Ch.12
Due to competitive pressures, Gertup has had to increase credit terms to customers to maintain sales. This resulted in Gertup's accounts receivable doubling from 12/31/04 to 12/31/05. The average accounts receivable turnover was 30 days. Without the increased credit terms, accounts receivable turnover would have remained at 12/31/04 levels. The impact of the change in credit policy was:
Decreased liquidity and decreased available cash
What is the correct order of the following steps in preparing a projected income statement (not all steps may be shown)?
I. Project future net sales II. Project future net income III. Project future cost of goods sold IV. Project future interest expense
If a company's cost of capital increases unexpectedly, which of the following actions will help it maintain or increase its stock price?
Increase its gross Margin
You construct a pro forma income statement and balance sheet in order to estimate the amount a company needs to borrow in the forthcoming period. If assets are greater than liabilities plus equity, this means the company needs to borrow money.
true
Pro forma financial statements are another name for common-size financial statements.
True
Projected accounts receivable can be calculated by dividing projected sales by accounts receivable turnover rate.
True
The accuracy of a cash flow forecast is inversely related to the forecast horizon.
True
The assumptions made about future changes in a company have a great effect on the quality of the projected financial statements.
True
The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are:60% of sales are made for cash. Simmons expects to receive 20% in the month following the sale and 15% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received. The cash inflows in March from sales will be:
March sales 300 * 50% = 150 Feb Sales 220 * 25% = 55 January sales f200 * 20% = 40 Cash inflows in march = 150 + 55 + 40 = 245
