SmartBook Assignment Chapter 4: Financial Forecasting

A firm's operating profit is $50,000, interest expense is $4,000, the tax rate is 35%, and common stock dividends are $2,500. Calculate the firm's earnings after taxes:

Blank 1: $29,900, 29,900, 29900, $29900, or $29900.00

The Blank______ provides a projection of how much profit the firm anticipates making over the ensuing time period.

pro forma income statement

The pro forma balance sheet is developed by integrating the information from the

pro forma income statement and cash budget.

This formula is used to determine the firm's Blank______ requirements: Blank______ = Projected sales + Desired ending inventory - Beginning inventory

production

A company should be able to estimate which of the following on the basis of its projected financial statements?

accounts receivable inventory payables

To calculate the cash balance before financing on the cash budget, add the

beginning cash balance to the budgeted cash receipts and deduct budgeted cash payments

Cash payments may be necessary for all of the following except

depreciation expenses.

The most comprehensive means of financial forecasting is to

develop a series of projected, or pro forma, financial statements.

The first step in developing the pro forma income statement is to

establish a sales projection

If a company is operating at Blank______, it will need to buy new plant and equipment to produce more goods to sell

full capacity

The primary considerations for cash payments are monthly costs associated with

general and administrative expenses, interest payments and taxes, inventory manufactured during the period.

Financial forecasting is essential to the strategic Blank______ of the firm.

growth

Using a systems approach, the first pro forma statement to be constructed is the

income statement

A firm that does not wish to borrow to meet anticipated sales growth may instead decide to

issue preferred stock. issue additional common stock.

Some companies prefer to use the Blank______ inventory accounting method because it provides a higher cost of goods sold value and a lower inventory value during periods of rising prices.

last-in, first out (LIFO)

It is crucial that a firm ensure that adequate cash is available to

meet maturing obligations.

The difference between monthly cash receipts and payments is referred to as

net cash flows.

A company has sales of $1,000,000, cost of goods sold at 60% of sales, general and administrative expenses of $250,000, interest expenses of $25,000, and a tax rate of 40%. The firm's earnings after taxes is

$75,000

Sales growth can be financed through which of the following?

- Insurance of long-term debt. - Sale of common stock - Use of notes payable.

The Blank______ method assumes that accounts on the balance sheet will maintain a given percentage relationship to sales

percent-of-sales

Which approach to determining a firm's financial needs is easier to use but less exacting?

percent-of-sales method

In preparation of the pro forma income statement, which of the following items are deducted from gross profits to arrive at earnings after taxes?

- tax expense - gen and admin expense - interest expense

According to the text, if there is one talent essential to the financial manager it is the ability to

plan ahead and to make necessary adjustments before actual events occur.

Holding cash for emergency purposes is a Blank______ motive.

precautionary

A firm using the FIFO inventory accounting method has beginning inventory of 300 units at a cost of $15 each. During the period the firm produced 700 units at a cost of $17 each. If the firm sold 800 units during the period, the cost of goods sold is

$13,000 Sold 300 units @ $15 and then 500 units @ $17, for a total of 800 units sold (200 remain in inventory @ $17) thus, CoGs = 13,000 300x$15=$4,500 500x$17=$8,500 $4,500+$8,500=$13,000

A firm anticipates cash receipts for February of $20,000 and for March of $30,000. Cash payments are expected to be $5,000 in February and $7,000 in March. The cash balance at the beginning of February was $6,000, which is the level the firm wishes to maintain. At the beginning of February, the firm has a $21,000 loan balance on a line of credit with a local bank. Based on the cash budget, how much can the firm repay in February and March?

$15,000 & $6,000, respectively, with a $23,000 cash balance at the end of March. FEBRUARY 15K (Feb Net CF) + 16K (Beg Cash Bal) = 21K (Cum Cash Bal - 6K End Cash Bal = $15K) MARCH 23K (Mar Net CF) + 6K (Beg Cash Bal) = 29K (Cum Cash Bal - 6K Feb Repayment = 23K Mar End Cash Balance

Following the steps needed to develop the pro forma income statement. Place each step in its proper order.

1) establish a sales projection 2) determine a production schedule 3) compute other expenses 4) determine profit

A company anticipates monthly sales of $300,000 for the months of April, May, June, and July. Materials represent 50% of sales, and because of level production, material purchases will be equal for each month. Materials are paid for one month after the month purchased. Labor costs are $16,000 in April, $19,000 in May, $16,000 in June, and $21,000 in July. Fixed overhead is $12,000 per month. General and administrative expenses are $2,000 per month, interest expense of $2,500 is paid in May, and new equipment of $10,000 is also purchased in May. What are the company's total cash payments in May?

195,500

A firm sells 500,000 widgets at $40 each, the cost of the widgets is $25 each, expected general and administrative expenses are 20% of sales, the firm has $2,000,000 of debt at a rate of 5%, and taxes are 35%. Calculate the firm's earnings after taxes?

2,210,000

A firm wishes to maintain a cash balance of $8,000 at all times. The cash budgets reveals that that the firm will go below this amount in the month of May. To maintain the desired cash balance, the firm must

borrow additional funds.

A company anticipates monthly sales of $400,000 (i.e., per month in January, February, March, and April). Material cost of each month represent 55% of sales of that month and due to level production, material purchases will be equal for each month. Labor costs are expected to be $15,000 in January, $18,000 in February, $14,000 in March, and $19,000 in April. Fixed overhead is $10,000 per month. General and administrative expenses are $2,500 per month, an interest expense of $2,500 is paid in March, new equipment is purchased for $10,000 in February, and a dividend of $3,000 is paid in March. The company's total cash payments in March are

252,000

A firm anticipates a 30% growth in sales this coming year. Last year the firm had the following figures expressed as a percentage of sales: cash at 10%, accounts receivable at 25%, and inventory at 20%. Using the percentage-of-sales forecasting method, what percentage growth in current liabilities is needed to sustain the growth in sales?

30.0%

A firm has total receipts of $16,000, $20,000, & $18,000 and total payments of $12,000, $15,000, & $12,500, in January, February, & March, respectively. The firm's net cash flow for January is

4,000

The firm projects sales at 500,000 units and requires an ending inventory of 25,000 units. If the firm's beginning inventory is 50,000 units, what is the firm's production requirement for the period?

475k = 500k + 25k - 50k

A firm determines that sales will rise from $500,000 to $750,000 next year. The relationship of variable assets to sales is 50% and the relationship of variable liabilities to sales is 20%. The firm has a 10% profit margin and a dividend payout ratio of 30%. What is the level of new funds required?

$22,500 RNF = .5($250k) - .2($250k) - (.1 x $750k) x (1-.3)

The firm has projected sales of $30,000 in June, $25,000 in July, and $20,000 in August. 20% of sales are collected in the month of the sale and 80% are collected in the month following the sale. What are cash receipts in August?

$24,000

A firm using the FIFO inventory accounting method has beginning inventory of 300 units at a cost of $15 each. During the period the firm produced 700 units at a cost of $17 each. If the firm sold 800 units during the period, what is the value of ending inventory?

$3,400

A company has forecasted sales of $50,000 in January, $40,000 in February, and $60,000 in March. All sales are on credit with 50% collected in the month of the sale, 30% collected in the month following the sale, and the remaining amount collected in the second month after the sale. After collections are made in the month of March, what will the accounts receivable balance be?

$38,000

A firm operating at full capacity will require a Blank______ level of new funds than a firm operating at less than full capacity.

Higher

Which of the following is more likely to need to raise additional long-term capital to support its anticipated sales growth?

A firm operating at full capacity

What is the inventory accounting method for inventory that first allocates the cost of current sales to beginning inventory and then to goods manufactured during the period?

FIFO

True or false: The generation of sales and profits ensures adequate cash on hand to meet financial obligations.

False

A company that has the ability to increase sales with its current plant and equipment is said to be Blank______.

Operating at less than full compacity

Which of the following is a projection of future assets, liabilities, and stockholders' equity levels?

Pro forma balance sheet

The importance of the pro forma income statement is to provide a projection of how much Blank______ is anticipated over the ensuing time period.

Profit

The production plan is dependent upon the _____ projection.

Sales

Which of the following two methods provides a month-to-month breakdown of the data?

Systems approach

True or false: 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.

True

The percent-of-sales method for financial forecasting

assumes balance sheet accounts maintain a constant relationship to sales.

The primary purpose of the Blank______ budget is to allow the firm to anticipate the need for outside funding at the end of each month.

cash

The information used to prepare the pro forma balance sheet comes from which of the following:

cash budget prior year's balance sheet pro forma income statement

In developing data for accounts payable for the pro forma balance sheet, the financial manager is most likely to turn to the

cash budget.

When preparing a pro forma income statement, the main consideration is the Blank______ for the time period.

cost of goods sold

The largest expense associated with a merchandising firm is its

cost of goods sold.