Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Virginia Commonwealth University - FIRE 623 4
Virginia Commonwealth University - FIRE 623
4.1 Explain the simplified procedures used to prepare and evaluate the pro forma income statement and the pro forma balance sheet.
1)Development of pro forma financial statements helps a financial manager to project the amount of external financing required to support a given level of sales as well as overall financial performance of the firm in the coming year.
2) Since the percentage-of-sales method assumes that all the form's costs and expenses are variable, it tends to understate profits when sales are increasing and overstate profits when sales are decreasing.
3) In the development of pro forma statements, a firm that requires external funds means that its projected level of cash is in excess of its needs and that funds would therefore be available for repaying debt, repurchasing stock, or increasing the dividend to stockholders.
4) The primary purpose in preparing pro forma financial statements is .
A) for cash planning
B) to ensure the ability to pay dividends
C) for risk analysis D) for profit planning
5) are projected financial statements. A) Pro forma statements
B) Statements of retained earnings
C) Cash budgets
D) Cash flow statements
6) The key inputs for preparing pro forma income statements using the simplified approaches are the .
A) sales forecast for the preceding year and financial statements for the coming year
B) sales forecast for the coming year and the cash budget for the preceding year
C) sales forecast for the coming year and financial statements for the preceding year
D) cash budget for the coming year and sales forecast for the preceding year
7) In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the .
A) pro forma income statement, balance sheet, and cash budget B) pro forma balance sheet and cash budget
C) cash budget and statement of retained earnings
D) pro forma income statement and pro forma balance sheet
8) A firm plans to retire outstanding bonds in the next planning period. Which of the following gets affected? A) pro forma income statement and pro forma balance sheet
B) previous year income statement and previous year balance sheet
C) previous year income statement and statement of retained earnings
D) pro forma income statement and proxy statement
9) A firm plans to depreciate a five year asset in the next planning period. The statements that will be directly affected are the .
A) pro forma income statement, pro forma balance sheet, and cash budget
B) pro forma balance sheet, cash budget, and statement of retained earnings
C) cash budget and pro forma balance sheet
D) pro forma income statement and pro forma balance sheet
10) In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to .
A) overstate costs and overstate profits B) overstate costs and understate profits
C) understate costs and overstate profits
D) understate costs and understate profits
11) The percentage-of-sales method of preparing pro forma income statements assumes that .
A) sales are fixed
B) all costs inversely vary with sales
C) all costs are independent D) all costs are variable
12) The percent-of-sales method of developing a pro forma income statement forecasts sales and other line items as a .
A) percentage of projected sales
B) percentage of average sales over a period
C) percentage of projected total assets
D) percentage of average total assets over a period
13) The best way to adjust for the presence of fixed costs when using the simplified approach for pro forma income statement preparation is .
A) to proportionately vary the fixed costs with the change in sales
B) to adjust for projected fixed-asset outlays
C) to disproportionately vary the costs with the change in sales
D) to break the firm's historical costs into fixed and variable components
14) The percent-of-sales method to prepare a pro forma income statement assumes a firm has no fixed costs. Therefore, the use of the past cost and expense ratios generally tends to profits when sales are increasing.
A) accurately predict
B) overstate C) understate
D) have no effect on
15) For firms with high fixed costs, the percent-of-sales approach for preparing a pro forma income statement tends to .
A) overestimate profits when sales are increasing B) underestimate profits when sales are increasing
C) underestimate profits when assets are increasing
D) overestimate profits when assets are increasing
16) In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to .
A) understate retained earnings and understate the additional financing needed
B) overstate retained earnings and overstate the additional financing needed C) understate retained earnings and overstate the financing needed
D) overstate retained earnings and understate the financing needed
17) Under the judgmental approach for developing a pro forma balance sheet, the "plug" figure required to bring the statement into balance may be called the .
A) cash balance
B) retained earnings
C) external financing required
D) accounts receivable
18) The method of developing a pro forma balance sheet estimates values of certain balance sheet accounts while external financing is used as a balancing, or plug, figure.
A) percent-of-sales
B) accrual
C) judgmental
D) cash
19) A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of $230,000. The firm should prepare to .
A) repurchase common stock totaling $230,000 B) arrange for a loan of $230,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $230,000
20) A firm has prepared the coming year's pro forma balance sheet resulting in a plug figure in a preliminary statement—called the external financing required—of negative $250,000. The firm may prepare to .
A) sell common stock totaling $250,000
B) arrange for a loan of $250,000
C) do nothing; the balance sheet balances
D) invest in marketable securities totaling $250,000
Table 4.3
The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the coming months of January through May. Historically, 75 percent of sales are for cash with the remaining 25 percent collected in the following month. The ending cash balance in January is $3,000.
21) The total cash receipts for April are . (See Table 4.3) A) $5,000
B) $7,500
C) $9,250 D) $10,000
22) The net cash flow for February is . (See Table 4.3)
A) -$1,250
B) -$1,000
C) $5,750
D) $750
23) The firm has a negative net cash flow in the month(s) of . (See Table 4.3)
A) January, February, and March
B) February and March C) January and February
D) February
24) The ending cash balance for March is . (See Table 4.3)
A) $250 B) $6,750 C) $2,500
D) $500
25) The ending cash balance for February is . (See Table 4.3)
A) $750 B) $1,750 C) $2,500
D) -$1,000
26) At the end of May, the firm has an ending cash balance of . (See Table 4.3) A) $9,000
B) $16,750 C) $14,250
D) $12,000
27) The firm has a total financing requirement of for the period from February through May. (See Table 4.3)
A) $ 0
B) $1,750
C) $1,250
D) $ 750
28) If a pro forma balance sheet dated at the end of May was prepared from the information presented, the marketable securities would total . (See Table 4.3)
A) $9,000
B) $9,500
C) $12,000 D) $16,750
Table 4.4
Use the percent-of-sales method to prepare a pro forma income statement for the year ended December 31, 2015, for Hennesaw Lumber, Inc.
Hennesaw Lumber, Inc. estimates that its sales in 2000 will be $4,500,000. Interest expense is to remain unchanged at $105,000 and the firm plans to pay cash dividends of $150,000 during 2015. Hennesaw Lumber, Inc.'s income statement for the year ended December 31, 2014 is shown below. From your preparation of the pro forma income statement, answer the following multiple choice questions.
29) The pro forma net profits after taxes for 2015 are . (See Table 4.4) A) $202,500
B) $207,000 C) $52,500
D) $57,000
30) The pro forma cost of goods sold for 2015 is . (See Table 4.4) A) $3,500,000
B) $3,750,000 C) $3,825,000 D) $4,000,000
31) The pro forma operating expenses for 2015 are . (See Table 4.4) A) $150,000
B) $200,000
C) $210,000 D) $225,000
32) The pro forma accumulated retained earnings account on the balance sheet is projected to be . (See Table 4.4)
A) $62,500
B) $52,500 C) $57,000 D) $67,000
Table 4.5
A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro forma balance sheet for cash and profit planning purposes for the coming year ended December 31, 2015. Using the percent-of-sales method and the following financial data, prepare the pro forma balance sheet in order to answer the following multiple choice questions.
(a) The firm estimates sales of $1,000,000.
(b) The firm maintains a cash balance of $25,000.
(c) Accounts receivable represents 15 percent of sales.
(d) Inventory represents 35 percent of sales.
(e) A new piece of mining equipment costing $150,000 will be purchased in 2010. Total depreciation for 2010 will be $75,000.
(f) Accounts payable represents 10 percent of sales.
(g) There will be no change in notes payable, accruals, and common stock.
(h) The firm plans to retire a long term note of $100,000.
(i) Dividends of $45,000 will be paid in 2015.
(j) The firm predicts a 4 percent net profit margin.
Balance Sheet General Talc Mines December 31, 2014
33) The pro forma total current assets amount is . A) $470,900
B) $500,000 C) $525,000 D) $575,000
34) The pro forma net fixed assets amount is . A) $500,000
B) $575,000 C) $600,000
D) $650,000
35) The pro forma current liabilities amount is . A) $400,000
B) $450,000
C) $475,000 D) $500,000
36) The pro forma total liabilities amount is . A) $500,000
B) $550,000 C) $700,000
D) $650,000
37) The pro forma accumulated retained earnings amount is . A) $90,000
B) $175,000
C) $140,000 D) $130,000
38) The external financing required in 2015 will be . A) $230,000
B) $240,000
C) $0
D) $195,000
39) General Talc Mines may prepare to . A) arrange for a loan equal to the external funds requirement
B) eliminate the dividend to cover the needed financing
C) cancel the retirement of the long term note to cover the needed financing
D) repurchase common stock equal to the external funds requirement
40) The external funds requirement results primarily from .
A) the payment of dividends
B) the retirement of debt and purchase of new fixed assets
C) low profit margin
D) high cost of sales
41) If General Talc Mines cannot raise the external financing required through traditional credit channels, the firm may .
A) increase sales
B) purchase additional fixed assets to raise productivity
C) sell common stock
D) factor accounts receivable
4.2 Evaluate the simplified approaches to pro forma financial statement preparation and the common uses of pro forma statements.
1) One basic weakness of the simplified pro forma approaches lies in the assumption that certain variables, such as cash, accounts receivable, and inventories, can be forced to take on certain "desired" values.
2) One basic weakness of the simplified pro forma approaches lies in the assumption that the firm's past financial condition is an accurate indicator of its future.
3) A weakness of the percent-of-sales method of preparing a pro forma income statement is .
A) that it forecasts income and then expresses the various income statement items as percentages of projected income
B) the assumption that the firm faces linear total revenue and total operating cost functions C) the assumption that the firm's past financial condition is an accurate predictor of its future
D) the difficulty faced in calculation and preparation of such statements
4) Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to .
A) understate profits when sales are decreasing B) understate profits when sales are increasing
C) overstate profits when sales are increasing
D) neither understate nor overstate profits
5) Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to .
A) understate profits when sales are decreasing and overstate profits when sales are increasing
B) understate profits, no matter what the change in sales, as long as fixed costs are present
C) understate profits when sales are increasing and overstate profits when sales are decreasing
D) overstate profits, no matter what the change in sales, as long as fixed costs are present
6) The weakness of the judgmental approach to preparing a pro forma balance sheet is . A) the assumption that the values of certain accounts can be forced to take on desired levels
B) the assumption that the firm faces linear total revenue and total operating cost functions
C) the assumption that the firm's past financial condition is an accurate predictor of its future
D) ease of calculation and preparation
Already member? Sign In
