Question 1

Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2004, for Saw
Lumber, Inc.

Saw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000.  Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2004.  The income statement for the year ended December 31, 2003
is shown below.
Income Statement
Saw Lumber, Inc.
For the Year Ended December 31, 2003
$\begin{array}{lc}
\text { Sales Revenue } & \$ 4,200,000 \
\text { Less: Cost of goods sold } & 3,570,000 \
& -\cdots \cdots \cdot-\cdot \
\text { Gross profits } & \$ 630,000 \
\text { Less: Operating expenses } & 210,000\& -\cdots \cdots \cdot-\cdot \
\text { Operating profits } & \$ 420,000 \
\text { Less: Interest expense } & 105,000 \
& -\cdots-. \
\text { Net income before taxes } & \$ 315,000 \
\text { Less: Taxes }(40 \%) & 126,000\& -\cdots-. \
\text { Net income after taxes } & \$ 189,000 \
\text { Less: Cash dividends } & 120,000 \& -\cdots-. \
\text { To: Retained earnings }&\$69,000
\end{array}$
-The pro forma operating expenses for 2004 are_____________

Accepted Answer

The operating expenses are calculated using the percent-of-sales method. The sales are expected to increase from $4,200,000 to $4,500,000, which is an increase of approximately 7.14%. Applying this percentage increase to the 2003 operating expenses of $210,000 gives $225,000 for 2004.

Question 2

Nortel Networks is concerned about their forecasting accuracy; as such, Nortel should

Accepted Answer

Nortel Networks should prepare cash budgets using worst-case, base-case, and best-case scenarios to improve their forecasting accuracy. This will allow them to prepare for any potential financial challenges and make informed decisions based on different possible outcomes. Option A is not a feasible solution as it would result in significant losses for stakeholders, while Option B is not a practical approach as forecasting cash flows is essential for businesses to make strategic decisions. Option D is also not advisable as it assumes that things will automatically work out without taking potential risks and challenges into account.

Question 3

The___________ method of developing a pro forma balance sheet estimates values of certain balancesheet accounts while others are calculated. In this method, the firm's external financing is used as abalancing, or plug, figure.

Accepted Answer

The judgmental method involves estimating certain balance sheet accounts and using external financing as a plug figure to balance the sheet.

Question 4

Cash disbursements may include all of the following EXCEPT

Accepted Answer

Cash disbursements include payments for expenses such as rent, taxes, and fixed asset outlays. Amortization expense, however, is a non-cash expense that does not result in a cash disbursement.

Question 5

A weakness of the percent-of-sales method to preparing a pro forma income statement is

Accepted Answer

The percent-of-sales method assumes that past financial conditions and relationships will continue into the future, which may not always be accurate.

Question 6

For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma incomestatement tends to

Accepted Answer

The percent-of-sales approach assumes that fixed costs remain constant as sales volume changes, which is not the case for firms with high fixed costs. As sales increase, the firm's total profit should increase at a faster rate than the percentage increase in sales. Therefore, the percent-of-sales approach tends to underestimate profits when sales are increasing for firms with high fixed costs.

Question 7

The net cash flow for February is____________
$$\begin{array}{l}\begin{array} { l r l } 
&\text { Sportif, Inc. }\
\text { Month } &{ \text { Sales } } & \text { Disbursements } \
\text { January } & \$ 5,000 & \$ 6,000 \
\text { February } & 6,000 & \$ 7,000 \
\text { March } & 10,000 & \$ 4,000 \
\text { April } & 10,000 & \$ 5,000 \
\text { May } & 10,000 & \$ 5,000
\end{array}
\end{array}$$

Accepted Answer

The net cash flow for February is calculated by subtracting disbursements from sales: $6,000 - $7,000 = -$1,000.

Question 8

The key input to the short-run financial planning process is

Accepted Answer

The sales forecast is the key input to the short-run financial planning process as it helps predict the level of cash inflows from sales. Without an accurate sales forecast, it is difficult to create a reliable cash budget or pro forma income statement. While the cash budget and cash forecast are important components of short-run financial planning, they are both outputs that rely on the accuracy of the sales forecast as an input.

Question 9

The weakness of the judgmental approach to preparing a pro forma balance sheet is

Accepted Answer

The judgmental approach assumes that certain accounts can be manipulated to achieve desired levels, which may not be a realistic assumption in practice. This approach relies heavily on subjective estimates and assumptions, which may lead to inaccuracies in the pro forma balance sheet.

Question 10

In October, a firm had an ending cash balance of $35,000. In November, the firm had a net cash flow of $40,000. The minimum cash balance required by the firm is $25,000. At the end of November, the firm

Accepted Answer

The firm had an ending cash balance of $35,000 in October, and it had a net cash flow of $40,000 in November. Therefore, the total cash available at the end of November is: 
$35,000 + $40,000 = $75,000
The minimum cash balance required by the firm is $25,000, so the excess cash balance is: 
$75,000 - $25,000 = $50,000
Therefore, the firm had an excess cash balance of $50,000.

Question 11

In the month of August, a firm had total cash receipts of $10,000, total cash disbursements of $8,000,depreciation expense of $1,000, a minimum cash balance of $3,000, and a beginning cash balance of$500. for August is

Accepted Answer

To calculate the ending cash balance, we need to start with the beginning cash balance of $500, add the total cash receipts of $10,000, and subtract the total cash disbursements of $8,000, and the depreciation expense of $1,000.
$500 + $10,000 - $8,000 - $1,000 = $1,500
Since the minimum cash balance is $3,000, the firm requires financing of $1,500 - $3,000 = -$1,500. However, since the firm already has a beginning cash balance of $500, it only requires additional financing of $1,500 - $500 = $1,000. Therefore, the answer is B.

Question 12

Assuming a zero cash balance at the start of January, the cash balance at the end of March is. _____________
$$\begin{array}{l}\begin{array} { l r l } 
&\text { Sportif, Inc. }\
\text { Month } &{ \text { Sales } } & \text { Disbursements } \
\text { January } & \$ 5,000 & \$ 6,000 \
\text { February } & 6,000 & \$ 7,000 \
\text { March } & 10,000 & \$ 4,000 \
\text { April } & 10,000 & \$ 5,000 \
\text { May } & 10,000 & \$ 5,000
\end{array}
\end{array}$$

Accepted Answer

The answer of Assuming a zero cash balance at the...

Question 13

A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2004.   Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions.

A.   The firm estimates sales of $1,000,000.
B.    The firm maintains a cash balance of $25,000.
 
C.   Accounts receivable represents 15 percent of sales. D.   Inventory represents 35 percent of sales.
E.    A new piece of mining equipment costing $150,000 will be purchased in 2004.
Total depreciation for 2004 will be $75,000.
F. 	Accounts payable represents 10 percent of sales.
G.   There will be no change in notes payable, accruals, and common stock.
H.   The firm plans to retire a long term note of $100,000. I. 	Dividends of $45,000 will be paid in 2004.
J. 	The firm predicts a 4 percent net profit margin.
Balance Sheet
General Talc Mines
December 31, 2003
Assets
$\begin{array}{lr}
\hline\text { Cash } & \$ 25,000 \
\text { Accounts receivable } & 120,000 \
\text { Inventories } & 300,000 \
& -\ldots . . . \
\quad \text { Total current assets } & \$ 445,000 \
\text { Net fixed assets } & \$ 500,000\& -\ldots . . . \\text { Total assets }&\$945,000\\
\text { Liabilities and stockholders' equity }\\hline\text { Accounts payable } & \$ 80,000 \
\text { Notes payable } & 350,000 \
\text { Accruals } & 50,000\& -\ldots . . . \
\text { Total current liabilities } & \$ 480,000 \
\text { Long-term debts } & 150,000\
\text { Total liabilities } & \$ 630,000 \
\text { Stockholders' equity } & \
\text { Common stock } & \$ 180,000 \
\text { Retained earnings } & 135,000\\text { Total stockholders' equity } & \$ 315,000 \
\text { Total liabilities and stockholders' equity } & \$ 945,000
\end{array}$
-The pro forma current liabilities amount is___________

Accepted Answer

The pro forma current liabilities are calculated as follows: Accounts payable (10% of $1,000,000 sales) = $100,000; Notes payable = $350,000; Accruals = $50,000. Total current liabilities = $100,000 + $350,000 + $50,000 = $500,000.

Question 14

The most common cash disbursement are

Accepted Answer

Cash purchases and accounts payable involve the payment of cash to suppliers for goods or services received, while dividends are payments of cash to shareholders. Interest income and rent are sources of cash inflows, rather than outflows. Cash sales and accounts receivable are sources of cash inflows, rather than disbursements.

Question 15

In April, a firm had an ending cash balance of $35,000.$40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firmis $25,000. At the end of May, the firm

Accepted Answer

The answer of In April, a firm had an ending...

Question 16

A firm plans to depreciate a five year asset in the next planning period.directly affected immediately are the

Accepted Answer

Depreciation is a non-cash expense that affects the pro forma income statement by reducing taxable income and net income. It also affects the pro forma balance sheet by reducing the value of the asset being depreciated and the accumulated depreciation account. Therefore, the correct choice is D as depreciation directly affects both the pro forma income statement and pro forma balance sheet.

Question 17

A projected excess cash balance for the month may be

Accepted Answer

Projected excess cash balance for the month should be invested in marketable securities, which are short-term securities with maturities less than one year. This allows the company to earn interest on the excess cash until it is needed for future operations or investment opportunities. Financing with long-term securities (choice A) is not appropriate for short-term excess cash balances, as these securities have longer maturities and are typically used for larger financing needs. Financing with short-term securities (choice B) is not necessary as the company already has excess cash, and these securities may incur additional expenses such as issuance costs. Investing in long-term securities (choice C) would not be appropriate as the company may need to access the cash in the near future, so they should invest in securities with shorter maturities to ensure liquidity.

Question 18

Generally, firms that are subject to high degree of____________ , relatively short production cycles, orboth tend to use shorter planning horizons.

Accepted Answer

Firms that face high operating uncertainty, such as those with volatile demand or variable input costs, may find it difficult to accurately forecast future demand and costs beyond a short period of time. Similarly, firms with short production cycles may only need to plan a few weeks or months ahead in order to meet customer demand and avoid excess inventory. Therefore, these types of firms tend to use shorter planning horizons. Option A is incorrect because profitability alone does not necessarily determine planning horizons. Option C is incorrect because financial certainty may lead to longer planning horizons, as the firm has a clearer understanding of its financial position. Option D is also incorrect because financial planning refers to the process of setting financial goals and developing strategies to achieve them, rather than the length of the planning horizon.

Question 19

In order to prepare a cash budget, the finance department would need

Accepted Answer

The cash budget is a financial plan that summarizes the expected cash inflows and outflows of a company over a specific period of time. It is used to ensure that the company has sufficient cash on hand to meet its obligations and to plan for future cash needs. The fixed asset outlay plan, the pro forma income statement, and the long-term financing plan are all important inputs to the cash budget, as they provide information about the company's expected capital expenditures, revenues, and expenses.

Question 20

The percent-of-sales method of preparing the pro forma income statement assumes all costs are

Accepted Answer

The percent-of-sales method assumes that all costs vary directly with sales, meaning they are considered variable.

Quiz 4: Financial Planning and Forecasting