104GitmanPrinciplesofFinance,EleventhEdition

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

Multiple Choice Questions

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

___________ ___________ ___________

3,510,000
2,265,000
390,000
135,000
__________
_________
100,000
235,000
__________
_________
200,000
35,000

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