FIN 534 Financial Planning & Forecasting Test Bank

FIN 534 Financial Planning & Forecasting Test Bank...

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CHAPTER 14 FINANCIAL PLANNING AND FORECASTING PRO FORMA FINANCIAL STATEMENTS (Difficulty: E = Easy, M = Medium, True-False Easy: Sales forecast Answer: a Diff: E 1 . A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects. a. True b. False Sales forecast Answer: b Diff: E 2 . Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm. a. True b. False Spontaneously generated funds Answer: a Diff: E 3 . As a firm's sales grow its current asset accounts tend to increase. For instance, as sales increase the firm's inventories increase and its level of accounts payable will increase. Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase. a. True b. False Spontaneously generated funds Answer: b Diff: E 4 . The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin. a. True b. False Chapter 14 - Page 1
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Asset increase Answer: a Diff: E 5 . An increase in the firm's inventory balance will normally require additional financing unless the increase is matched by an equally large decrease in some other asset account. a. True b. False Pro forma statements Answer: b Diff: E 6 . One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income. a. True b. False Pro forma statements Answer: b Diff: E 7 . Pro forma financial statements, as discussed in the text, are used primarily to assess a firm's historical performance. a. True b. False Pro forma statements Answer: a Diff: E 8 . The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast. a. True b. False Additional funds needed Answer: b Diff: E 9 . Any firm with a positive growth rate in sales will require some amount of external funding, assuming all existing ratios are to be maintained. a. True b. False Additional funds needed Answer: b Diff: E 10 . To determine the amount of additional funds needed, you may subtract the expected increase in liabilities (a source of funds) from the sum of the expected increases in retained earnings and assets (both uses of funds). a. True b. False Chapter 14 - Page 2
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Medium: Financial forecasting Answer: b Diff: M 11 . The fact that long-term debt and equity funds are raised infrequently and in large amounts lessens the need for the firm to forecast them on a continual basis. a. True b. False Percentage of sales method Answer: b Diff: M 12 . The percentage of sales method assumes that all financial ratios are constant, which means, for example, that if you plotted a graph of inventories versus sales, the regression line would be linear and would have a positive Y-intercept.
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