Chapter 3 - SB

A firm's earnings and dividends for the year were $39,000 and $11,000, respectively. If the firm had a retained earnings balance of $149,000 at the beginning of the year, what was the firm's retained earnings balance at the end of the year?

$177,000

Place the steps for scenario analysis in their proper order:

1. Identify plausible events that could impact the company. 2. For each scenario, change all inputs in accordance with how they would be impacted by the event. 3. Generate a separate forecast for each event.

Place in order the steps in the planning process for a large company:

1. Top managers determine corporate strategy. 2. Department personnel determine activities to support corporate strategy. 3. Department personnel develop budgets based on department activities. 4. Divisional budgets are integrated to produce the company's financial forecast.

Which of the following is not a step of the planning process in most large companies?

A shareholder planning cycle in which shareholders vote on future corporate strategy.

What adjustments are made to the retained earnings balance for the end of last year to determine the retained earnings balance for the end of this year?

Add this year's net income; subtract this year's dividends

Which of the following is not a technique used to alleviate the uncertainty of pro forma forecasts?

Advanced Estimation

In the context of dealing with uncertainty in pro forma projections, which of the following describes simulation?

Assigning probability distributions to all uncertain inputs to generate a distribution of possible outcomes

Which of the following describes sensitivity analysis?

Changing one of the assumptions in the pro forma statements and observing how the forecast responds

Select all that apply Which of the following financial statement items tend to vary closely in proportion with sales? Multiple select question. Cost of goods sold Property, plant, and equipment Accounts payable Inventory

Cost of goods sold Accounts payable Inventory

Select all that apply Which of the following line items would appear on a cash flow forecast? Multiple select question. Dividends Increase (or decrease) in accounts receivable Net income Increase (or decrease) in long-term debt

Dividends Increase (or decrease) in accounts receivable Net income Increase (or decrease) in long-term debt

When preparing pro forma forecasts, why is it difficult to estimate interest expense?

External funding required is needed to calculate interest expense, and interest expense is needed to calculate external funding required.

True or False 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

True or False An annual financial forecast for 2022 showing no external funding required assures a company that no cash shortfalls are likely to occur anytime during 2022.

False

True or False Cash flow forecasts are more informative than pro forma financial statements.

False

True or False Companies with seasonal financing requirements should only prepare pro forma forecasts for the end of each year.

False

True or False Estimates of external funding required based on cash flow forecasts are usually higher than estimates based on pro forma financial statements.

False

True or False Forecasting interest expense is difficult is primarily because interest rates are very difficult to forecast.

False

True or False In a cash flow forecast, external financing required equals forecasted sources of cash minus forecasted uses of cash.

False

True or False Rough estimates of sales are adequate when preparing pro forma financial statements.

False

True or False Scenario analysis involves changing one input to a financial forecast, whereas sensitivity analysis involves changing multiple inputs.

False

True or False When estimating future financing requirements, a financial executive focuses on the company's income statement.

False

Which of the following is not a step in scenario analysis?

Identify how changing one individual variable will impact the forecast.

Select all that apply Which of the following financial statement items tend to vary closely in proportion with sales? Multiple select question. Inventory Property, plant, and equipment Accounts payable Cost of goods sold

Inventory Accounts payable Cost of goods sold

Which of the following variables is least likely to vary in proportion to sales?

Property, plant, & equipment

In the percent-of-sales approach to forecasting, which of the following forecasts is the most crucial?

Sales

______ is a method used to alleviate the uncertainty surrounding a pro forma forecast in which multiple assumptions are changed simultaneously to reflect a possible economic event.

Scenario analysis

Select all that apply Which of the following are techniques used to deal with the uncertainty of pro forma forecasts? Multiple select question. Scenario analysis Simulation Sensitivity analysis Ratio analysis

Scenario analysis Simulation Sensitivity analysis

______ is a technique used to alleviate the uncertainty associated with pro forma financial forecasts in which only one variable is changed at a time.

Sensitivity Analysis

Which of the following is not an advantage of sensitivity analysis?

Sensitivity analysis allows management to see how one event will impact multiple inputs.

______ is a method for dealing with uncertainty in a pro forma forecast in which probability distributions are assigned to each input and computer software is used to generate a distribution of possible outcomes.

Simulation

Financial executives are most often interested in which of these financial statements?

The balance sheet

Which of the following is the most important reason for producing pro forma forecasts?

To determine the need for future external funding.

True or False A cash budget lists projected cash receipts and disbursements over a forecast period.

True

True or False A major purpose of pro forma financial statements is to estimate future external funding requirements.

True

True or False A pro forma balance sheet is a prediction of what a company's balance sheet will look like at the end of a forecast period.

True

True or False All else equal, increasing the assumed payables period in a financial forecast will decrease external funding required.

True

True or False All else equal, increasing the projected amount of accounts receivable in a financial forecast will increase external funding required.

True

True or False As the planning cycle for a large company moves from broad strategy to implementation, the tools of financial forecasting become more important.

True

True or False Cash budgets are based on cash accounting rather than accrual accounting.

True

True or False Given the same assumptions, cash flow forecasts and pro forma projections will yield the same need for external funding.

True

True or False One advantage of sensitivity analysis is that it helps managers focus on the factors most critical to the financial plan's success.

True

True or False Pro forma statements, cash flow forecasts, and cash budgets all produce the same estimate of external funding required.

True

True or False Scenario analysis is a method to deal with uncertainty in a pro forma forecast in which multiple assumptions are changed simultaneously to simulate a particular economic event.

True

True or False The forecast for retained earnings on the year-end 2022 balance sheet can be determined as retained earnings on the year-end 2021 balance sheet plus projected 2022 after-tax earnings less projected 2022 dividends.

True

True or False Pro forma statements, cash flow forecasts, and cash budgets all produce the same estimate of external funding required.

True

After producing a pro forma balance sheet, a firm's management predicts that at the end of the year, assets will equal $200 million, liabilities will equal $70 million, and shareholders' equity will equal $90. As a result of this forecast, management will need to:

acquire additional funding of $40 million during the year.

As the planning cycle for a large company moves from broad strategy to implementation, the tools of financial forecasting:

become more important

A ______ is a listing of all anticipated sources and uses of cash by the company over the forecast period.

cash flow forecast

In a ______, external funding required is defined as the difference between forecasted uses of cash and forecasted sources of cash.

cash flow forecast

After producing a pro forma balance sheet, a firm's management predicts that at the end of the year, assets will equal $150 million, liabilities will equal $70 million, and shareholders' equity will equal $90. As a result of this forecast, management will need to:

find a use for the additional $10 million in cash that will be generated during the year.

Compared to pro forma financial statements, cash flow forecasts are ______ useful than pro format financial statements because ______.

less; they do not provide information that is useful for evaluating the company's ability to raise the external financing required.

A cash budget:

lists projected cash receipts and disbursements to forecast cash shortages or surpluses.

Pro forma financial statements are applicable:

only on the forecast date.

A pro forma financial statement is a ______ financial statement.

projected

When using the same assumptions, the value for external financing required using a cash budget will be:

the same as it will be for a cash flow forecast or a pro forma forecast.