Chapter 14

Using the percentage of sales method, forecasted retained earnings balance is equal to what

the prior year retained earnings plus projected net income less projected dividends.

The percent of sales method does not accurately estimate the balances for lumpy assets. Which of the following statements best describes the possible errors?

If excess capacity exists, the percent of sales method will overestimate asset requirements.

Is it possible for the cash budget and the pro forma income statement to have different results?

yes, because revenues and expenses are accounted for over different time periods

What is the primary tool for short-term financial forecasting?

pro forma cash budget

A firm's cash position would most likely be hurt by

retiring outstanding debt.

True or False:Issuing new short-term bonds to finance an expansion is an example of spontaneous financing.

False

True or False: In order to reduce discretionary financing needed, a profitable company could decrease its dividend payout ratio.

True

True or False: Pro forma financial statements depict the end result of the planning period's operations.

True

True or False: One of the virtues of the percent-of-sales method is the precision of the estimate of future financing needs.

False

True or False: In the percent of sales method, a company's asset requirements are based on the company's projected sales level.

True

Plato Industries' projected sales for the first six months of 2012 are given below:

Jan. $250,000 April $300,000

Feb. $340,000 May $350,000

Mar. $280,000 June $380,000

20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $70,000/month. The company's cash balance as of February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The company must have a minimum cash balance of $40,000 at the beginning of each month. Plato's projected cumulative short-term borrowing as of April 30, 2012?

60,000

Discretionary financing accounts include all of the following EXCEPT

common stock.

accrued liabilities.

notes payable.

long-term debt.

Accrued Liabilities

Plato Industries' projected sales for the first six months of 2012 are given below:

Jan. $250,000 April $300,000

Feb. $340,000 May $350,000

Mar. $280,000 June $380,000

20% of sales are collected in cash at time of sale, 50% are collected in the month following the sale, and the remaining 30% are collected in the second month following the sale. Cost of goods sold is 85% of sales. Purchases are made in the month prior to the sales, and payments for purchases are made in the month of the sale. Total other cash expenses are $70,000/month. The company's cash balance as of February 28, 2012 will be $10,000. Excess cash will be used to retire short-term borrowing (if any). Plato has no short term borrowing as of February 28, 2012. Ignore any interest on short-term borrowing. The company must have a minimum cash balance of $40,000 at the beginning of each month. What is Plato Industries' total cash receipts for April 2012?

302,000

Rawhide Outfitters had projected its sales for the first six months of 2012 to be as follows:

Jan. $50,000 April $180,000

Feb. $60,000 May $240,000

Mar. $100,000 June $240,000

Cost of goods sold is 60% of sales. Purchases are made and paid for two months prior to the sale. 40% of sales are collected in the month of the sale, 40% are collected in the month following the sale, and the remaining 20% in the second month following the sale. Total other cash expenses are $40,000/month. The company's cash balance as of March 1st, 2012 is projected to be $40,000, and the company wants to maintain a minimum cash balance of $15,000. Excess cash will be used to retire short-term borrowing (if any exists). The firm has no short-term borrowing as of March 1st, 2012. Assume that the interest rate on short-term borrowing is 1% per month. What was Rawhides' projected loss for March?

$84,000

$110,000

$184,000

none of the above

none of the above

Potential sources of financing to support an increase in sales include all of the following EXCEPT

increase in the dividend payout ratio.

issuance of bonds and/or common stock.

increase in accounts payable.

increase in spontaneous liabilities.

Increase in the dividend payout ratio

True or False: Accounts payable and accrued expenses are known as discretionary sources of financing.

False

True or False: Using the percent of sales method, projected common stock on the 2010 pro forma balance sheet is equal to (Common Stock 2009/Sales 2009) times Projected Sales 2010.

False

True or False: For a typical firm expecting higher sales, external financing needed will be greater than discretionary financing needed.

False

True or False: A set of estimates which corresponds to the worst and best case outcomes is often desired in preparing a financial forecast.

True