In using a systems approach to financial planning, it is necessary to develop a...
pro forma income statement cash budget pro forma balance sheet
The key initial element in developing all pro forma statement is...
a sales forecast
In the development of the pro forma financial statements, the last step in the process is the development of the
pro forma balance sheet
In developing the pro forma income statement we follow what four steps?
1. Establish a sales projection. 2. Determine a production schedule. 3. Compute other expenses. 4. Determine profit by completing the actual pro forma statement.
Pro Forma financial statements are
The most comprehensive means of financial forecasting. Often required by prospective creditors. Projections of financial statements for a future period.
A rapid rate of growth in sales may require
Increased borrowing by the firm to support the sales increase.
Required production during a planning period will depend on the..
Beginning inventory of products. Sales during the period. Desired level of ending inventory.
In order to estimate production requirements we
Add projection sales in units, and subtract beginning inventory.
In calculating Gross Profits, a firm utilizing LIFO would assume that
Sales were from current production until current production was depleted, and then would use sales from beginning inventory.
When the cost of raw goods is increasing, FIFO accounting
yields higher ending inventory values than LIFO
FIFO inventory accounting would assume
Sales were from beginning inventory until it was depleted and then would use current production.
In financial statements, the number of units shown in cost of goods sold as compared to the number of units actually produced
can be either higher or lower
The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for
change in retained earnings
The larger the portion of a firm's sales are on credit, the
higher the firm's need to borrow
The need for an increase or decrease in short term borrowing can be predicted by
A cash budget
In the construction of the cash payment schedule, the major cash payment is generally
costs associated with inventory manufactured
The difference between total receipts and total payments is referred to as
net cash flow
Net cash flow is equal to
Cash receipts minus cash payments
In developing data for accounts receivable for the pro forma balance sheet, the analyst is most likely to turn to the
In a cash budget, the cumulative cash balance is equal to
net cash flow plus the beginning cash balance
What is most likely to increase the final number for notes payable for short term borrowing needs in the pro forma balance sheet?
A decrease in accounts payable
The percent of sales method of financial forecasting
Assumes that balance sheet maintain a constant relationship to sales
In the percent-of-sales method an increase in dividends
will increase required new funds
In the percent-of-sales method, if (A/S) and (L/S) both increase
more information is needed
In forecasting a firm's cash needs for some future period
the percent-of-sales method is a "broad brush" approach. Cash budgets are more exact than percent-of-sales method. A cash budget approach can deal effectively with both level and seasonal production schedules.
In the percent-of-sales method
as the dividend payout ratio goes up, the required new funds also rises.
When using the percent-of-sales method in forecasting the funds needed what is not true?
Required new funds increase as the dividend payout ratio decreases.
Firms that successfully increase their rates of inventory turnover will, among other things,
Be able to reproduce their borrowing needs.
The concept of operating leverage involves the use of _______ to magnify returns at high levels of operation
What question does break even analysis attempt to address?
How much do changes in volume affect costs and profits? At what point does the firm break even? What is the most efficient level of fixed assets to employ?
The contribution margin is
Price minus Variable Cost
At break even, a firm's profits are
equal to zero
If sales volume exceeds the break-even point, the firm will experience
An operating profit
Break even can be calculated by
fixed cost divided by contribution margin per unit
A highly automated plant would have
more fixed than variable costs
If fixed costs rise while all other costs stay the same
The break even point rises. The degree of operating leverage increases. Total profit declines.
If the price per unit decreases because of competition but the cost structure remains the same
the break even point rises
A firm's breakeven point will rise if
variable cost per unit rises
A weakness of break even analysis is that it assumes
revenue and costs are a linear (constant) function of volume
A high DOL means
there are high fixed costs
What is concerned with the change in operating profit as a result of a change in volume?
Cash break-even analysis
is helpful in analyzing the short-term outlook of the firm, particularly when it is in trouble financially.
Conservatively leveraged firm C and highly leveraged firm H operate at the same level of earnings before interest and taxes where the return is greater than the cost on debt.
Firm H will have a higher return on equity than C
Firm A has a higher degree of operating leverage; Firm B takes a more conservative approach. What does that mean?
B has a lower break even point than A, but A's profit grows faster after the break even.
Firms with a higher degree of operating leverage
are trading off higher fixed cost for lower per-unit variable cost.
Financial leverage deals with
the relationship of debt and equity in the capital structure
A conservative financing plan involves
heavy reliance on equity
A firm's earning per share is not impacted by its financing plan at the point when
The cost of borrowed funds equals the return on assests
Degree of financial leverage is concerned with the relationship between
changes in EBIT and changes in EPS
When a firm employs no debt
It has financial leverage of one
If a firm has the lowest possible degree of operating leverage and the lowest possible degree of financial leverage, then
DOL equals 1 DFL equals 1
Combined leverage is concerned with the relationship between
Changes in volume and changes in EPS
What is not true about leverage?
Combined leverage utilizes the entire income statement, showing the impact change in volume on EBIT
Heavy use of long term debt may be beneficial to an inflationary economy because
the debt may be repaid in "cheaper" dollars
Under what condition could the overuse of financial leverage be detrimental to the firm?
When there is a cyclical demand for the firm's products.
A factory that relies on highly technical machinery may choose to reduce its overall leverage position by
utilizing a higher level of equity
From Finance in Action - Global we can correctly assume that
Japanese firms routinely employ high financial leverage and tend to react aggressively to volume changes