Chapter 4 TB Flashcards
1
Q
Strategic financial plans are planned long-term financial actions and the anticipated financial impact of those actions
T or F?
A
TRUE
2
Q
A financial planning process begins with short-term, or operating, plans and budgets that in turn guide the formulation of long-term, or strategic, financial plans.
T or F?
A
FALSE
3
Q
The key input to the short-term financial planning process is ________.
A) the audit report
B) the pro forma balance sheet
C) the sales forecast
D) the pro forma income statement
A
C
4
Q
Operating financial plans are planned short-term financial actions and the anticipated financial impact of those actions
T or F?
A
TRUE
5
Q
The sales forecast and various forms of operating and financial data are the key outputs of the short run (operating) financial planning
T or F?
A
FALSE
6
Q
The financial planning process begins with ________ financial plans that in turn guide the formation of ________ plans and budgets.
A) short-term; long-term
B) short-term; short-term
C) long-term; long-term
D) long-term; short-term
A
D
7
Q
Short-term financial plans and long-term financial plans generally cover periods ranging from ________ years and ________ years, respectively.
A) one to two; two to ten
B) five to ten; ten to twenty
C) zero to one; five to ten
D) one to ten; ten to fifteen
A
A
8
Q
The key aspects of a financial planning process are ________.
A) cash planning and investment planning
B) operations planning and investment planning
C) investment planning and profit planning
D) cash planning and profit planning
A
D
9
Q
Pro forma financial statements are used for ________.
A) cash budgeting
B) preparing financial statements
C) profit planning
D) auditing
A
C
10
Q
The primary purpose in preparing pro forma financial statements is ________.
A) for cash planning
B) to ensure the ability to pay dividends
C) to reduce risk
D) for profit planning
A
D
11
Q
________ consider proposed fixed-asset outlays, research and development activities, marketing and product development actions, capital structure, and major sources of financing.
A) Short-term financial plans
B) Long-term financial plans
C) Pro forma statements
D) Cash budgeting
A
B
12
Q
________ generally reflect(s) the anticipated financial impact of planned long-term actions.
A) A cash budget
B) Strategic financial plans
C) Operating financial plans
D) A pro forma income statement
A
B
13
Q
The key outputs of the short-term financial planning process are the ________.
A) cash budget, pro forma income statement, and pro forma balance sheet
B) sales forecast and capital assets journal
C) sales forecast and schedule of changes in working capital
D) income statement, balance sheet, and source and use statement
A
A
14
Q
Key inputs to short-term financial planning are ________.
A) cash flow statements and income statement
B) pro forma financial statements
C) sales forecasts, and operating and financial data
D) leverage analysis and pro forma income statement
A
C
15
Q
Once sales are forecasted, ________ must be generated to estimate required raw materials.
A) a production plan
B) a cash budget
C) an operating budget
D) a pro forma statement
A
A
16
Q
In the statement of cash flows, the cash flows from financing activities result from debt and equity financing transactions; including incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to repurchase stock or pay cash dividends.
T or F?
A
TRUE
17
Q
Depreciation deductions, like any other business expenses, reduce the income that a firm reports on its income statement.
T or F?
A
TRUE
18
Q
Suppose that under the Tax Cuts and Jobs Act a firm that invests in equipment can immediately deduct
the full cost of that equipment or it can depreciate the equipment under the MACRS system. For tax purposes the firm should ________.
A) use the MACRS system because doing so better matches the firms costs to its revenues
B) use the MACRS system because the firm will report higher profits in the year the equipment is purchased than it would report if it fully expensed the cost of the asset
C) deduct the full cost of the asset immediately because doing so reduces taxes and increases cash flow
D) deduct the full cost of the asset immediately because profits in years after the equipment is purchased will be higher
A
C
19
Q
Prior to passage of the Tax Cuts and Jobs Act, most large corporations faced a 35% marginal tax rate. Under the new tax law, the marginal tax rate is 21%. In terms of the effect of this tax change on a firm’s decision to purchase assets that it will use for several years ________.
A) the tax change is beneficial because it lowers the after-tax cost of these assets
B) the tax change increases the tax benefits that the firm obtains when it acquires long-lived assets, whether it immediately deducts the full cost of those assets or depreciates the cost over time
C) the tax law reduces the tax benefits that a firm obtains when it acquires long-lived assets, whether it immediately deducts the full cost of those assets or depreciates the cost over time
D) the tax change has no effect because depreciation does not affect a firm’s cash flow
A
C
20
Q
If the Tax Cuts and Jobs Act requires a firm to fully deduct the cost of new equipment when it is purchased rather than depreciating that cost over several years, the investment becomes less attractive financially.
T or F?
A
FALSE
21
Q
When a firm acquires a long-lived asset such as equipment, if the tax law allows it managers would generally prefer to ________.
A) depreciate the equipment over a long life
B) depreciate the equipment over a short life
C) immediately take a deduction for the full cost of the asset when it is purchased
D) take no deduction at all for the cost of the equipment
A
C
22
Q
The Tax Cuts and Jobs Act allows firms to immediately deduct the full cost of many assets rather than depreciating that cost over several years using the MACRS rules. Suppose a firm buys a new assets and immediately deducts its full cost. The firm will have ________.
A) lower profits and higher cash flows than it would have had under the MACRS system
B) lower profits and lower cash flows than it would have had under the MACRS system
C) higher profits and higher cash flows than it would have had under the MACRS system
D) higher profits and lower cash flows than it would have had under the MACRS system
A
A
23
Q
Non-cash charges are expenses that involve an actual outlay of cash during the period but are not deducted on the income statement.
T or F?
A
FALSE
24
Q
Under the basic MACRS procedures, the depreciable value of an asset is its full cost, including outlays for installation.
T or F?
A
TRUE
25
Business firms are permitted to systematically charge a portion of the market value of fixed assets as depreciation against annual revenues.
| T or F?
FALSE
26
Given a financial manager's preference for faster receipt of cash flows, a longer depreciable life is preferred to a shorter one.
| T or F?
FALSE
27
For tax purposes, using MACRS recovery periods, assets in the first four property classes are depreciated by the double-declining balance method using the half-year convention and switching to straight line when advantageous.
| T or F?
TRUE
28
The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.
| T or F?
TRUE
29
Allocation of the historic costs of fixed assets against the annual revenue they generate is called ________.
A) arbitraging
B) securitization
C) depreciation
D) amortization
C
30
The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.
A) tax
B) financial reporting
C) budget
D) cost accounting
A
31
A corporation ________.
A) must use the straight-line depreciation method for tax purposes and double declining depreciation method financial reporting purposes
B) can use straight-line depreciation method for tax purposes and MACRS depreciation method financial reporting purposes
C) can use different depreciation methods for tax and financial reporting purposes
D) must use different depreciation method for tax purposes, but strictly mandated depreciation methods for financial reporting purposes
C
32
The depreciable value of an asset, under MACRS, is the ________.
A) current cost
B) current cost minus salvage value
C) the original cost plus installation
D) the original cost plus installation costs, minus salvage value
C
33
Given a financial manager's preference for faster receipt of cash flows, ________.
A) a longer depreciable life is preferred to a shorter one
B) a shorter depreciable life is preferred to a longer one
C) the manager is not concerned with depreciable life, because depreciation is a noncash expense
D) the manager is not concerned with depreciable life, because once purchased, depreciation is considered a sunk cost
B
34
In general, ________.
A) a longer depreciable life is preferred, because it will result in a faster receipt of cash flows
B) a shorter depreciable life is preferred, because it will result in a faster receipt of cash flows
C) a shorter depreciable life is preferred, because management can then purchase new assets, as the old assets are written off
D) a longer depreciable life is preferred, because management can postpone purchasing new assets, since the old assets still have a useful life
B
35
The depreciable value of an asset, under MACRS, is ________.
A) the full cost excluding installation costs
B) the full cost minus salvage value
C) the full cost including installation costs
D) the full cost including installation costs adjusted for the salvage value
C
36
Free cash flow (FCF) is the cash flow a firm generates from its normal operations; calculated as EBIT minus taxes plus depreciation.
| T or F?
FALSE
37
A firm's operating cash flow (OCF) is the cash flow it generates from its normal operations: producing and selling its output of goods or services.
| T or F?
TRUE
38
The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation
| T or F?
TRUE
39
The net fixed asset investment (NFAI) is defined as the change in net fixed assets plus depreciation.
| T or F?
TRUE
40
The net current asset investment (NCAI) is defined as the change in current assets minus the change in sum of the accounts payable and accruals.
| T or F?
TRUE
41
A firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments.
| T or F?
TRUE
42
A firm's free cash flow (FCF) equals the sum of operating cash flows, financing cash flows, and investing cash flows.
| T or F?
FALSE
43
Operating cash flow (OCF) is equal to a firm's net operating profits after taxes minus all non-cash charges
| T or F?
FALSE
44
In the statement of cash flows, cash flows from operating activities are cash flows directly related to purchase and sale of fixed assets.
| T or F?
FALSE
45
Depreciation is considered to be an outflow of cash.
| T or F?
FALSE
46
The statement of cash flows allows the financial manager and other interested parties to analyze a firm's past and possibly future profitability.
| T or F?
FALSE
47
To assess whether any developments have occurred that are contrary to a company's financial policies, the financial manager should pay special attention to both the major categories of cash flow and the individual items of cash inflow and outflow.
| T or F?
TRUE
48
It would be correct to define operating cash flow (OCF) as net operating profit after taxes plus depreciation.
| T or F?
TRUE
49
Operating cash flow (OCF) is calculated by deducting depreciation from net operating profit after taxes.
| T or F?
FALSE
50
Net operating profit after taxes (NOPAT) represents a firm's earnings before interest and after taxes.
| T or F?
TRUE
51
Net operating profit after taxes (NOPAT) represents a firm's earnings after deducting both interest and taxes.
| T or F?
FALSE
52
A firm's operating cash flow (OCF) is defined as ________.
A) gross profit minus operating expenses
B) gross profit minus depreciation
C) EBIT times one minus the tax rate plus depreciation
D) EBIT plus depreciation
C
53
Which of the following is an example of noncash charges?
A) depreciation
B) accruals
C) interest expense
D) dividends paid
A
54
Which of the following is a source of cash flows?
A) increase in marketable securities
B) increase in accounts payable
C) decrease in notes payable
D) repurchase of stock
B
55
________ is a noncash charge.
A) Labor expense
B) Depreciation
C) Salaries
D) Rent
B
56
In the statement of cash flows, retained earnings are handled through the adjustment of ________.
A) "Revenue" and "Cost" accounts
B) "Current Assets" and "Current Liabilities" accounts
C) "Depreciation" and "Purchases" accounts
D) "Net Profits After Taxes" and "Dividends Paid" accounts
D
57
The cash flows from operating activities section of the statement of cash flows includes ________.
A) principal received
B) cost of raw materials
C) dividends paid
D) stock repurchases
B
58
The cash flows from operating activities section of the statement of cash flows includes ________.
A) labor expense
B) proceeds from the sale of fixed assets
C) principal paid
D) dividends paid
A
59
The cash flows from financing activities section of the statement of cash flows includes ________.
A) labour expense
B) cost of raw materials
C) purchase of long-term assets
D) dividends paid
D
60
The three categories of a firm's statement of cash flows are ________.
A) cash flow from operating activities, cash flow from investment activities, and cash flow from noncash activities
B) cash flow from operating activities, cash flow from noncash activities, and cash flow from financing activities
C) cash flow from equity activities, cash flow from investment activities, and cash flow from financing activities
D) cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities
D
61
Which of the following is a cash inflow?
A) a decrease in accounts payable
B) a decrease in accounts receivable
C) an increase in dividend payment
D) a decrease in accrued liabilities
B
62
Which of the following is a cash outflow?
A) an increase in accounts payable
B) a decrease in notes receivable
C) an increase in accounts receivable
D) an increase in accrued liabilities
C
63
Which of the following line items of the statement of cash flows must be obtained from the income statement?
A) accruals in current liabilities
B) interest expenses
C) accounts receivable
D) cash dividends paid on both preferred and common stocks
B
64
Cash flows directly related to production and sale of a firm's products and services are called
________.
A) cash flow from operating activities
B) cash flow from investment activities
C) cash flow from financing activities
D) cash flow from equity activities
A
65
Cash flows associated with the purchase and sale of fixed assets and business interests are called cash flow from ________.
A) operating activities
B) investment activities
C) financing activities
D) equity activities
B
66
Cash flows that result from debt and equity financing transactions, including incurrence and repayment of debt, cash inflows from the sale of stock, and cash outflows to pay cash dividends or repurchase stock are called cash flow from ________.
A) operating activities
B) investment activities
C) financing activities
D) miscellaneous activities
C
67
A corporation sold a fixed asset for $100,000. This is ________.
A) an investment cash flow and a source of funds
B) an operating cash flow and a source of funds
C) an operating cash flow and a use of funds
D) an investment cash flow and a use of funds
A
68
A corporation raises $500,000 in long-term debt to acquire additional plant capacity. This is considered as ________.
A) an investment cash flow
B) a financing cash flow
C) a financing cash flow and investment cash flow, respectively
D) a financing cash flow and operating cash flow, respectively
C
69
Which of the following is a cash flow from financing activities?
A) purchase of a long-term asset
B) decrease in accounts payable
C) increase in accounts payable
D) repurchasing stock
D
70
Which of the following represents a cash flow from operating activities?
A) dividends paid
B) increase or decrease in current liabilities
C) increase or decrease in fixed assets
D) repurchasing stock
B
71
A firm has just ended the calendar year making a sale in the amount of $200,000 of merchandise purchased during the year at a total cost of $150,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. One possible problem this firm may face is ________.
A) low profitability
B) insolvency
C) inability to receive credit
D) high leverage
B
72
Generally, firms that have cash flows with highly seasonal cash flows or cash flows that are just generally harder to forecast prepare cash budgets more frequently compared to firms with cash flows that are less seasonal and/or more predictable.
| T or F?
TRUE
73
Which of the following would be the least likely to utilize a cash budget?
A) top management
B) middle management
C) public investors
D) lenders
C
74
An internal sales forecast is based on the relationships that can be observed between a firm's sales and certain key economic indicators such as the gross domestic product, new housing starts, or disposable personal income.
| T or F?
FALSE
75
The ________ is a financial projection of a firm's short-term cash surpluses or shortages.
A) operating financial plan
B) cash budget
C) strategic financial journal
D) capital assets journal
B
76
The primary purpose in preparing a cash budget is ________.
A) to evaluate the intrinsic value of a financial assets
B) to estimate a firm's short-term cash requirements
C) for risk analysis
D) to estimate sales
B
77
The cash budget is a statement of a firm's planned inflows and outflows of cash that is used to estimate its long-term cash requirement.
| T or F?
FALSE
78
Cash budgets and pro forma statements are useful not only for internal financial planning but also are routinely required by the Internal Revenue Service (IRS).
| T or F?
FALSE
79
A cash budget gives the financial manager a clear view of the timing of a firm's expected profitability over a given period
| T or F?
FALSE
80
Since depreciation and other noncash charges represent a scheduled write-off of an earlier cash outflow, they should not be included in the cash budget, though depreciation charges will affect the taxes that a firm pays.
| T or F?
TRUE
81
In cash budgeting, the impact of depreciation is reflected in a reduction in tax payments
| T or F?
TRUE
82
In cash budgeting, other cash receipts are cash receipts expected to result from sources other than sales.
| T or F?
TRUE
83
A firm's net cash flow is the mathematical difference between the firm's beginning cash and its cash disbursements in each period.
| T or F?
FALSE
84
The excess cash balance is the amount available for investment by a firm if the desired minimum cash balance is less than the period's ending cash
| T or F?
TRUE
85
The required total financing figures in the cash budget refer to the monthly changes in borrowing.
| T or F?
FALSE
86
If the net cash flow is less than the minimum cash balance, financing is required.
| T or F?
FALSE
## Footnote
If the ending cash balance is less than the minimum cash balance, financing is required.
87
If the ending cash is greater than the minimum cash balance, excess cash exists.
| T or F?
TRUE
88
Using simulations, a firm can determine the amount of financing needed to protect it adequately against a cash shortage.
| T or F?
TRUE
89
As the typical cash budget shows cash flows only on a monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency.
| T or F?
TRUE
90
As the typical cash budget shows cash flows on a monthly basis, the information provided by the cash budget is adequate for ensuring solvency.
| T or F?
FALSE
91
An external sales forecast is based on ________.
A) the relationships between a firm's sales and certain key economic indicators such as GDP and consumer confidence
B) a buildup, or consensus of sales forecasts through a firm's own sales channels
C) the prediction of a firm's sales over a given period through the analysis of the sales trends of its competitors
D) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales
A
92
An internal forecast is based on ________.
A) a buildup, or consensus, of sales forecasts through a firm's own sales channels, adjusted for additional factors such as production capabilities
B) the relationships between a firm's sales and certain economic indicators
C) the prediction of a firm's sales over a given period through surveys sent to financial analysts
D) developing the pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales
A
93
A firm's final sales forecast is usually a function of ________.
A) its net income
B) the salesperson's estimates of demand
C) internal and external factors in combination
D) its accounts receivable
C
94
In preparing a cash budget, the ________ seasonal and uncertain a firm's cash flows, the ________ the number of budgeting intervals it should use.
A) more; greater
B) more; fewer
C) less; greater
D) less; fewer
A
95
The key input to any cash budget is ________.
A) the sales forecast
B) the production plan
C) the pro forma balance sheet
D) the current tax laws
A
96
Cash disbursements include ________.
A) amortization expense
B) rent payments
C) depreciation expense
D) depletion
B
97
A projected excess cash balance for the month may be ________.
A) financed with short-term securities
B) financed with long-term securities
C) invested in marketable securities
D) invested in long-term securities
C
98
If a firm expects short-term cash surpluses, it can plan ________.
A) long-term investments
B) short-term borrowing
C) short-term investments
D) leverage decisions
C
99
Which of the following represents a way of coping with uncertainty in a cash budget?
A) careful estimation of cash budgets outputs
B) developing a pro forma income statement to forecast sales and then express the various income statement items as percentage of projected sales
C) always using the prior year's data for estimates of the future
D) using scenario analysis, or "what if" approach, to analyze cash flows under a variety of circumstances
D
100
Profit planning's main focus is on the firm's cash receipts and disbursements throughout the year.
| T or F?
FALSE
101
Compared to the short-term focus of cash planning, profit planning has a broader emphasis that encapsulates the firm's overall financial position.
| T or F?
TRUE
102
Firms construct pro forma financial statements by studying past relationships between key accounts on the income statement and balance sheet and making judgments about whether those relationships will continue in the near future.
| T or F?
TRUE
103
The two main inputs required to construct pro forma financial statements are the ________.
A) actual financial statements and cash budget from the prior year
B) actual financial statements for the last two years
C) actual financial statements from last year and the sales forecast for the next year
D) the cash budget from last year and the sales forecast for the next year
C
104
Development of pro forma financial statements helps a financial manager to project the amount of external financing required to support a given level of sales as well as overall financial performance of the firm in the coming year
| T or F?
TRUE
105
Since the percentage-of-sales method assumes that all the form's costs and expenses are variable, it tends to understate profits when sales are increasing and overstate profits when sales are decreasing.
| T or F?
TRUE
106
The primary purpose in preparing pro forma financial statements is ________.
A) for cash planning
B) to ensure the ability to pay dividends
C) for risk analysis
D) for profit planning
D
107
________ are projected financial statements.
A) Pro forma statements
B) Statements of retained earnings
C) Cash budgets
D) Cash flow statements
A
108
The key inputs for preparing pro forma income statements using the percent-of-sales method are the ________.
A) sales forecast for the preceding year and financial statements for the coming year
B) sales forecast for the coming year and the cash budget for the preceding year
C) sales forecast for the coming year and financial statements for the preceding year
D) cash budget for the coming year and sales forecast for the preceding year
C
109
In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.
A) overstate costs and overstate profits
B) overstate costs and understate profits
C) understate costs and overstate profits
D) understate costs and understate profits
B
110
The percentage-of-sales method of preparing pro forma income statements assumes that ________.
A) sales are fixed
B) all costs inversely vary with sales
C) all costs are independent
D) all costs are variable
D
111
The percent-of-sales method of developing a pro forma income statement forecasts sales and other line items as a ________.
A) percentage of projected sales
B) percentage of average sales over a period
C) percentage of projected total assets
D) percentage of average total assets over a period
A
112
The best way to adjust for the presence of fixed costs when preparing a pro forma income statement is ________.
A) to proportionately vary the fixed costs with the change in sales
B) to adjust for projected fixed-asset outlays
C) to disproportionately vary the costs with the change in sales
D) to break the firm's historical costs into fixed and variable components
D
113
The percent-of-sales method to prepare a pro forma income statement assumes a firm has no fixed costs. Therefore, the use of the past cost and expense ratios generally tends to ________ profits when sales are increasing.
A) accurately predict
B) overstate
C) understate
D) have no effect on
C
114
For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to ________.
A) overestimate profits when sales are increasing
B) underestimate profits when sales are increasing
C) underestimate profits when assets are increasing
D) overestimate profits when assets are increasing
B
115
One basic weakness of the simplified pro forma approaches lies in the assumption that certain variables, such as cash, accounts receivable, and inventories, can be forced to take on certain "desired" values.
| T or F?
TRUE
116
In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to ________.
A) understate retained earnings and understate the additional financing needed
B) overstate retained earnings and overstate the additional financing needed
C) understate retained earnings and overstate the financing needed
D) overstate retained earnings and understate the financing needed
C
117
Under the judgmental approach for developing a pro forma balance sheet, the "plug" figure required to bring the statement into balance may be called the ________.
A) cash balance
B) retained earnings
C) external financing required
D) accounts receivable
C
118
The ________ method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while external financing is used as a balancing, or plug, figure.
A) percent-of-sales
B) accrual
C) judgmental
D) cash
C
119
A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of $230,000. The firm should prepare to ________.
A) repurchase common stock totaling $230,000
B) arrange for a loan of $230,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $230,000
B
120
A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of negative $250,000. The firm may prepare to ________.
A) sell common stock totaling $250,000
B) arrange for a loan of $250,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $250,000
D
121
One basic weakness of the simplified pro forma approaches lies in the assumption that the firm's past financial condition is an accurate indicator of its future.
## Clarifier
T or F?
TRUE
122
A weakness of the percent-of-sales method of preparing a pro forma income statement is ________.
A) that it forecasts income and then expresses the various income statement items as percentages of projected income
B) the assumption that the firm faces linear total revenue and total operating cost functions
C) the assumption that the firm's past financial condition is an accurate predictor of its future
D) the difficulty faced in calculation and preparation of such statements
C
123
Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.
A) understate profits when sales are decreasing
B) understate profits when sales are increasing
C) overstate profits when sales are increasing
D) neither understate nor overstate profits
B
124
Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to ________.
A) understate profits when sales are decreasing and overstate profits when sales are increasing
B) understate profits, no matter what the change in sales, as long as fixed costs are present
C) understate profits when sales are increasing and overstate profits when sales are decreasing
D) overstate profits, no matter what the change in sales, as long as fixed costs are present
C
125
The weakness of the judgmental approach to preparing a pro forma balance sheet is ________.
A) the assumption that the values of certain accounts can be forced to take on desired levels
B) the assumption that the firm faces linear total revenue and total operating cost functions
C) the assumption that the firm's past financial condition is an accurate predictor of its future
D) ease of calculation and preparation
A
126
If transportation costs were a huge portion of a firm's expenses and the firm expected gas prices to increase greatly in the next year, then in preparing its pro forma income statement the firm should ________.
A) use the percentage of transportation costs from last year's sales
B) decrease the percentage of transportation costs from the percentage of last year's sales
C) increase the percentage of transportation costs from the percentage of last year's sales
D) double the percentage of transportation costs from the percentage of last year's sales
C
127
In the development of pro forma statements, a firm that requires external funds means that its projected level of cash is in excess of its needs and that funds would therefore be available for repaying debt, repurchasing stock, or increasing the dividend to stockholders.
## CLARIFIER
T or F?
FALSE
128
The two main weaknesses of pro forma financial statements are ________.
A) they produce inaccurate forecasts and they cannot be used by anyone outside the firm
B) they assume that the firm's past financial condition is an accurate indicator of its future and that managers can force particular accounts to take on particular desired values
C) stockholders take the pro forma forecasts too seriously, which causes volatility in stock prices when actual outcomes deviate from forecasts
D) pro forma statements provide useful forecasts of profits, but not cash flows, and they rely too much on the assumption that income statement items will grow at the same rate as sales
B
129
By necessity, building pro forma financial statements requires that managers make many assumptions which will not turn out to be true. Therefore, pro forma financial statements are of little use as a financial management tool.
## CLARIFIER
T or F?
FALSE
130
Pro forma financial statements highlight situations in which actual outcomes deviate from projections, which in turn helps managers understand why a firm's results are not in alignment with its forecasts.
## CLARIFIER
T or F?
TRUE
131
In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the ________.
A) pro forma income statement, balance sheet, and cash budget
B) pro forma balance sheet and cash budget
C) cash budget and statement of retained earnings
D) pro forma income statement and pro forma balance sheet
B
