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Unformatted text preview: CHAPTER 4 FINANCIAL PLANNING AND FORECASTING ANSWERS TO QUESTIONS: 1. Deferred taxes arise because of the timing difference of some expenses as recorded for financial reporting purposes and these same expenses as recorded for the purpose of making tax filings. For example, most firms use accelerated depreciation for tax purposes and straight-line depreciation for financial reporting. Consequently, taxable income is higher on the companys public financial statements and taxes paid also is higher. Actual taxes paid are determined from a companys tax filings. The difference between taxes actually paid, and taxes shown as being paid on a firms public financial statements is recorded as deferred taxes on the right-hand side of the balance sheet. 2. Pro forma financial statements are financial statements that project the results of some assumed events rather than actual events. The assumed events do not necessarily have to be future events; for example, a company considering acquiring another company will usually prepare pro forma statements assuming the two companies had been merged for the past couple of years. 3. The percentage of sales forecasting method is a method of estimating the additional financing that will be needed to support a given future sales level. Financial analysts should be aware that the method assumes that as a company's sales increase, its assets are also assumed to increase proportionately to support the new sales. In addition, the current liabilities that vary directly with sales are also assumed to increase proportionately with the new sales. These assumptions may not hold in many actual financial planning situations. 4. A cash budget is a projection of a company's cash receipts and disbursements over some future period of time. Normally a worksheet is prepared, showing expected receipts and disbursements over the time period. Then, the receipts and disbursements figures (normally, monthly) are combined to determine when the company will require short-term financing and when it will have excess cash. 5. The statement of cash flows can be used to estimate how much external financing a company will need in some future period by estimating the other cash flows of the company for the period (see Problem 16). 6. A deterministic model provides a single-number forecast of a financial variable (or variables) without specifying the probability of occurrence of these variables. A probabilistic model generates as output a probability distribution of possible values of the financial variable(s). 32 Chapter 4 Financial Planning and Forecasting SOLUTIONS TO PROBLEMS: 1. ATCF = EAT + Depreciation + Deferred taxes = $650,000 + $400,000 + $100,000 = $1,150,000 2. Summit Furniture Company Statement of Cash Flows For the Year Ended December 31, 2005 Increase (Decrease) in Cash and Cash Equivalents (000) Cash Flows from Operating Activities: Cash received from customers $142,000 Cash paid to suppliers and employees (120,000)...
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- Spring '08