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Financial statement forecasts rely on additivity within financial statements and articulation across financial statements

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1. 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
   A. accounts receivable
   B. accounts payable
   C. depreciation
   D. salary payable
2. If a company has very low operating leverage (i.e. a low proportion of fixed costs in the cost structure) and no changes are expected in operations
   A. percentage change income statement percentages can serve as the basis for projecting operating expenses.
   B. using common-size income statement percentages will overstate future projected operating expenses.
   C. using common-size income statement percentages will understate future projected operating expenses.
   D. using common-size income statement percentages can serve as a reasonable basis for projecting future operating expenses.
3. Nichols and Wahlen's 2004 study showed that superior forecasting provides the potential to earn superior security returns. Nichols and Wahlen's findings indicate
   A. that an investor could earn excess returns if the investor could predict accurately the sign of the change in earnings one year ahead.
   B. that an investor could earn excess returns if the investor could predict accurately the magnitude of the change in earnings one year ahead.
   C. that an investor could earn excess returns if the investor could predict accurately the sign of the change in cash flows from operations one year ahead.
   D. that an investor could earn excess returns if the investor could predict accurately the sign of the change in working capital one year ahead
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.
5. To ensure that the financial statements balance, it is important that the change in the cash balance on the balance sheet each year agrees with
   A. the cash collections from sales in the projected income statement.
   B. the cash provided by or used by operations on the projected statement of cash flows.
   C. the net change in cash on the projected statement of cash flows.
   D. the net change in working capital from period to period.
6. 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
7. 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 companies would most likely not be able to increase prices in the near future?
   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