Manual Quiz 4 (prep)

The Balance Sheet equation is Assets + Liabilities = Equity.

False.

Correct Equation: Assets = Liabilities + Equity.

Depreciation reduces taxable income even though it does not involve an actual cash outflow.

True

Depreciation lowers reported profit but no cash leaves the company; it’s a non-cash expense.

Current assets include items such as accounts receivable, inventory, and plant & equipment.

False.
👉 Plant & equipment are fixed assets, not current. Current = cash, receivables, inventory.

Retained earnings are the accumulated profits of the company that have not been distributed as dividends.

True

Depreciation in the simulation is spread over 20 years.

False.
👉 In Foundation, depreciation is based on a 15-year schedule.

Proforma reports predict results for the upcoming year based on company decisions and forecasts.

True.

Annual Reports always predict results for the upcoming year

False.
👉 Annual Reports show actual results from the past year, not predictions.

The Balance Sheet is a “snapshot” taken at the end of the year, not a continuous record.

True

Fixed assets are depreciated at an annual rate of 1/15 of their value.

True.
👉 This is how Foundation models depreciation.

If a company sells plant capacity, the sale immediately increases retained earnings on the Balance Sheet.

False.
👉 It affects cash and plant value; any gain/loss flows through the Income Statement first, then retained earnings.

The Cash Flow Statement categorizes movements of money into three areas: operating, investing, and financing.

True

A negative cash flow from operations always indicates the company is unprofitable.

False.
👉 Cash flow ≠ profit. Timing differences (receivables, payables, depreciation) can create negative cash flow even when profitable.

Proformas automatically correct unrealistic forecasts by adjusting revenues downward.

False.
👉 Proformas accept your inputs. Unrealistic forecasts will distort results.

Inventory carrying costs appear on the Income Statement.

True

If inventory carrying costs are $0, it always means the company produced exactly the right number of units.

False.
👉 $0 costs could also mean a stockout (sold everything, lost sales).

Net Margin is the difference between contribution margin and period costs.

True

EBIT excludes taxes and interest, while Net Profit includes both.

True

The Balance Sheet equation can also be expressed as Equity = Assets – Liabilities.

True

Stock buybacks increase equity on the Balance Sheet.

False.
👉 Buybacks reduce cash and equity; fewer outstanding shares remain.

Excessive inventory will show up as high carrying costs on the Income Statement.

True

A proforma Balance Sheet will always balance as long as all departmental decisions have been entered.

True.
👉 The system enforces the balance.

When plant & equipment depreciate, the book value of assets decreases, but the cash account also decreases.

False.
👉 Depreciation reduces assets & income, not cash. as it is a non-cash outlay

Income Statements only report actual financial performance, never projected numbers.

False.
👉 Annual Reports show actuals, Proformas show projected Income Statements.

The primary purpose of proformas is to anticipate the financial impact of pending decisions.

True

Annual Reports and Proformas are interchangeable because they present the same type of financial data.

False.
👉 Structure is similar, but purpose differs: proforma = prediction, annual report = actual.

Forecasting error affects only the Production Department and not the Finance Department.

False.
👉 It affects production (capacity) and finance (cash, proformas).

The simplest baseline forecast method is to take last year’s actual sales and apply the growth rate.

True

If your product stocked out last year, you should use “potential sales” (from the Market Share Report) rather than just actual sales for forecasting.

True

Customer Survey Scores are reported monthly, but only the December score is published in the FastTrack.

True

A product’s share of segment demand is proportional to its Customer Survey Score relative to competitors.

True

If your forecast is higher than the number of units available (production + inventory), the proforma uses the higher number.

False.
👉 Proformas cap at the lower of forecast vs. available units.

Overestimating forecasts typically results in excess inventory and higher carrying costs.

True

Underestimating forecasts typically results in stockouts and lost sales.

True

December Customer Survey Scores can be used to estimate demand shares for the next year.

True.
👉 They’re the most recent demand indicators.

A product priced $15 above its segment’s range can still sell in a seller’s market.

False.
👉 Tolerance limit = $9.99 above range; at $10.00+ customers refuse.

The Computer Prediction assumes each competitor offers a single mediocre product with a survey score of 20.

True

Forecasts entered in the Marketing spreadsheet override the Computer Prediction in the proformas.

True

Awareness (promotion) and accessibility (sales budget) do not influence Customer Survey Scores.

False.
👉 Both directly affect survey scores.

Worst-case scenarios in forecasting typically assume lower sales and higher inventory.

True

Best-case scenarios in forecasting typically assume higher sales and lower leftover inventory.

True

Finance managers can model best/worst case forecasts without saving changes in the spreadsheet.

True

A seller’s market occurs when industry capacity is less than total demand, even after considering second shifts.

True

When forecasting, ignoring competitor product improvements can lead to overconfidence in your sales predictions.

True

Accurate forecasting ensures both production efficiency and financial stability

True

Forecasts directly affect the Proforma Income Statement, Balance Sheet, and Cash Flow projections.

True