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Unformatted text preview: Chapter 4 Discussion Questions 4-1. What are the basic benefits and purposes of developing pro forma statements and a cash budget? The pro-forma financial statements and cash budget enable the firm to determine its future level of asset needs and the associated financing that will be required. Furthermore, one can track actual events against the projections. Bankers and other lenders also use these financial statements as a guide in credit decisions. 4-2. Explain how the collections and purchases schedules are related to the borrowing needs of the corporation. The collections and purchase schedules measure the speed at which receivables are collected and purchases are paid. To the extent collections do not cover purchasing costs and other financial requirements, the firm must look to borrowing to cover the deficit. 4-3. With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold? LIFO inventory valuation assumes the latest purchased inventory becomes part of the cost of goods sold, while the FIFO method assigns inventory items that were purchased first to the cost of goods sold. In an inflationary environment, the LIFO method will result in a higher cost of goods sold figure and one that more accurately matches the sales dollars recorded at current dollars. 4-4. Explain the relationship between inventory turnover and purchasing needs. The more rapid the turnover of inventory, the greater the need for purchase and replacement. Rapidly turning inventory makes for somewhat greater ease in foreseeing future requirements and reduces the cost of carrying inventory. 4-5. Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement. Rapid growth in sales and profits is often associated with rapid growth in asset commitment. A $100,000 increase in sales may cause a $50,000 increase in assets, with perhaps only $10,000 of the new financing coming from profits. It is very seldom that incremental profits from sales expansion can meet new financing needs. S4-1 4-6. Discuss the advantage and disadvantage of level production schedules in firms with cyclical sales. Level production in a cyclical industry has the advantage of allowing for the maintenance of a stable work force and reducing inefficiencies caused by shutting down production during slow periods and accelerating work during crash production periods. A major drawback is that a large stock of inventory may be accumulated during the slow sales period. This inventory may be expensive to finance, with an associated danger of obsolescence. 4-7. What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?...
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This note was uploaded on 04/10/2011 for the course ADM 474 taught by Professor Stewart during the Spring '10 term at Indiana Wesleyan.
- Spring '10