ch 11

Which of the following are forms of pro forma statements? income statements balance sheets costs of goods sold a and b

a and b

A gross margin ratio of 38 percent means that for every $1 of sales, a firm produces 62 cents of gross margin.

false

Pro forma statements show the firm's present financial position.

false

A key concept in developing an expense budget is that of

fixed costs

The first step in the preparation of the cash flow budget is the

identification and timing of cash inflows.

Production requirements are figured by subtracting the period's beginning inventory from

inventory needed for that period.

In the production budget for a manufacturing firm, the number of units needed in inventory is determined by

the sum of the desired ending inventory and the number of units to be sold.

Horizontal analysis looks at financial statements over time.

true

The cash-flow budget provides an overview of cash inflows and outflows for the budget period.

true

The first step in creating an operating budget is to prepare the sales forecast.

true

The first type of expense to be estimated when preparing an operating budget is cost of goods sold.

true

The handling questionable costs approach of break-even analysis was specifically designed for entrepreneurship firms.

true

The principal objective of capital budgeting is to maximize the value of the firm.

true

Investments in which returns are expected to extend beyond one year are referred to as

capital investments.

In handling questionable costs, the cost in question is substituted first as a _____ and then as a _____.

fixed cost; variable cost

Net present value method is a capital budgeting technique that helps to minimize some of the shortcomings of the payback method by

recognizing future cash flows beyond the payback period.

When using the internal rate of return method, the future cash flows are discounted at a rate that makes the net present value equal to

zero.

When using trend line analysis, how many periods are required?

5

One type of budget used by the entrepreneur is

an operating budget.

A method that discounts future cash flows at a rate that makes the net present value of the project equal to zero is known as

internal rate of return.

After the firm has forecast its sales for the budget period

expenses are estimated.

The set of assumptions on which financial projections are based have little meaning.

false

Which of the following is a decision rule for handling questionable costs? If expected sales are between the two break-even points, the questionable costs behavior needs to be dropped. If expected sales don't exceed the higher break-even point, the product should be profitable. The product should not be profitable if expected sales do not exceed the lower break-even point. Decide which questionable costs to ignore.

The product should not be profitable if expected sales do not exceed the lower break-even point.

An inventory turnover ratio of 9.80 means that the average dollar volume of inventory is used up almost _____ times during the fiscal year

10

Break-even analysis is used to assess

expected product profitability.

One of the easiest capital budgeting methods to understand is

the payback method.

Accounts receivable turnover measures the rate at which accounts receivable are being collected on an monthly basis.

false

An entrepreneur must graph at least two numbers, total sales and total expenses, when using the graphic approach for break-even analysis.

false

Financial information pulls together all the information presented in the other segments of the business.

true

The cash flow budget describes

cash inflows/cash outflows.

The principle objective of capital budgeting is to

maximize the value of the firm.

How many months of the year should be illustrated in the first pro forma income statement?

12

The contribution margin approach formula is

FC = (SP - VC) S

The traditional accounting equation that verifies the accuracy of the entrepreneur's balance sheet is

assets = liabilities + owners' equity.

Despite the drawbacks of the payback method, the entrepreneur should continue to use it because

it is very simple to use in comparison with other methods.

Financial information is important to entrepreneurs because:

it pulls together all the information presented in other segments of the business. it quantifies all the assumptions concerning business operations.

A budget that is a statement of estimated income and expenses over a specified period of time is referred to as an

operating budget.

The first step in constructing an operating budget is

preparation of the sales forecast.

Loan proceeds are not directly tied to

sales revenue.

Capital budgeting is designed to show

how many projects, in total, should be selected.

Many companies continue to use the payback method. It is

more favorable in its short-term effects on earnings.

In the simple linear regression analysis equation, Y = a + bx, x represents

the factor on which sales are dependent.

The pro forma income statement is prepared before the pro forma balance sheet.

true

The typical business will have cash inflows from three sources: cash sales, cash payments received on account, and loan proceeds.

true

Vertical analysis is the application of ratio analysis to all of the financial statements to find accounting mistakes.

true

The last step in preparing the operating budget is to

estimate operating expenses.

Contribution margin is the difference between the selling price and the fixed cost per unit.

false

It is typical for a firm to prepare an operating budget but not a cash budget.

false

The first step in the preparation of the cash flow budget is the identification and timing of cash outflows.

false

More established ventures will use a sales forecast model where the estimation of current sales will increase a certain percentage over the prior period's sales. This percentage is based upon

a trend line analysis

Using regression analysis to estimate the relationship between expected sales and another variable is rarely used.

false

Contribution margin is the difference between

selling price and variable cost per unit.

Contained in the pro forma balance sheet is

the cost budget.

Cash inflows come from

cash sales

Which of the following statements is not true about financial assumptions? They explain how the numbers are derived. They should be clear and precise. They are the most integral part of the financial segment. They do not necessarily correlate with information from other parts of the business.

They do not necessarily correlate with information from other parts of the business.

The concept of the net present value method works on the premise that

a dollar today is worth more than a dollar in the future.

A manufacturing firm needs to establish which of the following budgets? a profit budget a material purchases budget a cost budget an accounting budget

a material purchases budget

A variable cost

changes in the same direction and in direct proportion to changes in operation activity.

The rate used to adjust future cash flows to determine their value in present-period terms is the

cost of capital.

Break-even analysis is a technique commonly used to assess the

expected product profitability.

When using the graphic approach to break-even analysis, the entrepreneur must plot which of the following? total revenue and total costs total expenses and total revenue total costs and total income total income and total expenses

total revenue and total costs

A budget is one of the most powerful tools that an entrepreneur can use in planning business operations.

true

After the operating budget has been prepared, an entrepreneur can proceed to the next phase of the budget process, the cash flow budget.

true

Break-even analysis is used to tell how many units must be sold in order to break even at a particular selling price.

true

Capital budgeting is used to help the entrepreneur plan for capital expenditures.

true

Capital investments or capital expenditures are expected to last beyond one year.

true

For a manufacturing firm, the production budget represents

the number of units that must be produced in order to meet the sales forecast.

Ratio analysis can be applied from which of the following directions? vertical only vertical and horizontal horizontal only external and internal

vertical and horizontal

The traditional accounting equation is: assets + liabilities = owner's equity.

false

Comparing financial numbers in order to make decisions is referred to as:

ratio analysis.

Which of the following are needed in preparing a pro forma balance sheet? the last balance sheet prepared before the budget period began assets liabilities owners equity

the last balance sheet prepared before the budget period began