14.6 Pro Forma Financial Statements Flashcards
Calculate COGS with below
A. Sales
B. Beginning finished goods inventory
C. Ending finished goods inventory
D. Selling and administrative expenses
E. Cost of goods manufactured
COGS = Cost of Goods Manufactured + Beginning finished goods inventory - Ending finished goods inventory
COGS = E + B - C
Gross margin percentage
A. Sales
B. Beginning finished goods inventory
C. Ending finished goods inventory
D. Selling and administrative expenses
E. Cost of goods manufactured
F. COGS
(A. Sales - F. COGS) / A. Sales
The information contained in a cost of goods manufactured budget most directly relates to the
A. Materials used, direct labor, overhead applied, and work-in-process inventories budgets
B. Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods inventories budgets
C. Materials used, direct labor, overhead applied, and ending work-in-process budgets
D. Materials used, direct labor, overhead applied, and finished goods inventories budgets.
A. Materials used, direct labor, overhead applied, and work-in-process inventories budgets
When preparing the annual budget, which one of the following is an acceptable method of allocating production line workers’ fringe benefits?
A. Pro rata allocation between nonoperating expenses and administrative expenses.
B. Pro rata allocation between manufacturing overhead and administrative expenses
C. 100% allocation to administrative expenses
D. 100% allocation to manufacturing overhead
D. 100% allocation to manufacturing overhead
All of the following would appear on a projected schedule of cost of goods manufactured except for
A. Beginning finished goods inventory
B. The cost of raw materials used
C. Ending work-in-process inventory
D. Applied manufacturing overhead
A. Beginning finished goods inventory
Beginning finished goods inventory is a component of cost of goods sold, not cost of goods manufactured.
Which of the following is not a reason that a bank would be interested in reviewing a firm’s pro forma financial statements?
A. To determine a borrower’s expected future profitability
B. To determine whether a debt covenant has been violated
C. To evaluate a potential borrower’s projected capital structure.
D. To assess a current borrower’s projected solvency
B. To determine whether a debt covenant has been violated.
Although a bank may use pro forma financial statements to assess whether the company anticipates satisfying the requirement of debt companies, the pro forma statements are based on projected information and therefore cannot necessarily determine that a debt covenant has been violated. In order to determine whether the covenant has already been violated, the bank should consult the borrower’s most recent financial statements that are based on actual activity.
In general, which of the following pro forma financial statements is prepared first?
A. Pro forma statement of retained earnings
B. Pro forma income statement
C. Pro forma statement of cash flows
D. Pro forma balance sheet
B. Pro forma income statement
The first financial statement forecasted is generally the income statement.
One of the final steps in completing a master budget is the preparation of a pro forma cash flow statement. This statement is intended to help users of financial statements
A. Evaluate a firm’s economic resources and obligations
B. Evaluate a firm’s liquidity, solvency, and financial flexibility
C. Determine a firm’s components of income from operations.
D. Determine whether or not accounts receivable are collectible
B. Evaluate a firm’s liquidity, solvency, and financial flexibility
The pro forma statement of cash flows classifies cash receipts and disbursements depending on whether they are from operating, investing, or financing activities. Thus, it will help users evaluate a firm’s liquidity, solvency, and financial flexibility by analyzing the different cash disbursements and receipts.
Pro forma financial statements are part of the budgeting process. Normally, the last pro forma statement prepared is the
A. Statement of cash flows
B. Income statement
C. Statement of cost of goods sold
D. Capital expenditure plan
A. Statement of cash flows
The statement of cash flows is usually the last of the listed items prepared. All other elements of the budget process must be completed before it can be developed.
The cash budget must be prepared before the company can complete the
A. Production budget
B. Forecasted income statement
C. Capital expenditure budget
D. Forecasted balance sheet
D. Forecasted balance sheet
The pro forma income statement for a manufacturing company is built in projections of all of the following except
A. Cash balances
B. Marketing costs
C. Ending inventory
D. Production overhead
A. Cash balances
Cash is an asset, which appears on the balance sheet. Thus, cash does not appear on the income statement.
Which of the following parties is least likely to be interested in an entity’s pro forma financial statements?
A. Investment analysis
B. Potential lenders
C. Current creditors
D. Governmental taxing authorities
D. Governmental taxing authorities
They are more interested in actual income as opposed to pro forma income.
A company owns several retail stores. After all initial budget requests were received for the upcoming year, the company’s abbreviated pro forma income statement is as follows:
Sales: $46,000,000
Cost of goods sold: 20,700,000
Selling and administrative costs: 19,800,000
Operating income: 5,500,000
The cost of goods sold and a 5% sales commission are the only variable costs. The company’s upper management believes that the sales manager underestimated projected sales units and wants the sales budget increased such that the company can achieve its goal of a 15% return on sales. The amount by which sales must increase to achieve this goal is
A. $1,400,000
B. $3,500,000
C. $4,000,000
D. $1,750,000
C. $4,000,000
Return on sales is equal to operating income divided by sales. For every dollar added to sales, 45% will be the cost of goods sold, and 5% will be sales commissions. Therefore, for every dollar that is added to sales, $.50 [(100% - 45% - 5%) x $1] is added to operating income. To find how much the sales budget must be increased by to raise the return on sales to 15%, algebra is the most appropriate tool, as follows:
[($5,500,000 + .5X) / (46,000,000 + X)] =.15
($5,500,000 + .5X) = .15 x (46,000,000 + X)
5,500,000 + .5X = 6,900,000 + .15X
.35X = 1,400,000
X = 4,000,000
Kelly Company is a retail sporting goods store that uses accrual accounting for its records. Facts regarding Kelly’s operations are as follows:
- Sales are budgeted at $220,000 for December Year 1 and $200,000 for January Year 2.
- Collections are expected to be 60% in the month of sale and 38% in the month following the sale.
- Gross margin is 25% of sales.
- A total of 80% of the merchandise held for resale is purchased in the month prior to the month of sale and 20% is purchased in the month of sale. Payment for merchandise is made in the month following the purchase.
- Other expected monthly expenses to be paid in cash are $22,600.
- Annual depreciation is $216,000.
Below is Kelly Company’s statement of financial position at November 30, Year 1.
Assets
Cash: $22,000
Accounts receivable (net of $4,000
allowance for uncollectible accounts): 76,000
Inventory: 132,000
Property, plant, and equipment (net of
$680,000 accumulated depreciation): 870,000
Total assets: $1,100,000
Liabilities and Stockholders’ Equity
Accounts payable: 162,000
Common stock: 800,000
Retained earnings: 138,000
Total liabilities and stockholders’ equity: $1,100,000
Kelly’s projected balance in inventory on December 31, Year 1, is
A. $120,000
B. $160,000
C. $153,000
D. $150,000
A. $120,000
The inventory is expected to be 80% of January’s needs. Projected January sales of $200,000 x 80% = $160,000. Thus, the ending inventory would be goods that the company could sell for $160,000. Given a gross margin of 25%, cost would only be 75% of sales, and ending inventory would be $120,000 ($160,000 x 75%)
