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tb03 Cash Flow and Financial Planning
tb03 Cash Flow and Financial Planning
tb03 Cash Flow and Financial Planning
Chapter3
CashFlowandFinancialPlanning
.1
Learning Goals
1.
Understandtaxdepreciationproceduresandtheeffectofdepreciationonthefirmscashflows.
2.
Discussthefirmsstatementofcashflows,operatingcashflow,andfreecashflow.
3.
Understandthefinancialplanningprocess,includinglongterm(strategic)financialplansandshort
term(operating)plans.
4.
Discussthecashplanningprocessandthepreparation,evaluation,anduseofthecashbudget.
5.
Explainthesimplifiedproceduresusedtoprepareandevaluatetheproformaincomestatementand
theproformabalancesheet.
6.
Evaluatethesimplifiedapproachestoproformafinancialstatementpreparationandthecommon
usesofproformastatements.
.2
True/False
1.
Thedepreciablelifeofanassetcansignificantlyaffectthepatternofcashflows.Theshorterthe
depreciablelifeofanasset,themorequicklythecashflowcreatedbythedepreciationwriteoffwill
bereceived.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:1
Topic:DepreciationandCashFlows
2.
Noncashchargesareexpensesthatinvolveanactualoutlayofcashduringtheperiodbutarenot
deductedontheincomestatement.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
Topic:DepreciationandCashFlows
3.
UnderthebasicMACRSprocedures,thedepreciablevalueofanassetisitsfullcost,including
outlaysforinstallation.
Answer: TRUE
LevelofDifficulty:2
105GitmanPrinciplesofFinance,EleventhEdition
LearningGoal:1
Topic:DepreciationandCashFlows
Chapter3CashFlowandFinancialPlanning106
4.
Businessfirmsarepermittedtosystematicallychargeaportionofthemarketvalueoffixedassets,
asdepreciation,againstannualrevenues.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
Topic:DepreciationandCashFlows
5.
Giventhefinancialmanagerspreferenceforfasterreceiptofcashflows,alongerdepreciablelifeis
preferredtoashorterone.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:1
Topic:DepreciationandCashFlows
6.
Fortaxpurposes,usingMACRSrecoveryperiods,assetsinthefirstfourpropertyclassesare
depreciatedbythedoubledecliningbalance(200percent)methodusingthehalfyearconvention
andswitchingtostraightlinewhenadvantageous.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:1
Topic:DepreciationandCashFlows
7.
TheMACRSdepreciationmethodrequiresuseofthehalfyearconvention.Assetsareassumedto
beacquiredinthemiddleoftheyearandonlyonehalfofthefirstyearsdepreciationisrecovered
inthefirstyear.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:1
Topic:DepreciationandCashFlows
8.
Freecashflow(FCF)isthecashflowafirmgeneratesfromitsnormaloperations;calculatedas
EBITtaxesdepreciation.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:2
Topic:FreeCashFlow
9.
Thefinancedefinitionofoperatingcashflowexcludesinterestasanoperatingflow,whereasthe
accountingdefinitionincludesitasanoperatingflow.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:2
Topic:OperatingCashFlow
10.
Thenetfixedassetinvestment(NFAI)isdefinedasthechangeinnetfixedassetsplusdepreciation.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:2
Topic:FreeCashFlow
107GitmanPrinciplesofFinance,EleventhEdition
11.
Thenetcurrentassetinvestment(NCAI)isdefinedasthechangeincurrentassetsminusthechange
insumoftheaccountspayableandaccruals.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:2
Topic:FreeCashFlow
12.
Inthestatementofcashflows,thefinancingflowsarecashflowsthatresultfromdebtandequity
financingtransactions,includingincurrenceandrepaymentofdebt,cashinflowfromthesaleof
stock,andcashoutflowstorepurchasestockorpaycashdividends.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
13.
Cashflowfromoperationsisequaltothefirmsnetprofitsaftertaxesminusallnoncashcharges.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
14.
Inthestatementofcashflows,theoperatingflowsarecashflowsdirectlyrelatedtopurchaseand
saleoffixedassets.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
15.
Anincreaseinthefirmscashbalanceisaninflowofcashflow.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:InflowsandOutflowsofCash
16.
Depreciationisconsideredtobeanoutflowofcashsincethecashmustbedrawnfromsomewhere.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:InflowsandOutflowsofCash
17.
Thestatementofcashflowsallowsthefinancialmanagerandotherinterestedpartiestoanalyzethe
firmspastandpossiblyfutureprofitability.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
Chapter3CashFlowandFinancialPlanning108
18.
Toassesswhetheranydevelopmentshaveoccurredthatarecontrarytothecompanysfinancial
policies,thefinancialmanagershouldpayspecialattentiontoboththemajorcategoriesofcashflow
andtheindividualitemsofcashinflowandoutflow.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
19.
Becausedepreciationistreatedasaseparatesourceofcash,onlynetratherthangrosschangesin
fixedassetsappearonthestatementofcashflows.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
20.
Thestrategicfinancialplansareplannedlongtermfinancialactionsandtheanticipatedfinancial
impactofthoseactions.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:3
Topic:FinancialPlanningProcess
21.
Thefinancialplanningprocessbeginswithshortrun,oroperating,plansandbudgetsthatinturn
guidetheformulationoflongrun,orstrategic,financialplans.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:3
Topic:FinancialPlanningProcess
22.
Operatingfinancialplansareplannedshorttermfinancialactionsandtheanticipatedfinancial
impactofthoseactions.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:3
Topic:FinancialPlanningProcess
23.
Generally,firmsthataresubjecttohighdegreesofoperatinguncertainty,relativelyshortproduction
cycles,orbothtendtouseashorterplanninghorizon.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:3
Topic:FinancialPlanningProcess
24.
Cashbudgetisastatementofthefirmsplannedinflowsandoutflowsofcashthatisusedto
estimateitslongtermcashrequirement.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
109GitmanPrinciplesofFinance,EleventhEdition
25.
Cashplanninginvolvesthepreparationofthefirmscashbudget.Withoutadequatecash
regardlessofthelevelofprofitsanyfirmcouldfail.
Answer: TRUE
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
26.
Cashbudgetsandproformastatementsareusefulnotonlyforinternalfinancialplanningbutalso
areroutinelyrequiredbytheInternalRevenueService(IRS).
Answer: FALSE
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
27.
Thesalesforecast,cashbudget,andproformafinancialstatementsarethekeyoutputsofthe
shortrun(operating)financialplanning.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:4
Topic:FinancialPlanningProcess
28.
Thecashbudgetgivesthefinancialmanageraclearviewofthetimingofthefirmsexpected
profitabilityoveragivenperiod.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
29.
Aninternalsalesforecastisbasedontherelationshipsthatcanbeobservedbetweenthefirmssales
andcertainkeyeconomicindicatorssuchasthegrossdomesticproduct,newhousingstarts,or
disposablepersonalincome.
Answer: FALSE
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
30.
Sincedepreciationandothernoncashchargesrepresentascheduledwriteoffofanearliercash
outflow,theyshouldNOTbeincludedinthecashbudget.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
31.
Incashbudgeting,theimpactofdepreciationisreflectedinthelevelofcashoutflowrepresentedby
thetaxpayments.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
Chapter3CashFlowandFinancialPlanning110
32.
Incashbudgeting,othercashreceiptsarecashreceiptsexpectedtoresultfromsourcesotherthan
sales.Itemssuchasinterestanddividends,proceedsfromthesaleofequipment,depreciation,and
stockandbondsalesproceedsareexamplesofothercashreceipts.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
33.
Afirmsnetcashflowisthemathematicaldifferencebetweenthefirmsbeginningcashanditscash
disbursementsineachperiod.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
34.
Thenumberandtypeofintervalsinthecashbudgetdependonthenatureofthebusiness.Themore
seasonalanduncertainafirmscashflows,thegreaterthenumberofintervalsandtheshortertime
intervals.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
35.
Theexcesscashbalanceistheamountavailableforinvestmentbythefirmifthedesiredminimum
cashbalanceislessthantheperiodsendingcash.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
36.
Thefinancialmanagermaycopewithuncertaintyandmakemoreintelligentshorttermfinancial
decisionsbypreparingseveralcashbudgets,eachbasedondifferingassumptions.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
37.
Therequiredtotalfinancingfiguresinthecashbudgetrefertothemonthlychangesinborrowing.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
38.
Ifthenetcashflowislessthantheminimumcashbalance,financingisrequired.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
111GitmanPrinciplesofFinance,EleventhEdition
39.
Requiredfinancingandexcesscasharetypicallyviewedasshortterm.Therefore,required
financingmayberepresentedbynotespayableandexcesscashisassumedinvestedinaliquid,
interestpayingvehiclesuchasmarketablesecurities.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
40.
Apositiveexternalfundsrequirementwouldindicatethatthefirmsfinancingisinexcessofits
needsandthatfundswouldthereforebeavailableforrepayingdebt,repurchasingstock,or
increasingthedividendtostockholders.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:5
Topic:CashPlanningProcess
41.
Theproformastatementsprovidethefinancialmanagerwiththeamount,ifany,ofexternal
financingrequiredtosupportagivenlevelofsalesaswellasabasisforanalyzinginadvancethe
levelofprofitabilityandoverallfinancialperformanceofthefirminthecomingyear.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:5
Topic:ProFormaAnalysis
42.
Duetothenofixedcostsassumptioninthepercentofsalesmethod,theuseofcostandexpense
ratiosgenerallytendstounderstateprofitswhensalesareincreasingandoverstateprofitswhensales
aredecreasing.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
43.
Thebestwaytoadjustforthepresenceoffixedcostswhenusingasimplifiedapproachforpro
formaincomestatementpreparationistobreakthefirmshistoricalcostsintofixed,semivariable,
andvariablecomponentsandmaketheforecastusingthisrelationship.
Answer: FALSE
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
44.
Onebasicweaknessofthesimplifiedproformaapproachesliesintheassumptionthatcertain
variables,suchascash,accountsreceivable,andinventories,canbeforcedtotakeoncertain
desiredvalues.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:6
Topic:ProFormaAnalysis
Chapter3CashFlowandFinancialPlanning112
45.
Onebasicweaknessofthesimplifiedproformaapproachesliesintheassumptionthatthefirms
pastfinancialconditionisanaccurateindicatorofitsfuture.
Answer: TRUE
LevelofDifficulty:3
LearningGoal:6
Topic:ProFormaAnalysis
46.
ItwouldbecorrecttodefineOperatingCashFlow(OCF)asnetoperatingprofitaftertaxesplus
depreciation.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:OperatingCashFlow
47.
ItwouldbecorrecttodefineOperatingCashFlow(OCF)asnetoperatingprofitaftertaxesminus
depreciation.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:OperatingCashFlow
48.
Netoperatingprofitaftertaxes(NOPAT)representsthefirmsearningsbeforeinterestandafter
taxes.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:OperatingCashFlow
49.
Netoperatingprofitaftertaxes(NOPAT)representsthefirmsearningsafterdeductingbothinterest
taxes.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:OperatingCashFlow
50.
Thefirmsfreecashflow(FCF)representstheamountofcashflowavailabletoinvestors
(stockholdersandbondholders)afterthefirmhasmetalloperatingneedsandafterhavingpaidfor
netfixedassetinvestmentsandnetcurrentassetinvestments.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:FreeCashFlow
51.
Thefirmsfreecashflow(FCF)representstheamountofcashflowavailabletopaybankloansafter
thefirmhasmetalloperatingneedsandafterhavingpaidfornetfixedassetinvestmentsandnet
currentassetinvestments.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:FreeCashFlow
113GitmanPrinciplesofFinance,EleventhEdition
52.
Becausethecashbudgetshowscashflowsonlyonamonthlybasis,theinformationprovidedbythe
cashbudgetisnotnecessarilyadequateforensuringsolvency.
Answer: TRUE
LevelofDifficulty:2
LearningGoal:2
Topic:CashFlowAnalysis
53.
Becausethecashbudgetshowscashflowsonamonthlybasis,theinformationprovidedbythecash
budgetisadequateforensuringsolvency.
Answer: FALSE
LevelofDifficulty:2
LearningGoal:2
Topic:CashFlowAnalysis
.3
1.
Allocationofthehistoriccostsoffixedassetsagainsttheannualrevenuetheygenerateiscalled
(a) netprofits.
(b) grossprofits.
(c) depreciation.
(d) amortization.
Answer: C
LevelofDifficulty:1
LearningGoal:1
Topic:DepreciationandCashFlows
2.
TheModifiedAcceleratedCostRecoverySystem(MACRS)isadepreciationmethodusedfor
_________purposes.
(a) tax
(b) financialreporting
(c) managerial
(d) costaccounting
Answer: A
LevelofDifficulty:1
LearningGoal:1
Topic:DepreciationandCashFlows
3.
Afirmsoperatingcashflowisdefinedas
(a) grossprofitminusoperatingexpenses.
(b) grossprofitminusdepreciation.
(c) EBITtaxesdepreciation.
(d) EBITdepreciation.
Answer: C
LevelofDifficulty:2
LearningGoal:2
Topic:OperatingCashFlow
Chapter3CashFlowandFinancialPlanning114
4.
Acorporation
(a) mustusethesamedepreciationmethodfortaxandfinancialreportingpurposes.
(b) mustusedifferentdepreciationmethodsfortaxandfinancialreportingpurposes.
(c) mayusedifferentdepreciationmethodsfortaxandfinancialreportingpurposes.
(d) mustusedifferent(thanfortaxpurposes),butstrictlymandated,depreciationmethodsfor
financialreportingpurposes.
Answer: C
LevelofDifficulty:2
LearningGoal:1
Topic:DepreciationandCashFlows
5.
AllofthefollowingarenoncashchargesEXCEPT
(a) depreciation.
(b) accruals.
(c) depletion.
(d) amortization.
Answer: B
LevelofDifficulty:3
LearningGoal:2
Topic:DepreciationandCashFlows
6.
Thedepreciablevalueofanasset,underMACRS,is
(a) theoriginalcost(purchaseprice)only.
(b) theoriginalcostminussalvagevalue.
(c) theoriginalcostplusinstallation.
(d) theoriginalcostplusinstallationcosts,minussalvagevalue.
Answer: C
LevelofDifficulty:3
LearningGoal:1
Topic:DepreciationandCashFlows
7.
UnderMACRS,anassetwhichoriginallycost$10,000isbeingdepreciatedusinga5yearnormal
recoveryperiod.Whatisthedepreciationexpenseinyear3?
(a) $1,900
(b) $1,200
(c) $1,500
(d) $2,100
Answer: A
LevelofDifficulty:3
LearningGoal:1
Topic:DepreciationandCashFlows
115GitmanPrinciplesofFinance,EleventhEdition
8.
UnderMACRS,anassetwhichoriginallycost$100,000isbeingdepreciatedusinga10yearnormal
recoveryperiod.Thedepreciationexpenseinyear5is_________.
(a) $10,000
(b) $12,000
(c) $21,000
(d) $9,000
Answer: D
LevelofDifficulty:3
LearningGoal:1
Topic:DepreciationandCashFlows
9.
UnderMACRS,anassetwhichoriginallycost$100,000isbeingdepreciatedusinga10yearnormal
recoveryperiod.Thedepreciationexpenseinyear11is_________.
(a) $3,000
(b) $4,000
(c) $0
(d) $6,000
Answer: B
LevelofDifficulty:3
LearningGoal:1
Topic:DepreciationandCashFlows
10.
Giventhefinancialmanagerspreferenceforfasterreceiptofcashflows,
(a) alongerdepreciablelifeispreferredtoashorterone.
(b) ashorterdepreciablelifeispreferredtoalongerone.
(c) themanagerisnotconcernedwithdepreciablelives,becausedepreciationisanoncash
expense.
(d) themanagerisnotconcernedwithdepreciablelives,becauseoncepurchased,depreciationis
consideredasunkcost.
Answer: B
LevelofDifficulty:4
LearningGoal:1
Topic:DepreciationandCashFlows
11.
Thedepreciablelifeofanassetisofconcerntothefinancialmanager.Ingeneral,
(a) alongerdepreciablelifeispreferred,becauseitwillresultinafasterreceiptofcashflows.
(b) ashorterdepreciablelifeispreferred,becauseitwillresultinafasterreceiptofcashflows.
(c) ashorterdepreciablelifeispreferred,becausemanagementcanthenpurchasenewassets,asthe
oldassetsarewrittenoff.
(d) alongerdepreciablelifeispreferred,becausemanagementcanpostponepurchasingnewassets,
sincetheoldassetsstillhaveausefullife.
Answer: B
LevelofDifficulty:4
LearningGoal:1
Topic:DepreciationandCashFlows
Chapter3CashFlowandFinancialPlanning116
12.
Thedepreciablevalueofanasset,underMACRS,is
(a) thefullcostexcludinginstallationcosts.
(b) thefullcostminussalvagevalue.
(c) thefullcostincludinginstallationcosts.
(d) thefullcostincludinginstallationcostsadjustedforthesalvagevalue.
Answer: C
LevelofDifficulty:4
LearningGoal:1
Topic:DepreciationandCashFlows
13.
UnderMACRS,anassetwhichoriginallycost$100,000,incurredinstallationcostsof$10,000,and
hasanestimatedsalvagevalueof$25,000,isbeingdepreciatedusinga5yearnormalrecovery
period.Whatisthedepreciationexpenseinyear1?
(a) $15,000
(b) $12,750
(c) $11,250
(d) $22,000
Answer: D
LevelofDifficulty:4
LearningGoal:1
Topic:DepreciationandCashFlows
14.
Whichofthefollowingisasourceofcashflows?
(a) Costofgoodssold.
(b) Depreciation.
(c) Interestexpense.
(d) Taxes.
Answer: B
LevelofDifficulty:1
LearningGoal:2
Topic:DepreciationandCashFlows
15.
_________isanexpensethatisalegalobligationofthefirm.
(a) Laborexpense.
(b) Interestexpense.
(c) Salariesexpense.
(d) Rentexpense.
Answer: B
LevelofDifficulty:1
LearningGoal:2
Topic:StatementofCashFlows
117GitmanPrinciplesofFinance,EleventhEdition
16.
Thefirststepinpreparingastatementofcashflowsisto
(a) calculatechangesinincomestatementaccounts.
(b) calculatechangesinbalancesheetaccounts.
(c) calculatethedepreciationexpense.
(d) adjustretainedearnings.
Answer: B
LevelofDifficulty:1
LearningGoal:2
Topic:StatementofCashFlows
17.
Whenpreparingastatementofcashflows,retainedearningsadjustmentsarerequiredsothatwhich
ofthefollowingareseparatedonthestatement?
(a) revenueandcost
(b) assetsandliabilities
(c) depreciationandpurchases
(d) netprofitsanddividends.
Answer: D
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
18.
Thecashflowsfromoperatingactivitiesofthefirminclude
(a) interestexpense.
(b) costofrawmaterials.
(c) dividendspaid.
(d) stockrepurchases.
Answer: B
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
19.
Thecashflowsfromoperatingactivitiesofthefirminclude
(a) laborexpense.
(b) interestexpense.
(c) taxespaid.
(d) dividendspaid.
Answer: A
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
Chapter3CashFlowandFinancialPlanning118
20.
Inputstothestatementofcashflowsfromtheincomestatementincludeallofthefollowing
EXCEPT
(a) netprofitsaftertax.
(b) noncashcharges,suchasdepreciation.
(c) cashdividends.
(d) operatingprofit.
Answer: D
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
21.
ThestatementofcashflowsincludesallofthefollowingcategoriesEXCEPT
(a) operatingflows.
(b) investmentflows.
(c) financingflows.
(d) equityflows.
Answer: D
LevelofDifficulty:2
LearningGoal:2
Topic:StatementofCashFlows
22.
Thestatementofcashflowsprovidesasummaryofthefirms
(a) cashflowsfromoperations.
(b) cashinflowsfromfinancing.
(c) investmentcashflows.
(d) changesinthecashandmarketablesecurityaccounts.
(e) alloftheabove.
Answer: E
LevelofDifficulty:3
LearningGoal:2
Topic:StatementofCashFlows
23.
AllofthefollowingareinflowsofcashEXCEPT
(a) adecreaseinaccountsreceivable.
(b) netprofitsaftertaxes.
(c) dividends.
(d) anincreaseinaccruals.
Answer: C
LevelofDifficulty:3
LearningGoal:2
Topic:InflowsandOutflowsofCash
119GitmanPrinciplesofFinance,EleventhEdition
24.
AllofthefollowingareoutflowsofcashEXCEPT
(a) anincreaseininventory.
(b) adecreaseincash.
(c) dividends.
(d) adecreaseinnotespayable.
Answer: B
LevelofDifficulty:3
LearningGoal:2
Topic:InflowsandOutflowsofCash
25.
Threeimportantcomponentsofthestatementofcashflowsthatmustbeobtainedfromtheincome
statementincludeareallofthefollowingEXCEPT
(a) depreciationandanynoncashcharges.
(b) interestexpenses.
(c) netprofitsaftertaxes.
(d) cashdividendspaidonbothpreferredandcommonstocks.
Answer: B
LevelofDifficulty:3
LearningGoal:2
Topic:StatementofCashFlows
26.
Cashflowsdirectlyrelatedtoproductionandsaleofthefirmsproductsandservicesarecalled
(a) operatingflows.
(b) investmentflows.
(c) financingflows.
(d) Noneoftheabove.
Answer: A
LevelofDifficulty:3
LearningGoal:2
Topic:StatementofCashFlows
27.
Cashflowsassociatedwiththepurchaseandsaleoffixedassetsandbusinessinterestsarecalled
(a) operatingflows.
(b) investmentflows.
(c) financingflows.
(d) Noneoftheabove.
Answer: B
LevelofDifficulty:3
LearningGoal:2
Topic:StatementofCashFlows
Chapter3CashFlowandFinancialPlanning120
28.
Cashflowsthatresultfromdebtandequityfinancingtransactions,includingincurrenceand
repaymentofdebt,cashinflowsfromthesaleofstock,andcashoutflowstopaycashdividendsor
repurchasestockarecalled
(a) operatingflows.
(b) investmentflows.
(c) financingflows.
(d) Noneoftheabove.
Answer: C
LevelofDifficulty:3
LearningGoal:2
Topic:StatementofCashFlows
29.
Johnson,Inc.hasjustendedthecalendaryearmakingasaleintheamountof$10,000of
merchandisepurchasedduringtheyearatatotalcostof$7,000.Althoughthefirmpaidinfullfor
themerchandiseduringtheyear,ithasyettocollectatyearendfromthecustomer.Thenetprofit
andcashflowfortheyearare
(a) $3,000and$10,000,respectively.
(b) $3,000and$7,000,respectively.
(c) $7,000and$3,000,respectively.
(d) $3,000and$7,000,respectively.
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:OperatingCashFlows
30.
Afirmhasjustendedthecalendaryearbyselling$150,000worthofmerchandisethatwas
purchasedduringtheyearatacostof$112,500.Althoughthefirmpaidinfullforthemerchandise
duringtheyear,ithasyettocollectonthesaleatyearend.Thenetprofitandcashflowfortheyear
are
(a) $0and$150,000,respectively.
(b) $37,500and$150,000,respectively.
(c) $37,500and$112,500,respectively.
(d) $150,000and$112,500,respectively.
Answer: C
LevelofDifficulty:4
LearningGoal:2
Topic:OperatingCashFlows
121GitmanPrinciplesofFinance,EleventhEdition
Table3.1
RuffSandpaperCo.
BalanceSheets
FortheYearsEnded2002and2003
2003
Assets
Cash
Marketablesecurities
Accountsreceivable
Inventories
Grossfixedassets
LessAccumulatedDepreciation
Netfixedassets
Totalassets
Liabilities
Accountspayable
Notespayable
Accruals
Longtermdebt
Stockholdersequity
Commonstockatpar
Paidincapitalinexcessofpar
Retainedearnings
Totalliabilitiesandequity
Netprofitsaftertaxesfor2003:$150.00
2002
800
200
1,200
2,000
3,000
1,000
600
200
1,000
1,800
2,800
800
2,000
6,200
2,000
5,600
200
800
100
2,000
100
900
100
1,500
500
2,000
600
6,200
500
2,000
500
5,600
Chapter3CashFlowandFinancialPlanning122
31.
Theprimarysourceoffundsforthefirmin2003is(SeeTable3.1)
(a) netprofitsaftertaxes.
(b) anincreaseinnotespayable.
(c) anincreaseinlongtermdebt.
(d) anincreaseininventory.
Answer: C
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
32.
Commonstockdividendspaidin2003amountedto_________.(SeeTable3.1)
(a) $100
(b) $50
(c) $600
123GitmanPrinciplesofFinance,EleventhEdition
(d) $150
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
33.
Thefirmmayhaveincreasedlongtermdebtstofinance(SeeTable3.1)
(a) anincreaseingrossfixedassets.
(b) anincreaseincurrentassets.
(c) adecreaseinnotespayable.
(d) anincreaseincurrentassets,anincreaseingrossfixedassets,andadecreaseinnotespayable.
Answer: D
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
34.
Inflowsoffundsfor2003totaled_________.(SeeTable3.1)
(a) $600
(b) $700
(c) $800
(d) $950
Answer: D
LevelofDifficulty:4
LearningGoal:2
Topic:InflowsandOutflowsofCash
35.
Thefirm_________fixedassetsworth_________.(SeeTable3.1)
(a) purchased;$0
(b) purchased;$200
(c) sold;$0
(d) sold;$200
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
36.
Thefirmscashflowfromoperationsis_________.(SeeTable3.1)
(a) $350
(b) $300
(c) $150
Chapter3CashFlowandFinancialPlanning124
(d) $950
Answer: A
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
37.
Outflowsoffundsfor2003totaled(SeeTable3.1)
(a) $600
(b) $700
(c) $800
(d) $950
Answer: D
LevelofDifficulty:4
LearningGoal:2
Topic:InflowsandOutflowsofCash
125GitmanPrinciplesofFinance,EleventhEdition
38.
Thesmallestoutflowoffundsforthefirmin2003is(SeeTable3.1)
(a) adecreaseinnotespayable.
(b) anincreaseininventory.
(c) dividends.
(d) adecreaseinlongtermdebts.
Answer: C
LevelofDifficulty:4
LearningGoal:2
Topic:InflowsandOutflowsofCash
39.
Thedepreciationexpensefor2003is_________.(SeeTable3.1)
(a) $0
(b) $200
(c) $50
(d) $1,000
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
40.
Acorporationsoldafixedassetfor$100,000,whichwasalsoitsbookvalue.Thisis
(a) aninvestmentcashflowandasourceoffunds.
(b) anoperatingcashflowandasourceoffunds.
(c) anoperatingcashflowandauseoffunds.
(d) aninvestmentcashflowandauseoffunds.
Answer: A
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
41.
Acorporationraises$500,000inlongtermdebttoacquireadditionalplantcapacity.Thisis
considered
(a) aninvestmentcashflow.
(b) afinancingcashflow.
(c) afinancingcashflowandinvestmentcashflow,respectively.
(d) afinancingcashflowandoperatingcashflow,respectively.
Answer: C
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
Chapter3CashFlowandFinancialPlanning126
42.
AllofthefollowingarefinancingcashflowsEXCEPT
(a) saleofstock.
(b) paymentofstockdividends.
(c) increasingdebt.
(d) repurchasingstock.
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
127GitmanPrinciplesofFinance,EleventhEdition
43.
AllofthefollowingareoperatingcashflowsEXCEPT
(a) netprofit/earningsaftertax.
(b) increaseordecreaseincurrentliabilities.
(c) increaseordecreaseinfixedassets.
(d) depreciationexpense.
Answer: C
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
44.
FortheyearendedDecember31,2003,acorporationhadcashflowfromoperatingactivitiesof
$10,000,cashflowfrominvestmentactivitiesof$4,000,andcashflowfromfinancingactivitiesof
$9,000.TheStatementofCashFlowswouldshowa
(a) netdecreaseof$3,000incashandmarketablesecurities.
(b) netdecreaseof$5,000incashandmarketablesecurities.
(c) netincreaseof$3,000incashandmarketablesecurities.
(d) netincreaseof$5,000incashandmarketablesecurities.
Answer: C
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
45.
FortheyearendedDecember31,2003,acorporationhadcashflowfromoperatingactivitiesof
$20,000,cashflowfrominvestmentactivitiesof$15,000,andcashflowfromfinancingactivities
of$10,000.TheStatementofCashFlowswouldshowa
(a) netincreaseof$5,000incashandmarketablesecurities.
(b) netdecreaseof$5,000incashandmarketablesecurities.
(c) netdecreaseof$15,000incashandmarketablesecurities.
(d) netincreaseof$25,000incashandmarketablesecurities.
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
46.
FortheyearendedDecember31,2003,acorporationhadcashflowfromoperatingactivitiesof
$12,000,cashflowfrominvestmentactivitiesof$10,000,andcashflowfromfinancingactivities
of$4,000.TheStatementofCashFlowswouldshowa
(a) netdecreaseof$18,000incashandmarketablesecurities.
(b) netdecreaseof$6,000incashandmarketablesecurities.
(c) netincreaseof$6,000incashandmarketablesecurities.
(d) netincreaseof$2,000incashandmarketablesecurities.
Answer: C
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
Chapter3CashFlowandFinancialPlanning128
47.
Afirmhasjustendedthecalendaryearmakingasaleintheamountof$200,000ofmerchandise
purchasedduringtheyearatatotalcostof$150,500.Althoughthefirmpaidinfullforthe
merchandiseduringtheyear,ithasyettocollectatyearendfromthecustomer.Onepossible
problemthisfirmmayfaceis
(a) lowprofitability.
(b) insolvency.
(c) inabilitytoreceivecredit.
(d) highleverage.
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
48.
Thefinancialplanningprocessbeginswith_________financialplansthatinturnguidethe
formationof_________plansandbudgets.
(a) shortrun;longrun
(b) shortrun;operating
(c) longrun;strategic
(d) longrun;shortrun
Answer: D
LevelofDifficulty:1
LearningGoal:3
Topic:FinancialPlanningProcess
49.
Shortrunfinancialplansandlongrunfinancialplansgenerallycoverperiodsrangingfrom
_________yearsand_________years,respectively.
(a) onetotwo,twototen
(b) twototen,onetotwo
(c) onetofive,fivetoten
(d) onetothree,threetofive
Answer: A
LevelofDifficulty:1
LearningGoal:3
Topic:FinancialPlanningProcess
50.
Thekeyoutput(s)oftheshortrunfinancialplanningprocessarea(n)
(a) cashbudget,proformaincomestatement,andproformabalancesheet.
(b) cashbudget,salesforecast,andincomestatement.
(c) salesforecastandcashbudget.
(d) incomestatement,balancesheet,andsourceandusestatement.
Answer: A
LevelofDifficulty:1
LearningGoal:3
Topic:FinancialPlanningProcess
129GitmanPrinciplesofFinance,EleventhEdition
51.
Thekeyaspectsofthefinancialplanningprocessare
(a) cashplanningandinvestmentplanning.
(b) cashplanningandfinancing.
(c) investmentplanningandprofitplanning.
(d) cashplanningandprofitplanning.
Answer: D
LevelofDifficulty:1
LearningGoal:3
Topic:FinancialPlanningProcess
52.
Proformastatementsareusedfor
(a) cashbudgeting.
(b) creditanalysis.
(c) profitplanning.
(d) leverageanalysis.
Answer: C
LevelofDifficulty:1
LearningGoal:3
Topic:ProFormaAnalysis
53.
Whichofthefollowingwouldbetheleastlikelytoutilizeproformafinancialstatementsoracash
budget?
(a) Topmanagement.
(b) Middlemanagement.
(c) Investors.
(d) Lenders.
Answer: C
LevelofDifficulty:2
LearningGoal:3
Topic:FinancialPlanningProcess
54.
_________generallyreflect(s)theanticipatedfinancialimpactofplannedlongtermactions.
(a) Acashbudget
(b) Strategicfinancialplans
(c) Operatingfinancialplans
(d) Aproformaincomestatement
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:FinancialPlanningProcess
Chapter3CashFlowandFinancialPlanning130
55.
The_________isafinancialprojectionofthefirmsshorttermcashsurplusesorshortages.
(a) operatingfinancialplan
(b) cashbudget
(c) strategicfinancialjournal
(d) capitalassetsjournal
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:CashPlanningProcess
56.
Theprimarypurposeinpreparingproformafinancialstatementsis
(a) forcashplanning.
(b) toensuretheabilitytopaydividends.
(c) forriskanalysis.
(d) forprofitplanning.
Answer: D
LevelofDifficulty:2
LearningGoal:3
Topic:ProFormaAnalysis
57.
Theprimarypurposeinpreparingabudgetis
(a) forprofitplanning.
(b) forcashplanning.
(c) forriskanalysis.
(d) toestimatesales.
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:CashPlanningProcess
58.
Ingeneral,firmsthataresubjecttoahighdegreeof_________,relativelyshortproductioncycles,
orbothtendtouseshorterplanninghorizons.
(a) profitability
(b) financialcertainty
(c) operatinguncertainty
(d) financialplanning
Answer: C
LevelofDifficulty:2
LearningGoal:3
Topic:FinancialPlanningProcess
131GitmanPrinciplesofFinance,EleventhEdition
59.
_________considerproposedfixedassetoutlays,researchanddevelopmentactivities,marketing
andproductdevelopmentactions,andboththemixandmajorsourcesoffinancing.
(a) Shorttermfinancialplans
(b) Longtermfinancialplans
(c) Proformastatements
(d) Cashbudgeting
Answer: B
LevelofDifficulty:2
LearningGoal:3
Topic:FinancialPlanningProcess
60.
_________forecastisbasedontherelationshipsbetweenthefirmssalesandcertaineconomic
indicators.
(a) Aninternal
(b) Anexternal
(c) Asales
(d) Aproforma
Answer: B
LevelofDifficulty:1
LearningGoal:4
Topic:FinancialPlanningProcess
61.
Keyinputstoshorttermfinancialplanningare
(a) operatingbudgets.
(b) economicforecasts.
(c) salesforecasts,andoperatingandfinancialdata.
(d) leverageanalysis.
Answer: C
LevelofDifficulty:1
LearningGoal:4
Topic:FinancialPlanningProcess
62.
Oncesalesareforecasted,_________mustbegeneratedtoestimateavarietyofoperatingcosts.
(a) aproductionplan
(b) acashbudget
(c) anoperatingbudget
(d) aproformastatement
Answer: A
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
Chapter3CashFlowandFinancialPlanning132
63.
Thekeyinputtoanycashbudgetis
(a) thesalesforecast.
(b) theproductionplan.
(c) theproformabalancesheet.
(d) thecurrenttaxlaws.
Answer: A
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
64.
_________forecastisbasedonabuildup,orconsensus,ofsalesforecaststhroughthefirmsown
saleschannels,adjustedforadditionalfactorssuchasproductioncapabilities.
(a) Aninternalsales
(b) Anexternalsales
(c) Asales
(d) Aproforma
Answer: A
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
65.
Thefirmsfinalsalesforecastisusuallyafunctionof
(a) economicforecasts.
(b) salespersonsestimatesofdemand.
(c) internalandexternalfactorsincombination.
(d) accountsreceivableexperience.
Answer: C
LevelofDifficulty:1
LearningGoal:4
Topic:CashPlanningProcess
66.
Incashbudgeting,the_________seasonalanduncertainafirmscashflows,the_________the
numberofbudgetingintervalsitshoulduse.
(a) more,greater
(b) more,fewer
(c) less,greater
(d) less,fewer
Answer: A
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
133GitmanPrinciplesofFinance,EleventhEdition
67.
Thekeyinputtotheshortrunfinancialplanningprocessis
(a) thecashbudget.
(b) thecashforecast.
(c) thesalesforecast.
(d) theproformaincomestatement.
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:FinancialPlanningProcess
68.
Ofthefollowing,generallytheeasiesttoestimateare
(a) cashsales.
(b) cashreceipts.
(c) cashdisbursements.
(d) monthtomonthshorttermborrowing.
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
69.
AfirmhasprojectedsalesinMay,June,andJulyof$100,$200,and$300,respectively.Thefirm
makes20percentofsalesforcashandcollectsthebalanceonemonthfollowingthesale.Thefirms
totalcashreceiptsinJuly
(a) are$220.
(b) are$200.
(c) are$180.
(d) cannotbedeterminedwiththeinformationprovided.
Answer: A
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
70.
Themostcommoncomponentsofcashreceiptsare
(a) dividendincome,cashsales,andaccountspayable.
(b) cashsales,receivablecollections,andmiscellaneousreceipts.
(c) accrualcollections,cashsales,andinterestincome.
(d) retainedearnings,dividends,andcashsales.
Answer: B
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
Chapter3CashFlowandFinancialPlanning134
71.
Themostcommoncashdisbursementare
(a) dividendincome,cashsales,andaccountspayable.
(b) cashpurchases,dividends,andinterestincome.
(c) cashpurchases,dividends,andaccountspayable.
(d) cashsales,rent,andaccountspayable.
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
72.
CashdisbursementsmayincludeallofthefollowingEXCEPT
(a) taxpayments.
(b) rentpayments.
(c) depreciationexpense.
(d) fixedassetoutlays.
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
73.
Onewayafirmcanreducetheamountofcashitneedsinanyonemonthisto
(a) slowdownthepaymentofreceivables.
(b) delaythepaymentofwages.
(c) accruetaxes.
(d) speeduppaymentofaccountspayable.
Answer: B
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
74.
Aprojectedexcesscashbalanceforthemonthmaybe
(a) financedwithshorttermsecurities.
(b) financedwithlongtermsecurities.
(c) investedinmarketablesecurities.
(d) investedinlongtermsecurities.
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
135GitmanPrinciplesofFinance,EleventhEdition
75.
Ifafirmexpectsshorttermcashsurplusesitcanplan
(a) longterminvestments.
(b) shorttermborrowing.
(c) shorttermlending.
(d) leveragedecisions.
Answer: C
LevelofDifficulty:2
LearningGoal:4
Topic:CashPlanningProcess
76.
AfirmhasactualsalesinNovemberof$1,000andprojectedsalesinDecemberandJanuaryof
$3,000and$4,000,respectively.Thefirmmakes10percentofitssalesforcash,collects40percent
ofitssalesonemonthfollowingthesale,andcollectsthebalancetwomonthsfollowingthesale.
ThefirmstotalcashreceiptsinNovember
(a) are$1,000.
(b) are$100.
(c) are$700.
(d) cannotbedeterminedwiththeinformationprovided.
Answer: D
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
77.
AfirmhasactualsalesinNovemberof$1,000andprojectedsalesinDecemberandJanuaryof
$3,000and$4,000,respectively.Thefirmmakes10percentofitssalesforcash,collects40percent
ofitssalesonemonthfollowingthesale,andcollectsthebalancetwomonthsfollowingthesale.
ThefirmstotalexpectedcashreceiptsinJanuary
(a) are$700.
(b) are$2,100.
(c) are$1,900.
(d) cannotbedeterminedwiththeinformationprovided.
Answer: B
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
78.
InApril,afirmhadanendingcashbalanceof$35,000.InMay,thefirmhadtotalcashreceiptsof
$40,000andtotalcashdisbursementsof$50,000.Theminimumcashbalancerequiredbythefirmis
$25,000.AttheendofMay,thefirmhad
(a) anexcesscashbalanceof$25,000.
(b) anexcesscashbalanceof$0.
(c) requiredfinancingof$10,000.
(d) requiredfinancingof$25,000.
Answer: B
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
Chapter3CashFlowandFinancialPlanning136
79.
InOctober,afirmhadanendingcashbalanceof$35,000.InNovember,thefirmhadanetcash
flowof$40,000.Theminimumcashbalancerequiredbythefirmis$25,000.Attheendof
November,thefirmhad
(a) anexcesscashbalanceof$50,000.
(b) anexcesscashbalanceof$75,000.
(c) requiredtotalfinancingof$15,000.
(d) requiredtotalfinancingof$5,000.
Answer: A
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
80.
InthemonthofAugust,afirmhadtotalcashreceiptsof$10,000,totalcashdisbursementsof
$8,000,depreciationexpenseof$1,000,aminimumcashbalanceof$3,000,andabeginningcash
balanceof$500.TheendingcashbalanceforAugusttotals
(a) $1,500.
(b) $5,500.
(c) $2,500.
(d) $3,500.
Answer: C
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
81.
InthemonthofAugust,afirmhadtotalcashreceiptsof$10,000,totalcashdisbursementsof
$8,000,depreciationexpenseof$1,000,aminimumcashbalanceof$3,000,andabeginningcash
balanceof$500.Theexcesscashbalance(requiredfinancing)forAugustis
(a) requiredtotalfinancingof$500.
(b) excesscashbalanceof$5,500.
(c) excesscashbalanceof$500.
(d) requiredtotalfinancingof$2,500.
Answer: A
LevelofDifficulty:3
LearningGoal:4
Topic:CashPlanningProcess
82.
_________statementsareprojectedfinancialstatements.
(a) Proforma
(b) Income
(c) Cash
(d) Balancesheet
Answer: A
LevelofDifficulty:1
LearningGoal:5
Topic:ProFormaAnalysis
137GitmanPrinciplesofFinance,EleventhEdition
83.
Thekeyinputsforpreparingproformaincomestatementsusingthesimplifiedapproachesarethe
(a) salesforecastfortheprecedingyearandfinancialstatementsforthecomingyear.
(b) salesforecastforthecomingyearandthecashbudgetfortheprecedingyear.
(c) salesforecastforthecomingyearandfinancialstatementsfortheprecedingyear.
(d) cashbudgetforthecomingyearandsalesforecastfortheprecedingyear.
Answer: C
LevelofDifficulty:1
LearningGoal:5
Topic:ProFormaAnalysis
Chapter3CashFlowandFinancialPlanning138
84.
Thepercentofsalesmethodofpreparingtheproformaincomestatementassumesallcostsare
(a) fixed.
(b) constant.
(c) independent.
(d) variable.
Answer: D
LevelofDifficulty:1
LearningGoal:5
Topic:ProFormaAnalysis
85.
Underthejudgmentalapproachfordevelopingaproformabalancesheet,theplugfigurerequired
tobringthestatementintobalancemaybecalledthe
(a) cashbalance.
(b) retainedearnings.
(c) externalfinancingrequired.
(d) accountsreceivable.
Answer: C
LevelofDifficulty:1
LearningGoal:5
Topic:ProFormaAnalysis
86.
The_________methodofdevelopingaproformaincomestatementforecastssalesandvaluesfor
thecostofgoodssold,operatingexpenses,andinterestexpensethatareexpressedasaratioof
projectedsales.
(a) percentofsales
(b) accrual
(c) judgmental
(d) cash
Answer: A
LevelofDifficulty:2
LearningGoal:5
Topic:ProFormaAnalysis
87.
Thebestwaytoadjustforthepresenceoffixedcostswhenusingthesimplifiedapproachforpro
formaincomestatementpreparationis
(a) toproportionatelyvarythefixedcostswiththechangeinsales.
(b) toadjustforprojectedfixedassetoutlays.
(c) todisproportionatelyvarythecostswiththechangeinsales.
(d) tobreakthefirmshistoricalcostsintofixedandvariablecomponents.
Answer: D
LevelofDifficulty:2
LearningGoal:5
Topic:ProFormaAnalysis
139GitmanPrinciplesofFinance,EleventhEdition
88.
The_________methodofdevelopingaproformabalancesheetestimatesvaluesofcertainbalance
sheetaccountswhileothersarecalculated.Inthismethod,thefirmsexternalfinancingisusedasa
balancing,orplug,figure.
(a) percentofsales
(b) accrual
(c) judgmental
(d) cash
Answer: C
LevelofDifficulty:2
LearningGoal:5
Topic:ProFormaAnalysis
89.
Afirmhaspreparedthecomingyearsproformabalancesheetresultinginaplugfigureina
preliminarystatementcalledtheexternalfinancingrequiredof$230,000.Thefirmshould
prepareto
(a) repurchasecommonstocktotaling$230,000.
(b) arrangeforaloanof$230,000.
(c) donothing;thebalancesheetbalances.
(d) investinmarketablesecuritiestotaling$230,000.
Answer: B
LevelofDifficulty:2
LearningGoal:5
Topic:ProFormaAnalysis
90.
Afirmhaspreparedthecomingyearsproformabalancesheetresultinginaplugfigureina
preliminarystatementcalledtheexternalfinancingrequiredofnegative$250,000.Thefirmmay
prepareto
(a) sellcommonstocktotaling$250,000.
(b) arrangeforaloanof$250,000.
(c) donothing;thebalancesheetbalances.
(d) investinmarketablesecuritiestotaling$250,000.
Answer: D
LevelofDifficulty:2
LearningGoal:5
Topic:ProFormaAnalysis
91.
Theprimarypurposeinpreparingproformafinancialstatementsis
(a) forcashplanning.
(b) toensuretheabilitytopaydividends.
(c) forriskanalysis.
(d) forprofitplanning.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
Chapter3CashFlowandFinancialPlanning140
92.
Thepercentofsalesmethodtoprepareaproformaincomestatementassumesthefirmhasnofixed
costs.Therefore,theuseofthepastcostandexpenseratiosgenerallytendsto_________profits
whensalesareincreasing.
(a) accuratelypredict
(b) overstate
(c) understate
(d) havenoeffecton
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
93.
Inthenextplanningperiod,afirmplanstochangeitspolicyofallcashsalesandinitiateacredit
policyrequiringpaymentwithin30days.Thestatementsthatwillbedirectlyaffectedimmediately
arethe
(a) proformaincomestatement,proformabalancesheet,andcashbudget.
(b) proformabalancesheetandcashbudget.
(c) cashbudgetandstatementofretainedearnings.
(d) proformaincomestatementandproformabalancesheet.
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
94.
Afirmplanstoretireoutstandingbondsinthenextplanningperiod.Thestatementsthatwillbe
affectedarethe
(a) proformaincomestatement,proformabalancesheet,cashbudget,andstatementofretained
earnings.
(b) proformabalancesheetandcashbudget.
(c) cashbudgetandstatementofretainedearnings.
(d) proformaincomestatementandproformabalancesheet.
Answer: A
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
95.
Afirmplanstodepreciateafiveyearassetinthenextplanningperiod.Thestatementsthatwillbe
directlyaffectedimmediatelyarethe
(a) proformaincomestatement,proformabalancesheet,andcashbudget.
(b) proformabalancesheet,cashbudget,andstatementofretainedearnings.
(c) cashbudgetandproformabalancesheet.
(d) proformaincomestatementandproformabalancesheet.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
141GitmanPrinciplesofFinance,EleventhEdition
ThefinancialanalystforSportif,Inc.hascompiledsalesanddisbursementestimatesforthecoming
monthsofJanuarythroughMay.Historically,75percentofsalesareforcashwiththeremaining
25percentcollectedinthefollowingmonth.TheendingcashbalanceinJanuaryis$3,000.Prepare
acashbudgetforthemonthsofFebruarythroughMaytoanswerthefollowingmultiplechoice
questions.
Table3.2
Month
January
February
March
April
May
96.
Sportif,Inc.
Sales
$5,000
6,000
10,000
10,000
10,000
Disbursements
$6,000
$7,000
$4,000
$5,000
$5,000
ThetotalcashreceiptsforAprilare(SeeTable3.2)
(a) $5,000.
(b) $7,500.
(c) $9,250.
(d) $10,000.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:CashPlanningProcess
97.
ThenetcashflowforFebruaryis(SeeTable3.2)
(a) $1,250.
(b) $1,000.
(c) $5,750.
(d) $750.
Answer: A
LevelofDifficulty:3
LearningGoal:5
Topic:CashPlanningProcess
98.
Thefirmhasanegativenetcashflowinthemonth(s)of(SeeTable3.2)
(a) January,February,andMarch.
(b) FebruaryandMarch.
(c) JanuaryandFebruary.
(d) February.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:CashPlanningProcess
Chapter3CashFlowandFinancialPlanning142
99.
TheendingcashbalanceforMarchis(SeeTable3.2)
(a) $250.
(b) $6,750.
(c) $2,500.
(d) $500.
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:CashPlanningProcess
100. TheendingcashbalanceforFebruaryis(SeeTable3.2)
(a) $750.
(b) $1,750.
(c) $2,500.
(d) $1,000.
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:CashPlanningProcess
101. AttheendofMay,thefirmhasanendingcashbalanceof(SeeTable3.2)
(a) $9,000.
(b) $16,750.
(c) $14,250.
(d) $12,000.
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:CashPlanningProcess
102. Thefirmhasatotalfinancingrequirementof_________fortheperiodfromFebruarythroughMay.
(SeeTable3.2)
(a) $0
(b) $1,750
(c) $1,250
(d) $750
Answer: A
LevelofDifficulty:3
LearningGoal:5
Topic:CashPlanningProcess
143GitmanPrinciplesofFinance,EleventhEdition
103. IfaproformabalancesheetdatedattheendofMaywaspreparedfromtheinformationpresented,
theaccountsreceivablewouldtotal(SeeTable3.2)
(a) $2,500.
(b) $7,500.
(c) $10,000.
(d) $1,750.
Answer: A
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
104. IfaproformabalancesheetdatedattheendofMaywaspreparedfromtheinformationpresented,
themarketablesecuritieswouldtotal(SeeTable3.2)
(a) $9,000.
(b) $9,500.
(c) $12,000.
(d) $16,750.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
Usethepercentofsalesmethodtoprepareaproformaincomestatementfortheyearended
December31,2004,forHennesawLumber,Inc.
HennesawLumber,Inc.estimatesthatitssalesin2000willbe$4,500,000.Interestexpenseisto
remainunchangedat$105,000andthefirmplanstopaycashdividendsof$150,000during2004.
HennesawLumber,Inc.sincomestatementfortheyearendedDecember31,2003isshownbelow.
Fromyourpreparationoftheproformaincomestatement,answerthefollowingmultiplechoice
questions.
Table3.3
IncomeStatement
HennesawLumber,Inc.
FortheYearEndedDecember31,2003
SalesRevenue
$4,200,000
Less:Costofgoodssold
3,570,000
Grossprofits
$630,000
Less:Operatingexpenses
210,000
Operatingprofits
$420,000
Less:Interestexpense
105,000
Netprofitsbeforetaxes
$315,000
Less:Taxes(40%)
126,000
Netprofitsaftertaxes
$189,000
Less:Cashdividends
120,000
To:Retainedearnings
$69,000
Chapter3CashFlowandFinancialPlanning144
105. Theproformacostofgoodssoldfor2004is(SeeTable3.3)
(a) $3,500,000.
(b) $3,750,000.
(c) $3,825,000.
(d) $4,000,000.
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
106. Theproformaoperatingexpensesfor2004are(SeeTable3.3)
(a) $150,000.
(b) $200,000.
(c) $210,000.
(d) $225,000.
Answer: D
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
107. Theproformanetprofitsaftertaxesfor2004are(SeeTable3.3)
(a) $202,500.
(b) $207,000.
(c) $52,500.
(d) $57,000.
Answer: B
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
108. Theproformaaccumulatedretainedearningsaccountonthebalancesheetisprojectedto(See
Table3.3)
(a) increase$52,500.
(b) decrease$52,500.
(c) increase$57,000.
(d) decrease$57,000.
Answer: C
LevelofDifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
145GitmanPrinciplesofFinance,EleventhEdition
AfinancialmanageratGeneralTalcMineshasgatheredthefinancialdataessentialtoprepareapro
formabalancesheetforcashandprofitplanningpurposesforthecomingyearendedDecember31,
2004.Usingthepercentofsalesmethodandthefollowingfinancialdata,preparetheproforma
balancesheetinordertoanswerthefollowingmultiplechoicequestions.
(a) Thefirmestimatessalesof$1,000,000.
(b) Thefirmmaintainsacashbalanceof$25,000.
(c) Accountsreceivablerepresents15percentofsales.
(d) Inventoryrepresents35percentofsales.
(e) Anewpieceofminingequipmentcosting$150,000willbepurchasedin2004.Total
depreciationfor2004willbe$75,000.
(f) Accountspayablerepresents10percentofsales.
(g) Therewillbenochangeinnotespayable,accruals,andcommonstock.
(h) Thefirmplanstoretirealongtermnoteof$100,000.
(i) Dividendsof$45,000willbepaidin2004.
(j) Thefirmpredictsa4percentnetprofitmargin.
Table3.4
BalanceSheet
GeneralTalcMines
December31,2003
Assets
Cash
Accountsreceivable
Inventories
Totalcurrentassets
Netfixedassets
Totalassets
$25,000
120,000
300,000
$445,000
$500,000
$945,000
Liabilitiesandstockholders
equityAccountspayable
Notespayable
Accruals
Totalcurrentliabilities
Longtermdebts
Totalliabilities
Stockholdersequity
Commonstock
Retainedearnings
TotalStockholdersequity
Totalliabilitiesandstockholdersequity
$80,000
350,000
50,000
$480,000
150,000
$630,000
180,000
135,000
$315,000
$945,000
Chapter3CashFlowandFinancialPlanning146
109. Theproformatotalcurrentassetsamountis(SeeTable3.4)
(a) $470,900.
(b) $500,000.
(c) $525,000.
(d) $575,000.
Answer: C
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
110. Theproformanetfixedassetsamountis(SeeTable3.4)
(a) $500,000.
(b) $575,000.
(c) $600,000.
(d) $650,000.
Answer: B
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
111. Theproformacurrentliabilitiesamountis(SeeTable3.4)
(a) $400,000.
(b) $450,000.
(c) $475,000.
(d) $500,000.
Answer: D
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
112. Theproformatotalliabilitiesamountis(SeeTable3.4)
(a) $500,000.
(b) $550,000.
(c) $700,000.
(d) $650,000.
Answer: B
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
147GitmanPrinciplesofFinance,EleventhEdition
113. Theproformaaccumulatedretainedearningsamountis(SeeTable3.4)
(a) $90,000.
(b) $175,000.
(c) $140,000.
(d) $130,000.
Answer: D
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
114. Theexternalfinancingrequiredin2004willbe(SeeTable3.4)
(a) $230,000.
(b) $240,000.
(c) $0.
(d) $195,000.
Answer: B
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
115. GeneralTalcMinesmayprepareto(SeeTable3.4)
(a) arrangeforaloanequaltotheexternalfundsrequirement.
(b) eliminatethedividendtocovertheneededfinancing.
(c) canceltheretirementofthelongtermnotetocovertheneededfinancing.
(d) repurchasecommonstockequaltotheexternalfundsrequirement.
Answer: A
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
116. Theexternalfundsrequirementresultsprimarilyfrom(SeeTable3.4)
(a) thepaymentofdividends.
(b) theretirementofdebtandpurchaseofnewfixedassets.
(c) lowprofitmargin.
(d) highcostofsales.
Answer: B
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
Chapter3CashFlowandFinancialPlanning148
117. IfGeneralTalcMinescannotraisetheexternalfinancingrequiredthroughtraditionalcredit
channels,thefirmmay(SeeTable3.4)
(a) increasesales.
(b) purchaseadditionalfixedassetstoraiseproductivity.
(c) sellcommonstock.
(d) factoraccountsreceivable.
Answer: C
LevelofDifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
149GitmanPrinciplesofFinance,EleventhEdition
118. Aweaknessofthepercentofsalesmethodtopreparingaproformaincomestatementis
(a) theassumptionthatthevaluesofcertainaccountscanbeforcedtotakeondesiredlevels.
(b) theassumptionthatthefirmfaceslineartotalrevenueandtotaloperatingcostfunctions.
(c) theassumptionthatthefirmspastfinancialconditionisanaccuratepredictorofitsfuture.
(d) easeofcalculationandpreparation.
Answer: C
LevelofDifficulty:3
LearningGoal:6
Topic:ProFormaAnalysis
119. Forfirmswithhighfixedcosts,thepercentofsalesapproachforpreparingaproformaincome
statementtendsto
(a) overestimateprofitswhensalesareincreasing.
(b) underestimateprofitswhensalesareincreasing.
(c) beanaccuratepredictorofprofits.
(d) beadifficultmodeltoapply.
Answer: B
LevelofDifficulty:3
LearningGoal:6
Topic:ProFormaAnalysis
120. Utilizingpastcostandexpenseratios(percentofsalesmethod)whenpreparingproformafinancial
statementswilltendto
(a) understateprofitswhensalesaredecreasing.
(b) understateprofitswhensalesareincreasing.
(c) overstateprofitswhensalesareincreasing.
(d) neitherunderstatenoroverstateprofits.
Answer: B
LevelofDifficulty:3
LearningGoal:6
Topic:ProFormaAnalysis
121. Utilizingpastcostandexpenseratios(percentofsalesmethod)whenpreparingproformafinancial
statementswilltendto
(a) understateprofitswhensalesaredecreasingandoverstateprofitswhensalesareincreasing.
(b) understateprofits,nomatterwhatthechangeinsales,aslongasfixedcostsarepresent.
(c) understateprofitswhensalesareincreasingandoverstateprofitswhensalesaredecreasing.
(d) overstateprofits,nomatterwhatthechangeinsales,aslongasfixedcostsarepresent.
Answer: C
LevelofDifficulty:3
LearningGoal:6
Topic:ProFormaAnalysis
Chapter3CashFlowandFinancialPlanning150
122. Theweaknessofthejudgmentalapproachtopreparingaproformabalancesheetis
(a) theassumptionthatthevaluesofcertainaccountscanbeforcedtotakeondesiredlevels.
(b) theassumptionthatthefirmfaceslineartotalrevenueandtotaloperatingcostfunctions.
(c) theassumptionthatthefirmspastfinancialconditionisanaccuratepredictorofitsfuture.
(d) easeofcalculationandpreparation.
Answer: A
LevelofDifficulty:3
LearningGoal:6
Topic:ProFormaAnalysis
123. Inaperiodofrisingsales,utilizingpastcostandexpenseratios(percentofsalesmethod)when
preparingproformafinancialstatementswilltendto
(a) overstatecostsandoverstateprofits.
(b) overstatecostsandunderstateprofits.
(c) understatecostsandoverstateprofits.
(d) understatecostsandunderstateprofits.
Answer: B
LevelofDifficulty:4
LearningGoal:6
Topic:ProFormaAnalysis
124. Inaperiodofrisingsalesutilizingpastcostandexpenseratios(percentofsalesmethod),when
preparingproformafinancialstatementsandplanningfinancing,willtendto
(a) understateretainedearningsandunderstatetheadditionalfinancingneeded.
(b) overstateretainedearningsandoverstatetheadditionalfinancingneeded.
(c) understateretainedearningsandoverstatethefinancingneeded.
(d) overstateretainedearningsandunderstatethefinancingneeded.
Answer: C
LevelofDifficulty:4
LearningGoal:6
Topic:ProFormaAnalysis
125. Calculatenetoperatingprofitaftertaxes(NOPAT)ifafirmhassalesof$1,000,000,operatingprofit
(EBIT)of$100,000,interestexpenseof$50,000,andataxrateof30percent.
(a) $35,000.
(b) $700,000.
(c) $70,000.
(d) noneoftheabove.
Answer: C
LevelofDifficulty:3
LearningGoal:2
Topic:FreeCashFlow(Equation3.2)
151GitmanPrinciplesofFinance,EleventhEdition
126. Calculateafirmsfreecashflowifithasnetoperatingprofitaftertaxesof$100,000,netfixedasset
investmentrequirementof$40,000,anetcurrentassetrequirementof$30,000andataxrateof
30percent.
(a) $0.
(b) $30,000.
(c) $30,000.
(d) noneoftheabove.
Answer: A
LevelofDifficulty:3
LearningGoal:2
Topic:FreeCashFlow(Equation3.5)
127. NICOCorporationhadnetfixedassetsof$2,000,000attheendof2006and$1,800,000attheend
of2005.Inaddition,thefirmhadadepreciationexpenseof$200,000during2006and$180,000
during2005.Usingthisinformation,NICOsnetfixedassetinvestmentfor2006was
(a) $20,000.
(b) $0.
(c) $380,000.
(d) $400,000.
Answer: D
LevelofDifficulty:4
LearningGoal:2
Topic:FreeCashFlow(Equation3.6)
128. NICOCorporationhadnetcurrentassetsof$2,000,000attheendof2006and$1,800,000attheend
of2005.Inaddition,NICOhadnetspontaneouscurrentliabilitiesof$1,000,000in2006and
$1,500,000in2005.Usingthisinformation,NICOsnetcurrentassetinvestmentfor2006was
(a) $700,000.
(b) $300,000.
(c) $300,000.
(d) $700,000.
Answer: B
LevelofDifficulty:4
LearningGoal:2
Topic:FreeCashFlow(Equation3.7)
129. During2006,NICOCorporationhadEBITof$100,000,achangeinnetfixedassetsof$400,000,an
increaseinnetcurrentassetsof$100,000,anincreaseinspontaneouscurrentliabilitiesof$400,000,
adepreciationexpenseof$50,000,andataxrateof30percent.Basedonthisinformation,NICOs
freecashflowis
(a) $630,000.
(b) $50,000.
(c) $650,000.
(d) $30,000.
Answer: D
LevelofDifficulty:4
LearningGoal:2
Chapter3CashFlowandFinancialPlanning152
Topic:FreeCashFlow(Equation3.5)
.4
Essay Questions
1.
DarlingPaperContainer,Inc.purchasedseveralmachinesatatotalcostof$300,000.The
installationcostforthisequipmentwas$25,000.Thefirmplanstodepreciatetheequipmentusing
theMACRS5yearnormalrecoveryperiod.Prepareadepreciationscheduleshowingthe
depreciationexpenseforeachyear.
Answer:
Year
1
2
3
4
5
6
DepreciationSchedule
DepreciationExpense
($300,000$25,000)
0.20$65,000
$325,000
0.32104,000
$325,000
0.1961,750
$325,000
0.1239,000
$325,000
0.1239,000
$325,000
0.0516,250
LevelofDifficulty:2
LearningGoal:1
Topic:DepreciationandCashFlows
2.
GiventhefinancialdataforNewElectronicWorld,Inc.(NEW),computethefollowingmeasuresof
cashflowsfortheNEWfortheyearendedDecember31,2005
(a) OperatingCashFlow.
(b) FreeCashFlow.
FortheyearendedDecember31,
2004
Depreciation
EBIT
InterestExpenses
Taxes
Cash
AccountsReceivable
Inventory
Netfixedassets
Accountspayable
Notespayable
Accruals
$21,000
39,000
27,000
22,000
25,000
50,000
1,000
2005
$3,000
30,000
3,000
8,000
24,000
45,000
30,000
24,000
30,000
40,000
2,000
153GitmanPrinciplesofFinance,EleventhEdition
Answers:
(a) OCFEBITTaxesDepreciation
OCF$30,000$8,000$3,000$35,000
(b) FCFOCFNetfixedassetinvestment(NFAI)Netcurrentassetinvestment
(NCAI)
NFAIChangeinnetfixedassetsDepreciation
(24,00022,000)3,000$5,000
NCAIChangeincurrentassetschangein(AccountspayableAccurals)
(99,00087,000)(32,00026,000)
$6,000
FCF35,0005,0006,000$24,000
Levelofdifficulty:4
LearningGoal:2
Topic:OperatingCashFlowsandFreeCashFlows(Equation3.4and3.5)
3.
Identifyeachexpenseorrevenueasacashflowfromoperatingactivities(O),acashflowfrom
investmentactivities(I),oracashflowfromfinancingactivities(F).
Administrativeexpenses
Rentpayment
Interestonanotepayable
Interestonanotereceivable
Saleofequipment
Dividendpayment
Stockrepurchase
Saleoffinishedgoods
Laborexpense
Saleofabondissue
Repaymentofalongtermdebt
Sellingexpenses
Depreciationexpense
Saleofcommonstock
Purchaseoffixedassets
Chapter3CashFlowandFinancialPlanning154
Answer:
Administrativeexpenses............................
Rentpayment.......................................
Interestonanotepayable.........................
Interestonanotereceivable......................
Saleofequipment..................................
Dividendpayment...................................
Stockrepurchase...................................
Saleoffinishedgoods.............................
Laborexpense......................................
Saleofabondissue...............................
Repaymentofalongtermdebt...............
Sellingexpenses...................................
Depreciationexpense...............................
Saleofcommonstock...............................
Purchaseoffixedassets...........................
O
O
F
F
I
F
F
O
O
F
F
O
O
F
I
Levelofdifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
4.
Calculatethechangeinthekeybalancesheetaccountsbetween2002and2003andclassifyeachas
asource(S),ause(U),orneither(N),andindicatewhichtypeofcashflowitis:anoperatingcash
flow(O),andinvestmentcashflow(I)orafinancingcashflow(F).
Account
Longtermdebts
Accountsreceivable
Commonstock
Cash
Retainedearnings
Accruals
Inventory
Accountspayable
Netfixedassets
ABCCorp.
BalanceSheetChangesandClassification
ofKeyAccountsbetween2004and2005
2004
2005
Change Classification
$960
$800
640
500
200
200
640
500
960
800
50
200
840
600
1,150
1,000
1,800
2,000
Type
155GitmanPrinciplesofFinance,EleventhEdition
Answer:
ABCCorp.
BalanceSheetChangesandClassification
ofKeyAccountsbetween2004and2005
Account
2004
2005
Chng.
Classif.
Longtermdebts
$960
$800
160
S
Accountsreceivable
640
500
140
U
Commonstock
200
200
0
N
Cash
640
500
140
U
Retainedearnings
960
800
160
S
Accruals
50
200
150
U
Inventory
840
600
240
U
Accountspayable
1,150
1,000
150
S
Netfixedassets
1,800
2,000
200
S
Levelofdifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
Table3.5
MagnaFax,Inc.
IncomeStatement
FortheYearEndedDecember31,2005
Salesrevenue
Costofgoodssold
GrossProfits
Sellingexpense
Generalandadministrativeexpense
Depreciationexpense
Operatingprofits
Interestexpense
Netprofitbeforetaxes
Taxes(40%)
Netprofitaftertaxes
$150,000
117,500
$32,500
4,500
4,000
4,000
$20,000
2,500
$17,500
7,000
$10,500
Type
F
O
F
O
O/F
O
O
O
I
Chapter3CashFlowandFinancialPlanning156
MagnaFax,Inc.
BalanceSheet
FortheYearsEndedDecember31,2004and2005
2004
Assets
Cash
Accountsreceivable
Inventory
Grossfixedassets
Acc.Depreciation
Netfixedassets
Totalassets
LiabilitiesandEquity
Accountspayable
Notespayable
Accruals
Longtermdebts
Commonstockatpar
Paidincapitalinexcessofpar
Retainedearnings
Totalliabilitiesandequity
5.
$24,000
45,000
30,000
$42,000
22,000
2005
$21,000
39,000
27,000
$40,000
18,000
20,000
$119,000
22,000
$109,000
$25,000
50,000
1,000
10,000
1,000
4,000
28,000
$119,000
$30,000
40,000
2,000
8,000
1,000
4,000
24,000
$109,000
ThecreditmanageratFirstNationalBankhasjustreceivedtheincomestatementandbalancesheet
forMagnaFax,Inc.fortheyearendedDecember31,2005.(SeeTable3.5.)Thebankrequiresthe
firmtoreportitsearningsperformanceandfinancialpositionquarterlyasaconditionofaloan
agreement.Thebankscreditmanagermustpreparetwokeyfinancialstatementsbasedonthe
informationsentbyMagnaFax,Inc.Thiswillbepassedontothecommercialloanofficerassigned
tothisaccount,sothathemayreviewthefinancialconditionofthefirm.
(a) PrepareastatementofretainedearningsfortheyearendedDecember31,2005.
(b) PrepareasummaryofcashinflowsandcashoutflowsfortheyearendedDecember31,2005.
(c) PrepareastatementofcashflowsfortheyearendedDecember31,2005,organizedbycash
flowfromoperatingactivities,cashflowfrominvestmentactivities,andcashflowfrom
financingactivities.
Answers:
(a)
MagnaFax,Inc.
StatementofRetainedEarnings
FortheYearEndedDecember31,2005
RetainedEarningsBalance(December31,2004)
$24,000
Netprofitsaftertaxes
10,500
Dividends
6,500
RetainedEarningsBalance(December31,2005)
$28,000
157GitmanPrinciplesofFinance,EleventhEdition
(b)
MagnaFax,Inc.
StatementofCashFlows
FortheYearEndedDecember31,2005
CashInflows
CashOutflows
Netprofits
Dividendspaid
aftertaxes
$10,500
Inc.incash
Depreciation
4,000
Inc.inacct.Rec
Inc.inNotesPayable
10,000
Inc.inInventory
Inc.inLTdebts
2,000
Inc.inFixedAsset
Dec.inAcctPay.
Dec.inaccruals
TotalInflows
$26,500
TotalOutflows
(c)
MagnaFax,Inc.
StatementofCashFlows
FortheYearEndedDecember31,2005
Cashflowfromoperatingactivities:
Netprofitsaftertaxes
$10,500
Depreciation
4,000
Inc.inAccountsReceivable
6,000
Inc.inInventory
3,000
Dec.inAccountsPayable
5,000
Dec.inAccruals
1,000
$500
Cashflowfrominvestmentactivities:
Inc.ingrossfixedassets
Changesinbusinessinterest
2,000
0
$2,000
Cashflowfromfinancingactivities:
Inc.innotespayable
Inc.inlongtermdebts
ChangesinS.E.
Dividendspaid
Netincreaseincash&marketablesec.
Levelofdifficulty:4
LearningGoal:2
Topic:StatementofCashFlows
$10,000
2,000
0
6,500
$5,500
$3,000
$6,500
3,000
6,000
3,000
2,000
5,000
1,000
$26,500
Chapter3CashFlowandFinancialPlanning158
6.
GerryJacobs,afinancialanalystforBestValuSupermarkets,haspreparedthefollowingsalesand
cashdisbursementestimatesfortheperiodAugustthroughDecemberofthecurrentyear.
Month
August
September
October
November
December
Sales
$400
500
500
600
700
CashDisbursements
$300
500
700
400
500
90percentofsalesareforcash,theremaining10percentarecollectedonemonthlater.All
disbursementsareonacashbasis.Thefirmwishestomaintainaminimumcashbalanceof$50.The
beginningcashbalanceinSeptemberis$25.PrepareacashbudgetforthemonthsofOctober,
November,andDecember,notinganyneededfinancingorexcesscashavailable.
Answer:
ACashBudgetforBestValuSupermarkets
Sept.
Oct.
Nov.
Cashreceipts
Sales(cash90%)
SalesCollected
(1mo.lag10%)
Totalcashreceipts
Totalcashdisbursements
Netcashflow
Beg.cashbalance
Endingcashbalance
Minimumbalance
Requiredfinancing
excesscash
Dec.
$450
$450
$540
$630
40
$490
500
(10)
25
15
50
35
50
$500
700
(200)
15
(185)
50
235
50
$590
400
190
(185)
5
50
45
60
$690
500
190
5
195
50
145
BestValuSupermarketsshouldarrangeforalineofcreditforatleast$235duringthe
fourmonthperiod.
Levelofdifficulty:3
LearningGoal:4
Topic:CashFlowAnalysis
7.
TerrelManufacturingexpectsstablesalesthroughthesummermonthsofJune,July,andAugustof
$500,000permonth.Thefirmwillmakepurchasesof$350,000permonthduringthesemonths.
Wagesandsalariesareestimatedat$60,000permonthplus7percentofsales.Thefirmmustmake
aprincipalandinterestpaymentonanoutstandingloaninJuneof$100,000.Thefirmplansa
purchaseofafixedassetcosting$75,000inJuly.Thesecondquartertaxpaymentof$20,000isalso
dueinJune.Allsalesareforcash.
159GitmanPrinciplesofFinance,EleventhEdition
(a) ConstructacashbudgetforJune,July,andAugust,assumingthefirmhasabeginningcash
balanceof$100,000inJune.
(b) Thesalesprojectionsmaynotbeaccurateduetothelackofexperiencebyanewlyhiredsales
manager.Ifthesalesmanagerbelievesthemostoptimisticandpessimisticestimatesofsalesare
$600,000and$400,000,respectively,whatarethemonthlynetcashflowsandrequired
financingorexcesscashbalances?
Answers:
Sales(cash)
Less:CashDisbursements
Purchases
Wages&Salaries
Variableportion(W&S)
Principal&Interest
Purchaseoffixedassets
Taxpayment
Totalcashdisbursement
Netcashflow
Add:Beg.cash
Endingcash
Less:Mincash
Requiredfinancing
Excesscash
MultipleCashBudgets
June
Pessimistic
MostLikely
$400,000
$500,000
Optimistic
$600,000
350,000
60,000
28,000
100,000
350,000
60,000
35,000
100,000
350,000
60,000
42,000
100,000
20,000
$558,000
(158,000)
100,000
(58,000)
20,000
$565,000
(65,000)
100,000
35,000
20,000
$572,000
28,000
100,000
128,000
35,000
128,000
Pessimistic
$400,000
MostLikely
$500,000
Optimistic
$600,000
350,000
60,000
28,000
350,000
60,000
35,000
350,000
60,000
42,000
75,000
75,000
75,000
$513,000
(113,000)
(58,000)
(171,000)
$520,000
(20,000)
35,000
15,000
$527,000
73,000
128,000
201,000
15,000
201,000
58,000
July
Sales(cash)
Less:CashDisbursements
Purchases
Wages&Salaries
Variableportion(W&S)
Principal&Interest
Purchaseoffixedassets
Taxpayment
Totalcashdisbursement
Netcashflow
Add:Beg.cash
Endingcash
Less:Mincash
Requiredfinancing
Excesscash
171,000
Chapter3CashFlowandFinancialPlanning160
Sales(cash)
Less:CashDisbursements
Purchases
Wages&Salaries
Variableportion(W&S)
Principal&Interest
Purchaseoffixedassets
Taxpayment
Totalcashdisbursement
Netcashflow
Add:Beg.cash
Endingcash
Less:Mincash
Requiredfinancing
Excesscash
August
Pessimistic
MostLikely
$400,000
$500,000
Optimistic
$600,000
350,000
60,000
28,000
350,000
60,000
35,000
350,000
60,000
42,000
$438,000
(38,000)
171,000
(209,000)
$445,000
(55,000)
15,000
70,000
$452,000
148,000
201,000
349,000
70,000
349,000
209,000
Ifthemostpessimisticsalesfigure($400,000)materializes,thefinancialmanagershould
expectafinancingrequirementof$209,000andshouldarrangeforalineofcredittocover
thefirmscashdeficit.However,ifthemostoptimisticestimatematerializes,thefinancial
managerwillneedtoarrangeforinvestingatotalof$349,000overthethreemonth
period.
Levelofdifficulty:4
LearningGoal:4
Topic:CashFlowAnalysis
8.
Inpreparationforthequarterlycashbudget,thefollowingrevenueandcostinformationhavebeen
compiled.PrepareandevaluateacashbudgetforthemonthsofOctober,November,andDecember
basedontheinformationshownbelow.
Month
August(actual)
September(actual)
October(forecast)
November(forecast)
December(forecast)
Sales
$3,000,000
$4,500,000
$1,000,000
$1,500,000
$2,000,000
Purchases
$3,500,000
$2,000,000
$500,000
$750,000
$1,000,000
161GitmanPrinciplesofFinance,EleventhEdition
Thefirmcollects60percentofsalesforcashand40percentofitssalesonemonthlater.
Interestincomeof$50,000onmarketablesecuritieswillbereceivedinDecember.
Thefirmpayscashfor40percentofitspurchases.
Thefirmpaysfor60percentofitspurchasesthefollowingmonth.
Salariesandwagesamountto15percentoftheprecedingmonthssales.
Salescommissionsamountto2percentoftheprecedingmonthssales.
Leasepaymentsof$100,000mustbemadeeachmonth.
AprincipalandinterestpaymentonanoutstandingloanisdueinDecemberof$150,000.
Thefirmpaysdividendsof$50,000attheendofthequarter.
Fixedassetscosting$600,000willbepurchasedinDecember.
Depreciationexpenseeachmonthof$45,000.
ThefirmhasabeginningcashbalanceinOctoberof$100,000andmaintainsaminimumcash
balanceof$200,000.
Answer:
Month
Sales
Cash(60%)
1mo.(40%)
Interest
TotalReceipts
Purchase
Cash(40%)
1mo.(60%)
Salaries&Wages
SalesCommission
LeasePayments
Princ&InterestPay
Cashdividends
Fixedassetspurchase
TotalDisbursements
Netcashflow
Add:Beg.Cash
Endingcash
Less:MinCash
RequiredFin.
ExcessCash
August
$3,000,000
1,800,000
3,500,000
1,400,000
CashBudget
September
October
4,500,000
1,000,000
2,700,000
600,000
1,200,000
1,800,000
3,900,000
2,000,000
800,000
2,100,000
450,000
60,000
100,000
2,400,000
500,000
200,000
1,200,000
675,000
90,000
100,000
November
1,500,000
900,000
400,000
_________
870,000
430,000
235,000
665,000
200,000
December
2,000,000
1,200,000
600,000
50,000
1,850,000
1,000,000
400,000
450,000
225,000
30,000
100,000
150,000
50,000
600,000
2,005,000
(155,000)
665,000
510,000
200,000
465,000
310,000
1,300,000
750,000
300,000
300,000
150,000
20,000
100,000
Chapter3CashFlowandFinancialPlanning162
Thefirmhasexcesscashduringthethreemonthperiodandcaninvesttheexcesscashinmarketable
securities.
Levelofdifficulty:4
LearningGoal:4
Topic:CashFlowAnalysis
9.
HarrysHouseofHamburgers(HHH)wantstoprepareacashbudgetformonthsofSeptember
throughDecember.Usingthefollowinginformation,preparethecashbudgetscheduleandinterpret
theresults.
Saleswere$50,000inJuneand$60,000inJuly.Saleshavebeenforecastedtobe$65,000,
$72,000,$63,000,$59,000,and$56,000formonthsofAugust,September,October,November,
andDecember,respectively.Inthepast,10percentofsaleswereoncashbasis,andthe
collectionwere50percentinthefirstmonth,30percentinthesecondmonth,and10percentin
thethirdmonthfollowingthesales.
163GitmanPrinciplesofFinance,EleventhEdition
Everyfourmonths(threetimesayear)$500ofdividendsfrominvestmentsareexpected.The
firstdividendpaymentwasreceivedinJanuary.
Purchasesare60percentofsales,15percentofwhicharepaidincash,65percentarepaidone
monthlater,andtherestispaidtwomonthsafterpurchase.
$8,000dividendsarepaidtwiceayear(inMarchandSeptember).
Themonthlyrentis$2,000.
Taxesare$6,500payableinDecember.
AnewhamburgerpresswillbepurchasedinOctoberfor$2,300.
$1,500interestwillbepaidinNovember.
$1,000loanpaymentsarepaideverymonth.
Wagesandsalariesare$1,000plus5percentofsalesineachmonth.
Augustsendingcashbalanceis$3,000.
HHHwouldliketomaintainaminimumcashbalanceof$10,000.
Answer:
Month
June
Sales
$50,000
Cash
5,000
sales(10%)
CollectionsofA/R:
1mon(50%)
2mon(30%)
3mon(10%)
Dividendincome
Totalcashrecpts
July
60,000
6,000
25,000
Purch.
$30,000 36,000
Cash
4,500
5,400
purchases(15%)
PaymentsofA/P:
1mon(65%)
19,500
2mon(20%)
Dividend
Payment
Rent
Taxes
NewAsset
Interest
LoanPayment
Wages&Salaries
Totalcash
disbursements
CashBudget
Aug.
Sept.
65,000
72,000
6,500
7,200
Oct.
63,000
6,300
Nov.
59,000
5,900
Dec.
56,000
5,600
32,500
18,000
5,000
36,000
19,500
6,000
31,500
21,600
6,500
29,500
18,900
7,200
$63,200
67,800
65,500
61,200
39,000
5,850
43,200
6,480
37,800
5,670
35,400
5,310
33,600
5,040
23,400
6,000
25,350
7,200
28,080
7,800
24,570
8,640
23,010
7,560
8,000
2,000
2,000
2,000
2,000
6,500
1,000
4,150
51,000
2,300
1,500
1,000
3,950
46,970
30,000
15,000
500
1,000
4,600
$54,630
1,000
3,800
48,910
Chapter3CashFlowandFinancialPlanning164
Netcashflow
Add:Beg.cash
Endingcash
Less:Min.cash
RequiredtotalfinancingExcesscash
$8,570
3,000
11,570
10,000
1,570
16,800
11,570
28,370
10,000
18,370
18,530
28,370
46,900
10,000
36,900
12,290
46,900
59,190
10,000
49,190
Nofinancingrequired.Thecompanymayinvesttheexcesscashinmarketablesecurities.
Levelofdifficulty:4
LearningGoal:4
Topic:CashFlowAnalysis
10.
IncomeStatement
HuddlestonManufacturingCompany
FortheYearEndedDecember31,2005
Sales
$2,800,000
Less:Costofgoodssold
1,820,000
Grossprofits
$980,000
Less:Operatingexpenses
240,000
OperatingProfits
$740,000
Less:Interestexpense
70,000
Netprofitsbeforetaxes
$670,000
Less:Taxes(40%)
268,000
Netprofitsaftertaxes
$402,000
Less:CashDividends
132,000
To:Retainedearnings
$270,000
HuddlestonManufacturingestimatesitssalesin2006willbe$3million.Interestexpenseis
expectedtoremainunchangedat$70,000,andthefirmplanstopaycashdividendsof$140,000
during2006.Usethepercentofsalesmethodtoprepareaproformaincomestatementfortheyear
endedDecember31,2006,basedonthe2005incomestatementshownabove.
165GitmanPrinciplesofFinance,EleventhEdition
Answer:
ProFormaIncomeStatement
HuddlestonManufacturingCompany
FortheYearEndedDecember31,2006
Sales
$3,000,000
Less:Costofgoodssold(65%)
1,950,000
Grossprofits
$1,050,000
Less:Operatingexpenses(8.57%)
257,142
OperatingProfits
$792,858
Less:Interestexpense
70,000
Netprofitsbeforetaxes
$722,858
Less:Taxes(40%)
289,143
Netprofitsaftertaxes
$433,714
Less:CashDividends
140,000
To:Retainedearnings
$293,714
Levelofdifficulty:3
LearningGoal:5
Topic:ProFormaAnalysis
Table3.6
IncomeStatement
AceManufacturing,Inc.
FortheYearEndedDecember31,2005
Sales
$2,000,000
Less:Costofgoodssold
1,200,000
Grossprofit
$800,000
Less:Sellingexpense
200,000
General&administrativeexpense
60,000
Less:Depreciation
40,000
Operatingprofit
$500,000
Less:Interest
80,000
Earningsbeforetaxes
$420,000
Less:Taxes(40%)
168,000
Netprofitaftertaxes/EACS
$252,000
Commonstockdividends
$100,000
11.
AceManufacturing,Inc.,ispreparingproformafinancialstatementsfor2006.Thefirmutilizedthe
percentofsalesmethodtoestimatecostsforthenextyear.Salesin2005were$2millionandare
expectedtoincreaseto$2.4millionin2006.Thefirmhasa40percenttaxrate.
(a) Giventhe2005incomestatementinTable3.6,estimatenetprofitandretainedearningsfor
2006.
(b) If$200,000ofthecostofgoodssoldand$40,000ofsellingexpensearefixedcosts;andthe
interestexpenseanddividendsarenotexpectedtochange,whatisthedollareffectonnet
incomeandretainedearnings?Whatisthesignificanceofthiseffect?
Chapter3CashFlowandFinancialPlanning166
Answers:
(a)
Proformaincomestatement:December31,2006
Sales
$2,400,000
Less:Costofgoodssold
1,440,000
Grossprofit
Less:Sellingexpense
General&administrativeexpense
Less:Depreciation
960,000
240,000
72,000
48,000
Operatingprofit
Less:Interest
$600,000
96,000
Earningsbeforetaxes
Less:Taxes(40%)
$504,000
201,600
Netprofitaftertaxes/EACS
Commonstockdividends
$302,400
120,000
Retainedearnings
$182,400
(b)
Sales
Less:Costofgoodssold(0.50)
fixed
$2,400,000
1,200,000
200,000
Grossprofit
Less:Sellingexpense(0.08)
fixed
General&administrativeexpense
Less:Depreciation
1,000,000
192,000
40,000
72,000
48,000
Operatingprofit
Less:Interest
$648,000
80,000
Earningsbeforetaxes
Less:Taxes(40%)
$568,000
227,200
Netprofitaftertaxes/EACS
Commonstockdividends
$340,800
100,000
Retainedearnings
$240,800
167GitmanPrinciplesofFinance,EleventhEdition
Netprofitaftertaxisunderstatedby$38,400andretainedearningsby$58,400,usingthe
percentofsalesmethod.Inplanningtheadditionofassets(currentorfixed)andthe
financingofthoseassets,thestraightpercentofsalesmethodunderstatesnetprofitand
retainedearnings.This,therefore,overstatesadditionalfinancingneededtoaddthose
assets.Thejudgmentalapproachallowsthefirmtoobtainamoreaccurateestimateofthe
lineofcreditorlongtermfinancingthatwillbenecessaryinthenextplanningperiod.
Levelofdifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
TheincomestatementandbalancesheetfortheZZZMattressCo.fortheyearendedDecember
31,2005follow.
Table3.7
IncomeStatement
ZZZMattressCompany
FortheYearEndedDecember31,2005
Sales
$300,000
Less:Costofgoodssold
195,000
Grossprofit
$105,000
Less:Sellingexpense
40,000
Generalandadministrativeexpense
11,000
Less:Depreciation
10,000
Operatingprofit
$44,000
Less:Interest
12,000
Netprofitbeforetaxes
$32,000
Less:Taxes(40%)
12,800
$19,200
BalanceSheet
ZZZMattressCompany
December31,2005
Assets
Cash
Accountsreceivable
Inventory
Totalcurrentassets
$1,500
60,000
95,000
$156,500
Netplantandequipment
Totalassets
150,000
$306,500
Chapter3CashFlowandFinancialPlanning168
LiabilitiesandEquities
Accountspayable
Notespayable
Accruals
Totalcurrentliabilities
Longtermdebt
Stockholdersequity:
Commonstock
Retainedearnings
Totalliabilitiesandequities
12.
$45,500
55,000
5,000
$105,500
$55,000
$71,000
75,000
$306,500
TheZZZMattressCo.hasbeenrequestedbythe1stNationalBank,amajorcreditor,topreparea
proformabalancesheetfortheyearending,December31,2006.Usingthepercentofsalesmethod
andthefollowingfinancialdata,preparetheproformaincomestatementandbalancesheetand
discusstheresultingexternalfinancingrequired.(SeeTable3.7)
2006salesareestimatedat$330,000.
Accountsreceivablerepresent20percentofsales.
Aminimumcashbalanceof$1,650ismaintained.
Inventoryrepresents32percentofsales.
Fixedassetoutlaysin2006are$20,000.Totaldepreciationexpensefor2006willbe$15,000.
Accountspayablerepresents15percentofsales.
Notespayableandaccrualswillremainthesame.
Nolongtermdebtwillberetiredin2004.
Nocommonstockwillberepurchasedin2006.
Thefirmwillpaydividendsequalto50percentofitsearningsaftertaxes.
Answer:
IncomeStatement
ZZZMattressCompany
FortheYearEndedDecember31,2006
Sales
$330,000
Less:Costofgoodssold(65%)
214,500
Grossprofit
$115,500
Less:Sellingexpense(13.3%)
44,000
Generalandadministrativeexpense(3.67%)
12,100
Less:Depreciation
15,000
Operatingprofit
$44,400
Less:Interest(4%)
13,200
Netprofitbeforetaxes
$31,200
Less:Taxes(40%)
12,480
$18,720
169GitmanPrinciplesofFinance,EleventhEdition
BalanceSheet
ZZZMattressCompany
December31,2006
Assets
Cash
Accountsreceivable
Inventory
Totalcurrentassets
Netplantandequipment
Totalassets
LiabilitiesandEquities
Accountspayable
Notespayable
Accruals
Totalcurrentliabilities
Longtermdebt
Stockholdersequity:
Commonstock
Retainedearnings
Totalliabilitiesandequities
$1,650
66,000
105,600
$173,250
155,000
$328,250
$49,500
55,000
5,000
$109,500
55,000
71,000
84,360
$328,250
A10percentgrowthrateinsalescannotbesupportedbythefirmsinternallygenerated
funds.Alargerlineofcreditorarequestforalongtermloanfortheadditional$8,390is
necessarytofinanceoperations.
Levelofdifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis
Table3.8
IncomeStatement
WirlWindCompany
Salesrevenue
$3,028,500
Less:Costofgoodssold
Fixedcosts
1,350,000
Variablecosts
1,260,600
Grossprofits
$417,900
Less:Operatingexpenses
Fixedexpenses
4,500
Variableexpenses
85,840
Operatingprofits
$327,560
Less:Interestexpense
82,150
Netprofitsbeforetaxes
$245,410
Less:Taxes(40%)
98,164
Netprofitsaftertaxes
$147,246
Less:Dividend
50,000
Increasedretainedearnings
$97,246
Chapter3CashFlowandFinancialPlanning170
BalanceSheet
WirlWindCompany
Assets
Currentassets
Cash
Marketablesecurities
Accountsreceivable
Inventories
Totalcurrentassets
Landandbuilding
Machinery&equip
Fixtures&Furn
Totalgrossfixedassets
Less:AccumulatedDepreciation
$625,000
298,000
580,000
496,000
$1,999,000
$625,000
765,000
110,000
Netfixedassets
Totalassets
$1,500,000
30,000
$1,470,000
$3,469,000
LiabilitiesandStockholdersEquity
Currentliabilities
Accountspayable
Notespayable
Accruals
Totalcurrentliabilities
TotalLongtermdebt
Totalliabilities
Stockholdersequity
Preferredstock
Commonstock
Paidincapital
Retainedearnings
13.
$267,000
135,000
288,000
$690,000
1,200,000
$1,890,000
79,000
750,000
601,000
149,000
Totalstockholdersequity
$1,579,000
Totalliabilitiesandstockholdersequity
$3,469,000
TheWirlWindCompanyofAmericaistryingtoplanforthenextyear.Usingthecurrentincome
statementandbalancesheetgiveninTable3.8,andtheadditionalinformationprovided,preparethe
companysproformastatements.
Salesareprojectedtoincreaseby15percent.
Totalof$75,000individendwillbepaid.
Aminimumcashbalanceof$650,000isdesired.
Anewassetfor$50,000willbepurchased.
171GitmanPrinciplesofFinance,EleventhEdition
Depreciationexpensefornextyearis$50,000.
Marketablesecuritieswillremainthesame.
Accountsreceivable,inventory,accountspayable,notespayable,andaccrualswillincreaseby
15percent.
$30,000newissueofbondwillbesold.
Nonewstockwillbeissued.
Answer:
ProFormaIncomeStatement
WirlWindCompany
Salesrevenue
$3,482,775
Less:Costofgoodssold
Fixedcosts
1,350,000
Variablecosts(42%)
1,462,766
Grossprofits
Less:Operatingexpenses
Fixedexpenses
Variableexpenses(2.8%)
$670,009
Operatingprofits
Less:Interestexpense(2.7%)
$567,991
94,035
Netprofitsbeforetaxes
Less:Taxes(40%)
$473,956
189,582
Netprofitsaftertaxes
Less:Dividend
$284,374
75,000
Increasedretainedearnings
$209,374
4,500
97,518
Chapter3CashFlowandFinancialPlanning172
ProFormaBalanceSheet
WirlWindCompany
Assets
Currentassets
Cash
Marketablesecurities
Accountsreceivable
Inventories
$650,000
298,000
667,000
570,400
Totalcurrentassets
Landandbuilding
Machinery&equip.
Fixtures&Furn.
Totalgrossfixedassets
Less:AccumulatedDepreciation
Netfixedassets
$2,185,400
Totalassets
$3,655,400
$1,470,000
LiabilitiesandStockholdersEquity
Currentliabilities
Accountspayable
$307,050
Notespayable
155,250
Accruals
331,200
Totalcurrentliabilities
Longtermdebts
$793,500
1,230,000
Totalliabilities
Stockholdersequity
Preferredstock
Commonstock
Paidincapital
Retainedearnings
$2,023,500
Totalstockholdersequity
Excesscash
$1,788,374
156,474
Totalliabilitiesandstockholders
equity
$3,655,400
79,000
750,000
601,000
358,374
TheWirlWindCompanyofAmericawillhaveanexcesscashof$156,474whichcanbe
usedtopaydebt.
Levelofdifficulty:4
LearningGoal:5
Topic:ProFormaAnalysis