1. The objective of forecasting is to develop
   
   a. stand alone financial statements for future analysis
   b. set of realistic expectations for future value-relevant payoffs
   c. a balance sheet and income statement that articulate

b. set of realistic expectations for future value-relevant payoffs

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. 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

4. 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.

5. 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.

6. 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.

7. Common-size financial statements recast each statement item as a percentage of what?
   
   a. a percentage of the "bottom line"
   b. a percentage using industry averages for the "base number"
   c. a percentage using a base year number for each line item
   d. a percentage of some "base number" on the financial statement in question

d. a percentage of some "base number" on the financial statement in question

8. Financial statement forecasts rely on additivity within financial statements and articulation across financial statements. Given this information forecasts of future growth in inventory will most likely affect growth in what?
   
   a. AR
   b. AP
   c. depreciation
   d. salary payable

b. AP

9. Projecting sales price changes depends on factors specific to the firm and its industry that might affect demand and price elasticity. Which of the following types of companies would most likely be able to increase prices?
   A.) A firm in a capital intensive industry that is expected to operate near capacity for the near future.
   B.) A firm in a capital intensive industry in which excess capacity exists.
   C.) A firm operating in an industry that is expected to experience technological improvements in its production process.
   D.) A firm operating in an industry that is transitioning from the high growth to the maturity phase of its life cycle.

A.) A firm in a capital intensive industry that is expected to operate near capacity for the near future.

10. An analyst using the inventory turnover ratio to calculate future levels of inventory may face the problem that the methods do what?

The method can introduce artificial volatility in ending balances