1. When projecting operating expenses it is important to determine the mix of fixed and variable costs, one clue suggesting the pressence of fixed costs is what?

The percentage change in cost of goods sold in prior years is significantly less than the percentage change in sales

2. All of the following are true regarding projected financial statements except:
   A.) The statement of cash flows is the most critical forecast since it reflects profitability rather than viability.
   B.) Preparing projected financial statements must incorporate a company's past performance records.
   C.) Preparing projected financial statements must incorporate a company's current performance records
   D.) The income statement demonstrates immediate capability to service debt for banks or real potential for growth in returns for venture capital.

A.) The statement of cash flows is the most critical forecast since it reflects profitability rather than viability.

3. Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior security returns. Nicholas and Wahlen's findings indicate what?

That an investor could earn excess returns if the investor could predict accurately the SIGN of the change in EARNINGS one year ahead.

4. All of the following are the fundamental bases for future payoffs to equity shareholders and share value except:
   A.) Earnings
   B.) cash flows
   C.) Dividends
   D.) depreciation

D.) depreciation

5. All of the following are true regarding the key principles of forecasting except:
   A.) Financial statement forecasts need not be comprehensive.
   B.) Forecasts should not manifest wishful thinking.
   C.) Financial statement forecasts must be internally consistent.
   D.) Financial statement forecasts must rely on assumptions that have external validity.

A.) Financial statement forecasts need not be comprehensive.

6. To ensure that the financial statements balance, it is important that the change in the cash balance sheet year agrees with what?

The net change in cash on the projected statement of cash flows

7. Which of the following statements does not apply to preventing "garbage in, garbage out" when implementing a forecasting game plan?
   A.) The quality of the financial statement forecasts will depend on the quality of the forecast assumptions.
   B.) The quantities forecasted within financial statement forecasts will depend on the quantity of the forecast assumptions.
   C.) Analysts should justify and evaluate the most important assumptions that reflect the critical risk and success factors of the firm's strategy.
   D.) Analysts can impose reality checks on the assumptions by analyzing the forecasted financial statements using ratios, common-size, and rate-of-change financial statements.

B.) The quantities forecasted within financial statement forecasts will depend on the quantity of the forecast assumptions.

8. Projected financial statements can be used to assess the sensitivity of all of the following except:
   A.) a firm's liquidity
   B.) a firm's leverage to changes in assumptions
   C.) conditions under which the firm's debt covenants may become problematic
   D.) unusual patterns for projected total assets.

D.) unusual patterns for projected total assets.

9. Common-size financial statements recast each statement item as a percentage of what?

A percentage of some "base number" on the financial statement in question

10. Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information forescasts of future growth in inventory will most likely affect growth in what?

Accounts payable