Chapter 4: Financial Forecasting need finish

Question 1

Types of Pro Forma Statements

Answer 1

Pro forma income statement (based on sales/production plan)
Cash budget (translate material)
Pro forma balance sheet

Question 2

What are pro forma financial stmts?

Answer 2

enable a firm to estimate future receivables, inventory, and payables, as well as anticipated profits and borrowing requirements.

Statements are often required by bankers, other lenders as guide for the future.

Question 3

How to establish stmts

Answer 3

1. Construct income statement based on sales projections and the production plan.
2. Translate this into a cash budget.
3. Assimilate all materials into pro forma balance sheet.

Question 4

How to construct pro forma Income Statement

Answer 4

1. Establish a sales projection
2. Determine production schedule and associate new material, direct labor, and overhead to arrive at gross profit
3. Compute other expenses: EBT, Aftertax income, Contribution to RE
4. Determine profit by completing the actual pro forma stmt

Question 5

Production requirements =

Answer 5

Projected sales + Desired ending inventory - Beginning Inventory

Question 6

COGS uses (LIFO or FIFO)

Answer 6

LIFO accounting

Question 7

Cash Budget

Answer 7

a. Find Cash Receipts (Inflows) - Sales / Collections

b. Find Cash Payments (outflows) -
Manufacturing (materials, labor, overhead), gen/admin, interest, tax, dividends, P&E

c. Actual budget - Net cash flow, loans, end cash balance (min)

Question 8

Pro Forma Balance Sheet Components Needed

Answer 8

Prior balance sheet: Marketable securities, long term debt, common stock

Pro Forma Income: Inventory, RE

Cash Budget Analysis: Cash, A/R, P/E, A/P, N/P

Question 9

What is the Percentage of Sales Method

Answer 9

A method of determining future financial needs that is an alternative to the development of pro forma financial statements. We first determine the percentage relationship of various asset and liability accounts to sales, and then we show how that relationship changes as our volume of sales changes.

no % for NP, Common Stock, or RE

Question 10

Establishing funds required to finance growth (equation)

Answer 10

RNF = (Assets/Sales % * Change in Sales) - (Liabilities/Sales % * Change in sales) - Profit Margin*New Sales level * ( 1 - Dividend payout ratio)

Question 11

A rapid rate of growth in sales may require

Answer 11

increased borrowing by the firm to support the sales increase.

Question 12

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?

Answer 12

Ending Inventory = 300 units @ $12 each = $3,600

Question 13

What belongs in the cash budget analysis? What does not belong:

Answer 13

A/R
P & E
Notes Payable - NP

Not: inventory

Question 14

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 cumulative amount of loan at the end of January?

Answer 14

Net outflow $ (6,500)
Beginning cash balance $ 16,000
Cumulative cash balance $ 9,500

Answer = 0 in loans

Question 15

When developing a pro forma income statement, in what order are the steps typically completed?

Answer 15

1. Determine profit by completing the actual pro forma statement?
2. Compute other expenses.
3. Establish a sales projection.
4. Determine a production schedule and the associated use of new material, direct labor, and overhead to arrive at gross profit.

3,4,2,1

Question 16

In order to estimate production requirements, we

Answer 16

add projected sales in units to desired ending inventory and subtract beginning inventory.

Question 17

The pro forma income statement is important to the overall process of constructing the pro forma balance sheet because it allows us to determine a value for

Answer 17

change in retained earnings.

Question 18

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? “”””””

Answer 18

Net outflow $ (6,500)
Beginning cash balance $ 16,000
Cumulative cash balance $ 9,500
- 4500 loan

Answer: end cash balance = 5,000

Question 19

Net cash flow =

Answer 19

Cash receipts - cash payments

Question 20

Pro forma financial statements are

Answer 20

the most comprehensive means of financial forecasting.

often required by prospective creditors.

projections of financial statements for a future period.

Question 21

In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the

Answer 21

cash budget

Question 22

If the actual A ÷ R at the end of February 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 amount of cash is collected during March?

Answer 22

Cash collected in March=cash sales+60% of credit sales

=(50,000×0.3)+ (50,000×0.7×0.6) =$36,000+12,000 (AR)
=$48,000

Question 23

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)?

Answer 23

Old inventory
(450 units at $10) = $ 4,500
Plus new production
(500 units at $12) = $ 6,000

= $ 10,500
Less ending inventory
(250 units at $12) = ($ 3,000)

= Cost of goods sold $ 7,500

Question 24

Firms that successfully increase their inventory turnover ratio will, among other things,

Answer 24

be able to reduce their borrowing needs.

Question 25

XYZ Company 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?

Answer 25

+ Projected sales 400 units
+ Desired ending inventory
875 = (1.25 × 700)
− Beginning inventory
500 = (1.25 × 400)

=Units to be produced, 775

Question 26

When determining the projected quantity of unit sales for the next six months which of the following are used in this process?

Answer 26

Production requirements

beginning inventory − desired ending inventory

Projected sales

Question 27

In the percent-of-sales method, an increase in dividends

Answer 27

will increase required new funds.

Question 28

The percent-of-sales method of financial forecasting

Answer 28

assumes that balance sheet accounts maintain a constant relationship to sales

Question 29

In forecasting a firm’s cash needs for some future period

Answer 29

the percent-of-sales method is a “broad-brush” approach.

cash budgets are more exact than the percent-of-sales method.

a cash budget approach can deal effectively with both level and seasonal production schedules.