Question 1

To forecast future performance, we should first create a set of financial statements that reflects items we expect to persist (continue).

Accepted Answer

Forecasting future performance involves analyzing trends and making assumptions based on historical data, which includes creating financial statements that reflect items expected to continue, as they provide a basis for projecting future results.

Question 2

The usual financial statement forecasting process is completed in the following order: balance sheet, income statement, statement of cash flows.

Accepted Answer

The usual financial statement forecasting process is typically completed in the following order: income statement, balance sheet, statement of cash flows. This is because the income statement provides necessary information for the preparation of the balance sheet, which in turn provides necessary information for the cash flow statement.

Question 3

Forecasting future revenues includes revenue growth from mergers and acquisitions.

Accepted Answer

Forecasting future revenues often includes considering revenue growth from various sources, including organic growth and growth through mergers and acquisitions, as they can significantly impact a company's future revenue streams.

Question 4

Calculating sales estimates, derived from an estimate of the sales growth rate, is how the forecasting process begins.

Accepted Answer

The forecasting process often starts with estimating sales growth rates to predict future sales, which helps in planning and decision-making.

Question 5

To forecast property, plant, and equipment (PPE) we increase the prior year's balance by estimated CAPEX and reduce the estimate by forecasted depreciation expense.

Accepted Answer

To forecast PPE, you start with the prior year's balance, add estimated capital expenditures (CAPEX) for new assets, and subtract forecasted depreciation expense for the aging of assets. This reflects the investment in new assets and the depreciation of existing assets over time.

Question 6

The forecasting process assumes that the cash on the balance sheet is a plug.

Accepted Answer

In the forecasting process, cash is often treated as a plug figure, meaning it is the residual amount that balances the assets with liabilities and equity after all other account forecasts have been made.

Question 7

The forecasted statement of cash flows uses either the forecasted income statement or the balance sheet.

Accepted Answer

The answer of The forecasted statement of cash flows uses...

Question 8

Forecasted depreciation expense, commonly estimated as: [(Current year depreciation expense / Prior year PPE, net) x Current year PPE, net], is added back to net income in the cash flow from operating activities section of the Statement of Cash Flows.

Accepted Answer

Depreciation expense is a non-cash charge that reduces net income but does not affect cash flow; therefore, it is added back to net income in the operating activities section of the cash flow statement to adjust for the non-cash effect.

Question 9

The parsimonious projection method relies on sales growth, net operating profit margin (NOPM), and asset turnover (AT) to project net operating profit after tax and net operating assets.

Accepted Answer

The answer of The parsimonious projection method relies on sales...

Question 10

The parsimonious projection method is the more efficient method for projecting property, plant and equipment.

Accepted Answer

The parsimonious projection method focuses on simplicity and minimalism, often at the expense of detailed accuracy, making it not necessarily the most efficient method for projecting property, plant, and equipment where detailed and accurate projections are crucial.

Question 11

Which of the following is not a typical adjustment made to the income statement for projection purposes?
A) Adjusting net income for perceived under- or over-accruals
B) Adjusting revenues to only include organic revenue growth
C) Separating operating and non-operating items
D) Removing transitory items such as restructuring charges
E) None of the above

Accepted Answer

Adjusting revenues to only include organic revenue growth is not a typical adjustment made to the income statement for projection purposes.

Question 12

Ashbury Corporation reports 2016 and 2017 total revenues of $90.0 million and $100.8 million respectively. If we expect prior growth to persist, we would forecast a revenue growth rate of:
A) 15%
B) 12%
C) 24%
D) 9%
E) None of the above

Accepted Answer

The answer of Ashbury Corporation reports 2016 and 2017 total...

Question 13

Following are financial statement numbers and ratios for Snap-On Incorporated for the year ended December 28, 2016 (in millions).
If we expected revenue growth of 5% in the next year, what would projected revenue be for the year ended December 30, 2017?
 
A) $3,567.8 million
B) $3,551.0 million
C) $3,898.9 million
D) $3,713.2 million
E) None of the above

Accepted Answer

The answer of Following are financial statement numbers and ratios...

Question 14

Following are financial statement numbers and ratios for Lockheed Martin Corp. for the year ended December 31, 2016. If we expected revenue growth of 3.5% in the next year, what would projected revenue be for 2017?
 
A) $48,901.7 million
B) $48,240.2 million
C) $47,248.0 million
D) $51,169.6 million
E) None of the above

Accepted Answer

The answer of Following are financial statement numbers and ratios...

Question 15

Payton Inc. reports in its 2017 annual report 10-K, sales of $8,180 million and cost of goods sold of $3,272 million. For next year, you project that sales will grow by 3% and that cost of goods sold percentage will be 1 percentage point higher.
Projected cost of goods sold for 2018 will be:
A) $3,304 million
B) $3,813 million
C) $3,454 million
D) $3,370 million
E) There is not enough information to determine the amount.

Accepted Answer

The projected sales for 2018 are $8,180 million * 1.03 = $8,425.4 million. The cost of goods sold percentage for 2017 is $3,272 million / $8,180 million = 40%. If this percentage increases by 1 percentage point to 41%, the projected cost of goods sold for 2018 is 41% of $8,425.4 million = $3,454.414 million, which rounds to $3,454 million.

Question 16

Hudson Company reports in its 2017 10-K, sales of $332 million, long-term debt of $27 million, and interest expense of $980,000.
If sales are projected to increase by 4% next year, projected interest expense for 2018 will be:
A) $1,019,200
B) $ 908,000
C) $1,007,000
D) $ 980,000
E) None of the above

Accepted Answer

Interest expense is typically not directly tied to sales, so unless there is information indicating a change in debt or interest rates, it is reasonable to assume it remains the same at $980,000.

Question 17

Reed Corporation reports 2017 sales of $415 million, income before income taxes of $122.3 million and tax expense of $35.9 million.
If sales are projected to increase by 4% next year, projected tax expense for 2018 will be:
A) $35.9 million
B) $37.3 million
C) $40.8 million
D) $42.3 million
E) There is not enough information to determine the amount.

Accepted Answer

The projected tax expense for 2018 cannot be determined with the information provided because we do not know the tax rate or whether the relationship between sales and income before taxes (or the cost structure of the company) will remain constant. An increase in sales does not directly translate to a proportional increase in tax expense without additional information about expenses and the applicable tax rate.

Question 18

When forecasting balance sheet financials, an unusually high forecasted cash balance suggests which of the following?
A) Sales are projected to increase in coming years.
B) The company will need to sell additional stock.
C) The company is generating a lot of cash, most typically from operations.
D) Account receivables have dipped to an unacceptable level.
E) None of the above

Accepted Answer

An unusually high forecasted cash balance often indicates that the company is generating a significant amount of cash, typically from its operational activities. This suggests efficient operations, high demand for its products or services, or effective cash management strategies.

Question 19

CVS Health Corporation reported sales of $177,526 million, property, plant and equipment (PPE), net of $10,175 million, and capital expenditures of $2,224 million in 2016.
If sales are projected to increase 4% per year over the next five years, what is the projected capital expenditures (purchases of new PPE) for 2017?
A) $7,951 million
B) $3,313 million
C) $2,224 million
D) $7,775 million
E) $2,400 million

Accepted Answer

The projected sales for 2017 would be $177,526 million * 1.04 = $184,627.04 million. However, the question asks for projected capital expenditures, not sales. Since the question does not provide a direct relationship between sales growth and capital expenditures growth, and without any other information provided, we cannot assume that capital expenditures will grow at the same rate as sales. Therefore, the best answer with the information given is to assume capital expenditures remain the same as the previous year, which is $2,224 million. However, since that option is not available and assuming a slight increase might be considered reasonable, the closest reasonable estimate given is $2,400 million.

Question 20

The 2016 financial statements of CVS Health Corporation reported sales of $177,526 million and accounts receivable of $12,164 million.
If sales are projected to increase 4% next year, what is the projected accounts receivable balance for 2017?
A) $12,164 million
B) $12,739 million
C) $12,998 million
D) $13,016 million
E) $13,529 million

Accepted Answer

The projected sales for 2017 would be $177,526 million * 1.04 = $184,627.04 million. Assuming the ratio of accounts receivable to sales remains constant, the projected accounts receivable would be $12,164 million / $177,526 million * $184,627.04 million = $12,739 million.

Quiz 12: Forecasting Financial Statements

To forecast future performance, we should first create a set of financial statements that reflects items we expect to persist (continue).

The usual financial statement forecasting process is completed in the following order: balance sheet, income statement, statement of cash flows.

Forecasting future revenues includes revenue growth from mergers and acquisitions.

Calculating sales estimates, derived from an estimate of the sales growth rate, is how the forecasting process begins.

To forecast property, plant, and equipment (PPE) we increase the prior year's balance by estimated CAPEX and reduce the estimate by forecasted depreciation expense.

The forecasting process assumes that the cash on the balance sheet is a plug.

The forecasted statement of cash flows uses either the forecasted income statement or the balance sheet.

Forecasted depreciation expense, commonly estimated as: [(Current year depreciation expense / Prior year PPE, net) x Current year PPE, net], is added back to net income in the cash flow from operating activities section of the Statement of Cash Flows.

The parsimonious projection method relies on sales growth, net operating profit margin (NOPM), and asset turnover (AT) to project net operating profit after tax and net operating assets.

The parsimonious projection method is the more efficient method for projecting property, plant and equipment.

Which of the following is not a typical adjustment made to the income statement for projection purposes?

Ashbury Corporation reports 2016 and 2017 total revenues of $90.0 million and $100.8 million respectively. If we expect prior growth to persist, we would forecast a revenue growth rate of:

Following are financial statement numbers and ratios for Snap-On Incorporated for the year ended December 28, 2016 (in millions) . If we expected revenue growth of 5% in the next year, what would projected revenue be for the year ended December 30, 2017?

Following are financial statement numbers and ratios for Lockheed Martin Corp. for the year ended December 31, 2016. If we expected revenue growth of 3.5% in the next year, what would projected revenue be for 2017?

Payton Inc. reports in its 2017 annual report 10-K, sales of $8,180 million and cost of goods sold of $3,272 million. For next year, you project that sales will grow by 3% and that cost of goods sold percentage will be 1 percentage point higher. Projected cost of goods sold for 2018 will be:

Hudson Company reports in its 2017 10-K, sales of $332 million, long-term debt of $27 million, and interest expense of $980,000. If sales are projected to increase by 4% next year, projected interest expense for 2018 will be:

Reed Corporation reports 2017 sales of $415 million, income before income taxes of $122.3 million and tax expense of $35.9 million. If sales are projected to increase by 4% next year, projected tax expense for 2018 will be:

When forecasting balance sheet financials, an unusually high forecasted cash balance suggests which of the following?

The 2016 financial statements of CVS Health Corporation reported sales of $177,526 million and accounts receivable of $12,164 million. If sales are projected to increase 4% next year, what is the projected accounts receivable balance for 2017?