610) + 0.70($670) + 0.08($650) = $643 Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

22. On May 1, Vaya Corp. had a beginning cash balance of $175. Vaya’s sales for April were $430, and May sales were $480. During May, the firm had cash expenses of $110 and made payments on accounts payable of $290. Vaya’s accounts receivable period is 30 days. What is the firm’s beginning cash balance on June 1? A. $145 B. $155 C. $205 D. $215 E. $265 Cash balance = $175 − $110 − $290 + $430 = $205 Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

23. You are preparing pro forma financial statements for 2017 using the percent-of-sales method. Sales were $100,000 in 2016 and are projected to be $120,000 in 2017. Net income was $5,000 in 2016 and is projected to be $6,000 in 2017. Equity was $45,000 at year-end 2015 and $50,000 at year-end 2016. Assuming that this company never issues new equity, never repurchases equity, and never changes its dividend payout ratio, what would be projected for equity at year-end 2017? A. $55,000 B. $56,000 C. $60,000 D. Insufficient information is provided to project equity in 2017. All of net income was added to equity in 2016, so all of net income will be added to equity in 2017. $50,000 + $6,000 = $56,000. Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

[The following information applies to the questions displayed

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below.]

Oscar's Incredible Eatery ($ thousands) Income Statement for the year ending Dec. 31, 2017 Net sales 17,300 Cost of goods sold 10,600 Depreciation 3,250 Earnings before interest and taxes 3,450 Interest expense 680 Earnings before tax 2,770 Tax 940 Earnings after tax 1,830 Dividends

450

Oscar's Incredible Eatery ($ thousands) Balance Sheet as of Dec. 31, 2017 Cash 350 Accounts payable 1,920 Accounts receivable 940 Long-term debt 3,500 Inventory 2,360 Common stock 7,500 Total current assets 3,650 Retained earnings 1,580 Net fixed assets 10,850 Total assets 14,500Total liab. & equity14,500

24. Please refer to Oscar’s financial statements above. What was Oscar’s increase in retained earnings during 2017? A. $450 B. $1,380 C. $1,830 D. $2,280 E. None of the options are correct. 1,830 − 450 = 1,380 Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

25. Please refer to Oscar’s financial statements above. Sales are projected to increase by 3 percent next year. The profit margin and the dividend payout ratio are projected to remain constant. What is the projected addition to retained earnings for next year? A. $1,309.19 B. $1,421.40 C. $1,884.90 D. $2,667.78 E. $3,001.40 F. None of the options are correct. Projected addition to retained earnings = $1,380 × (1 + 0.03) = $1,421.40 Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

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26. Please refer to Oscar’s financial statements above. All of Oscar’s costs and current asset accounts vary directly with sales. Sales are projected to increase by 10 percent. What is the pro forma accounts receivable balance for next year? A. $949 B. $1,034 C. $1,113 D. $1,730 E. $2,670 F. None of the options are correct. Pro forma accounts receivable = $940 × (1 + 0.10) = $1,034 Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

27. Please refer to Oscar’s financial statements above. Assume a constant profit margin and dividend payout ratio, and further assume all of Oscar’s assets and current liabilities vary directly with sales. Assume long-term debt and common stock remain unchanged. Sales are projected to increase by 10 percent. What is Oscar’s external financing need for next year? A. -$410 B. -$260 C. $235 D. $1,320 E. $7,240 F. None of the options are correct. Projected total assets = $14,500 × 1.10 = $15,950 Projected total liabilities = $1,920 × 1.10 + $3,500 = $5,612 Projected total equity = $7,500 + ($1,580 + $1,380 × 1.1) = $10,598 External financing needed = $15,950 − ($5,612 + $10,598) = − $260 Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

28. Please refer to Oscar’s financial statements above. Assume a constant debt-equity ratio, net profit margin, and dividend payout ratio, and further assume all of Oscar’s expenses, assets, and current liabilities vary directly with sales. What is the pro forma net fixed asset value for next year if sales are projected to increase by 7.5 percent?

A. $10,857.50 B. $10,931.38 C. $11,663.75 D. $15,587.50 E. $18,987.50 F. None of the options are correct. Pro forma net fixed assets = $10,850 × (1 + 0.075) = $11,663.75 Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

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[The following information applies to the questions displayed below.]

Financial Statements for Royal Corporation Actual 2016 and Pro Forma 2017 ($ millions) Income Statement Net sales Cost of goods sold Other expenses Depreciation expense EBIT

Balance Sheet 2016 2017 $ 47,616 $ 52,378 Cash & securities 40,718 44,790 Accounts receivable 5,171 5,688 Inventories 1,000 1,100 Net fixed assets 727 800 Total assets

Interest expense Earnings before tax Tax Net income

215 512 154 $ 359

215 585 176 $ 409

Dividends paid Add. to retained earnings

90 $ 269

102

Bank loan (short-term) Accounts payable Long-term debt Total liabilities Shareholders' equity Total liabilities & equity

2016 2017 $ 951 $ 1,046 5,666 6,233 4,236 4,660 4,048 14,901

$ 392 $ 431 8,161 7,419 2,148 9,959 4,942 $ 14,901

29. In the above financial statements, Royal Corporation has prepared (incomplete) pro forma financial statements for 2017 based on actual financial statements for 2016. Royal Corp. used the percent-of-sales method, assuming a sales growth rate of 10% for 2017. If capital expenditures are planned to be $1,615 in 2017, then what would be the appropriate projection for net fixed assets in 2017? A. $4,453 B. $4,563 C. $4,663 D. $5,663 4,048 + 1,615 − 1,100 = $4,563 Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

30. Please refer to the pro forma financial statements for Royal Corporation above. If Royal Corporation plans to issue $100 in new equity in 2017, what should be the projection for shareholders’ equity for 2017? A. $5,349 B. $5,436 C. $5,451 D. $5,536 4,942 + 307 + 100 = $5,349 Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

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31. Please refer to the pro forma financial statements for Royal Corporation above. Assume that net fixed assets are projected to be $5,000 for 2017 and that shareholders’ equity is projected to be $5,500 for 2017. If long-term debt is the plug figure, what should be the projection for long-term debt for Royal Corporation in 2017? A. $2,206 B. $2,363 C. $2,455 D. $2,847 Total assets would be 1,046 + 6,233 + 4,660 + 5,000 = $16,939 Total liabilities and equity, without long-term debt, would be 431 + 8,161 + 5,500 = $14,092 Long-term debt must make up the difference = 16,939 − 14,092 = $2,847 Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

[The following information applies to the questions displayed below.] Selected assumptions for 2018 Sales growth rate Cost of goods sold/Sales Dividends/Net income

9

%

62

%

40

%

Income Statement

Sales

$

Balance Sheet

Actual

Forecast

2017 1,000

2018

Actual Cash

$

2017 100

Cost of goods sold

600

Accounts receivable

200

Operating expense Depreciation expense EBIT

200

Inventory

500

100

Total Current Assets

800

100

Net PP&E

35

Total Assets

Pre-tax income

65

Accounts payable

300

Tax

26

Bank loan Total Current Liabilities Long-Term Debt Shareholders' Equity Total Liabilities & Equity

100

$

39

2018

1,000

Interest expense

Net Income

Forecast

1,800

400 400 1,000 $

1,800

32. Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2018. Which of the following formulas would correctly give the forecast for sales in cell C8? A. = B8 × B2 B. = B8 + B8 × B2 C. = (1 + B8) × B2 D. = (1/B2) × B8 E. None of the options are correct.

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33. Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2018. When the pro formas are completed, which of the following formulas would correctly give the forecast for cost of goods sold in cell C9? A. = B9 × B3 B. = B9 + B9 × B3 C. = B8 × B3 D. = B9 × B2 E. None of the options are correct. Accessibility: Keyboard Navigation Difficulty: 1 Easy Gradable: automatic

34. Please refer to the spreadsheet above. Selected assumptions are given for preparing pro forma financial statements for 2018. Assume that no new equity will be issued in 2018. When the pro formas are completed, which of the following formulas would correctly give the forecast for shareholders’ equity in cell G19? A. = F19 × B2 B. = F19 × (1 + B2) C. = F19 + (1 − B4) × C16 D. = F19 + B4 × C16 E. None of the options are correct. Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

35. Which of the following statements is correct if a firm’s pro forma financial statements project net income of $12,000 and external financing required of $5,000? A. Total assets cannot grow by more than $10,000. B. Dividends cannot exceed $10,000. C. Retained earnings cannot grow by more than $12,000. D. Long-term debt cannot grow by more than $5,000. Accessibility: Keyboard Navigation Difficulty: 2 Medium Gradable: automatic

36. Pro forma financial statements, by definition, are predictions of a company’s financial statements at a future point in time. So, why is it important to analyze the historical performance of the company before constructing pro forma financial statements? Historical analysis helps decide for which financial statement items a percent-of-sales forecast might be approp...