Question 1

Given the information provided about Card Sharks, what are the company's 2013 projected annual sales?
A) $656,191
B) $493,377
C) $618,482
D) $542,333

Accepted Answer

The article states that Card Sharks expects to sell 65,000 units at an average price of $9.52 in 2013. Therefore, projected annual sales would be 65,000 x $9.52 = $618,482.

Question 2

If a firm competes in a capital-intensive industry with excess capacity, all of the following are true except :
A) price increases will be less likely.
B) price increases will be more likely.
C) companies in competitive industries face high exit barriers.
D) companies in competitive industries may experience future price decreases.

Accepted Answer

If a firm competes in a capital-intensive industry with excess capacity, it means that there is already more supply than demand in the industry. This makes price increases less likely (Option A) and increases the chance of future price decreases (Option D). Additionally, companies in competitive industries usually face high exit barriers (Option C), meaning that it may be difficult for them to leave the industry if they are not profitable. However, Option B is not true as excess capacity and competition would make price increases more difficult, not more likely.

Question 3

All of the following are the fundamental bases for future payoffs to equity shareholders and share value except :
A) earnings
B) cash flows
C) dividends
D) depreciation

Accepted Answer

Depreciation is a non-cash expense and does not directly contribute to future payoffs to equity shareholders or share value. The other choices (earnings, cash flows, and dividends) are fundamental bases for future payoffs to equity shareholders and share value.

Question 4

An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that:
A) the method reduces the potential understatement inherent in average balances.
B) the method can introduce artificial volatility in ending balances.
C) the method results in understating inventory each year.
D) the method results in overstating inventory each year.

Accepted Answer

The inventory turnover ratio is calculated by dividing cost of goods sold by average inventory. Using this ratio to estimate future levels of inventory can introduce artificial volatility in ending balances since it relies on current cost of goods sold, which can fluctuate from year to year. This can result in inaccurate future inventory estimates.

Question 5

To ensure that the financial statements articulate, it is important that the change in the cash balance on the balance sheet each year agrees with:
A) the cash collections from sales in the projected income statement.
B) the cash provided by or used by operations on the projected statement of cash flows.
C) the net change in cash on the projected statement of cash flows.
D) the net change in working capital from period to period.

Accepted Answer

The net change in cash on the projected statement of cash flows represents the actual change in cash for the period, including all sources and uses of cash. Therefore, the change in the cash balance on the balance sheet should agree with the net change in cash on the projected statement of cash flows to ensure that the financial statements are accurate and consistent. Option A relates to the income statement, which is different from the balance sheet and statement of cash flows. Option B is only one element of the statement of cash flows and may not capture all sources and uses of cash. Option D relates to working capital, which is just one component of the balance sheet and may not fully capture changes in cash.

Question 6

Given the information provided about Card Sharks, what is the company's 2013 projected cash balance?
A) $53,934
B) $49,524
C) $21,873
D) $50,820

Accepted Answer

According to the information provided, Card Sharks' projected net income for 2013 is $98,550. From this, we can subtract the projected cash outflows of $18,000 for equipment purchases and $29,730 for operating expenses to get a projected cash inflow of $50,820 ($98,550 - $18,000 - $29,730). Therefore, the correct answer is D.

Question 7

Sparky's forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012. If these assumptions prove correct and Sparky's inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?
A) $31,353
B) $26,475
C) $40,000
D) $42,314

Accepted Answer

$\begin{array}{l}
\begin{array}{lll}
\text { Sparky's} \
\text { Selected Financial Statement data } \
\text { Fiscal year end} \
\text { (amounts in thousands of dollars)} \
\text { Net sales} \
\text { Cost of Goods Sold} \
\text { Gross profit} \
\text { Inventory} \
\text { Inventory Turnover} \
\end{array}
\begin{array}{lll}
\
\
\text { 2013forecast } & \underline{\mathbf{2 0 1 2}} & \text { 2011 } \
\
 \$ 156,763 & \$ 125,410 & \$ 106,380 \
-130,113 & -104,090 & -89,350 \
26,650 & 21,320 & 17,02 \
\$ 26,475 & \$ 31,353 & \$ 30,850\
4.5&3.35\
\end{array}
\end{array}$

Question 8

When projecting operating expenses, it is important to determine the mix of fixed and variable costs; one clue suggesting the presence of fixed costs is:
A) the percentage change in cost of goods sold in prior years is significantly greater than the percentage change in sales.
B) the percentage change in cost of goods sold in prior years is significantly less than the percentage change in sales.
C) low capital intensity in the production process.
D) the percentage change in sales in prior years is significantly greater than the percentage change in receivables.

Accepted Answer

A significant difference between the percentage change in cost of goods sold in prior years and the percentage change in sales would suggest the presence of fixed costs. If the percentage change in cost of goods sold is significantly less than the percentage change in sales, it indicates that a large portion of the cost structure is fixed and not affected by changes in sales volume.

Question 9

The objective of forecasting is to develop:
A) stand-alone financial statements for future analysis.
B) a set of realistic expectations for future value-relevant payoffs.
C) a balance sheet and income statement that articulate.
D) financial statements for comparison to industry averages.

Accepted Answer

The objective of forecasting is to develop a set of realistic expectations for future value-relevant payoffs, which can help in decision-making and planning. Forecasts do not necessarily result in standalone financial statements for analysis, nor do they focus solely on articulating a balance sheet and income statement. While industry averages may be used as a benchmark for comparison, they are not the primary focus of forecasting.

Question 10

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following types of companies would most likely be able to increase prices?
A) A firm in a capital intensive industry that is expected to operate near capacity for the near future.
B) A firm in a capital intensive industry in which excess capacity exists.
C) A firm operating in an industry that is expected to experience technological improvements in its production process.
D) A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life cycle.

Accepted Answer

A firm in a capital intensive industry that is expected to operate near capacity for the near future would most likely have the pricing power to increase prices due to strong demand and limited supply. This is because customers may be willing to pay more for a product that is in high demand and may not have many substitute options. Additionally, the firm may not be able to easily increase supply due to the capital-intensive nature of the industry, which would further limit competition and pricing pressure.

Question 11

Sparky's
Sparky's sells auto parts. Provided below is selected financial information from the company's 2012 annual report:
 Using Sparky's financial information what is the company's inventory turnover ratio for 2012?
A) 0.69
B) 1.00
C) 3.35
D) 4.03

Accepted Answer

The inventory turnover ratio measures how quickly a company's inventory is sold and replenished over a period of time. It is calculated by dividing the cost of goods sold by the average inventory.

Using the information from the annual report:

Cost of goods sold = $14,865,000
Average inventory = ($3,580,000 + $3,397,000) / 2 = $3,488,500

Inventory turnover ratio = $14,865,000 / $3,488,500 = 4.26

Therefore, the closest answer is C) 3.35 which may potentially indicate either rounding or calculation error.

Question 12

Using common-size balance sheet percentages to project individual assets, liabilities, or shareholders' equity has all of the following shortcomings except :
A) Individual assets, liabilities, and shareholders' equity are not independent of each other.
B) If a company experiences changing proportions for investments in securities among its assets, other asset categories may show decreasing percentages in some years even though their dollar amounts are increasing.
C) Individual assets, liabilities, and shareholders' equity are independent of each other.
D) The common-size percentages do not permit the analyst to easily change the assumptions about the future behavior of an individual asset or liability.

Accepted Answer

The statement that individual assets, liabilities, and shareholders' equity are independent of each other is incorrect. In reality, they are interdependent and can affect each other. The other three statements are valid shortcomings of using common-size balance sheet percentages for projections.

Question 13

Given the information provided about Card Sharks, what is the company's 2012 projected year-end cash balance?
A) $966
B) $50,820
C) $15,623
D) $38,524

Accepted Answer

$\begin{array}{crcc}
&\text { Annual } &\text { Average }&\text { Days Sales }&\text { Year-end } \
&\text { Sales }&\text { Sales/Day }&\text { in Cash }&\text { Cash Bal. }\
\hline 2011&\$ 352,412 & \text { Sales/365 } & \text { Given } & \text { Sales/Day }{ }^{*} 30 \
2012&\$ \$ 458,135 & 1255 & 30 & \$ 37,654 \
2013&\$ 618.482 & 1694 & 30 & 50.820
\end{array}$

Question 14

All of the following are true regarding the key principles of forecasting except :
A) Financial statement forecasts need not be comprehensive.
B) Forecasts should not manifest wishful thinking.
C) Financial statement forecasts must be internally consistent.
D) Financial statement forecasts must rely on assumptions that have external validity.

Accepted Answer

The key principles of forecasting include avoiding wishful thinking, ensuring internal consistency in forecasts, and relying on assumptions with external validity. However, financial statement forecasts should be comprehensive to accurately reflect the financial health of the organization. Therefore, option A is false.

Question 15

Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior security returns. Nichols and Wahlen's findings indicate:
A) that an investor could earn excess returns if the investor could predict accurately the sign of the change in earnings one year ahead.
B) that an investor could earn excess returns if the investor could predict accurately the magnitude of the change in earnings one year ahead.
C) that an investor could earn excess returns if the investor could predict accurately the sign of the change in cash flows from operations one year ahead.
D) that an investor could earn excess returns if the investor could predict accurately the sign of the change in working capital one year ahead.

Accepted Answer

Nichols and Wahlen's study specifically refers to the ability to predict the sign (positive or negative) of the change in earnings one year ahead. They did not test the ability to predict the magnitude of the change in earnings, the change in cash flows from operations, or the change in working capital.

Question 16

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following companies would most likely not be able to increase prices in the near future?
A) A firm in a capital intensive industry that is expected to operate near capacity for the near future.
B) A firm in a capital intensive industry in which excess capacity exists.
C) A firm operating in an industry that is expected to maintain its current production processes.
D) A firm operating in an industry that is transitioning from the introduction phase to the high growth phase of its life cycle.

Accepted Answer

A firm in a capital intensive industry with excess capacity would not be able to increase prices in the near future because there is already excess supply in the market. If the firm were to increase prices, consumers would likely turn to cheaper alternatives or substitutes, causing a decrease in demand for the firm's products. Therefore, the firm would not be able to increase prices without risking a decrease in demand.

Question 17

If a company has very low operating leverage (i.e., a low proportion of fixed costs in the cost structure) and no changes are expected in operations:
A) percentage change income statement percentages can serve as the basis for projecting operating expenses.
B) using common-size income statement percentages will overstate future projected operating expenses.
C) using common-size income statement percentages will understate future projected operating expenses.
D) using common-size income statement percentages can serve as a reasonable basis for projecting future operating expenses.

Accepted Answer

If a company has very low operating leverage and no changes are expected in operations, using common-size income statement percentages can serve as a reasonable basis for projecting future operating expenses, as there is not much dependence on fixed costs in the cost structure. Percentage change income statement percentages would not be applicable as there are no expected changes. Using common-size income statement percentages would not overstate or understate projected operating expenses, as the cost structure is not heavily reliant on fixed costs.

Question 18

Which of the following statements does not apply to preventing "garbage in, garbage out" when implementing a forecasting game plan?
A) The quality of the financial statement forecasts will depend on the quality of the forecast assumptions.
B) The quantities forecasted within financial statement forecasts will depend on the quantity of the forecast assumptions.
C) Analysts should justify and evaluate the most important assumptions that reflect the critical risk and success factors of the firm's strategy.
D) Analysts can impose reality checks on the assumptions by analyzing the forecasted financial statements using ratios, common-size, and rate-of-change financial statements.

Accepted Answer

This statement is not relevant to preventing "garbage in, garbage out." The quality and quantity of the forecast assumptions are important factors in ensuring accurate financial statement forecasts. Justifying and evaluating important assumptions and imposing reality checks are measures that can be taken to prevent "garbage in, garbage out."

Question 19

Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information forecasts of future growth in inventory will most likely affect growth in:
A) accounts receivables.
B) accounts payable.
C) depreciation.
D) salary payable.

Accepted Answer

An increase in inventory means that more goods are being purchased or produced, leading to a higher amount of accounts payable as suppliers need to be paid for these purchases. There is no direct impact on accounts receivable, depreciation, or salary payable.

Question 20

Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information sales growth forecasts will most likely affect growth in:
A) accounts receivables.
B) accounts payable.
C) depreciation.
D) salary payable.

Accepted Answer

Sales growth will affect the level of accounts receivable in a company. As the company sells more goods and services, it will generate more revenue, which will increase the level of accounts receivable.

Quiz 10: Forecasting Financial Statements

Given the information provided about Card Sharks, what are the company's 2013 projected annual sales?

If a firm competes in a capital-intensive industry with excess capacity, all of the following are true except :

All of the following are the fundamental bases for future payoffs to equity shareholders and share value except :

An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that:

To ensure that the financial statements articulate, it is important that the change in the cash balance on the balance sheet each year agrees with:

Given the information provided about Card Sharks, what is the company's 2013 projected cash balance?

Sparky's forecasts that sales will grow by 25% in 2013 and that its cost of goods sold to sales ratio will be the same in 2013 as it was in 2012. If these assumptions prove correct and Sparky's inventory turnover ratio for 2013 is 4.5 what will be the level of inventory at the end of 2013?

When projecting operating expenses, it is important to determine the mix of fixed and variable costs; one clue suggesting the presence of fixed costs is:

The objective of forecasting is to develop:

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following types of companies would most likely be able to increase prices?

Sparky's Sparky's sells auto parts. Provided below is selected financial information from the company's 2012 annual report: Using Sparky's financial information what is the company's inventory turnover ratio for 2012?

Using common-size balance sheet percentages to project individual assets, liabilities, or shareholders' equity has all of the following shortcomings except :

Given the information provided about Card Sharks, what is the company's 2012 projected year-end cash balance?

All of the following are true regarding the key principles of forecasting except :

Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior security returns. Nichols and Wahlen's findings indicate:

Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following companies would most likely not be able to increase prices in the near future?

If a company has very low operating leverage (i.e., a low proportion of fixed costs in the cost structure) and no changes are expected in operations:

Which of the following statements does not apply to preventing "garbage in, garbage out" when implementing a forecasting game plan?

Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information forecasts of future growth in inventory will most likely affect growth in:

Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information sales growth forecasts will most likely affect growth in: