Exam 9: Prospective Analysis

If a company has the necessary cash available, it almost always makes economic sense to take a purchase discount offered by suppliers.

The reliability of short-term cash forecast depends most heavily on the quality of:

You construct a pro forma income statement and balance sheet in order to estimate the amount a company needs to borrow in the forthcoming period. If assets are greater than liabilities plus equity, this means the company needs to borrow money.

Which of the following statements is most correct?

Below is selected data for Gertup Corporation as of 12/31/05: Total assets \ 5,500 Current assets 2,750 Long-term debt 450 Current ratio 2.5 Inventory 1,500 For year ended 12/31/05 Sales \ 18,500 Cost of goods sold 14,800 -If sales increased by 10% per annum for the next 20 years, sales for year 2025 would be closest to:

Hiruit company's sales in December were $5,500. It expects sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is: Collections Percentage of total receivables In month of sale 10\% In second month 70\% In third month 15\% Not collectible 5\% Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400. -What cash is paid for purchases in the month of March?

The statement of cash flows for Georgey Company for 2004 and 2005 is as follows: 2004 2005 Net income \1 89 \1 70 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 201 173 Deferred income taxes 14 (20) Restructuring charges 80 90 Accounts receivable 30 20 Inventory (30) 50 Current liabilities 10 30 Cash flow from operations 494 513 Sale of equipment 200 300 Purchase of equipment (130) (120) Cash flow from investing 70 180 Dividends (120) (130) Long-term debt (440) (440) Cash flow from financing (650) (570) -The cash flow from operations and cash flow from investing are both positive. Which of the following best describes the situation of Georgey?

The treasurer of Simmons Corporation, a newly formed software company is trying to ascertain Simmons cash flows for the next three months. Expected sales are: January February March Expected Sales \ 200 \ 220 \ 300 50% of sales are made for cash. Simmons expects to receive 25% in the month following the sale and 20% in the second month following the sale. The remaining 5% are expected to be un-collectible. Gross margin is 20%, and purchases are made one month prior to sale. Purchases are paid one month after received. -The cash inflows in March from sales will be:

Pro forma financial statements are another name for common-size financial statements.

Below is selected data for Gertup Corporation as of 12/31/05: Total assets \ 5,500 Current assets 2,750 Long-term debt 450 Current ratio 2.5 Inventory 1,500 For year ended 12/31/05 Sales \ 18,500 Cost of goods sold 14,800 -Due to competitive pressures, Gertup has had to increase credit terms to customers to maintain sales. This resulted in Gertup's accounts receivable doubling from 12/31/04 to 12/31/05. The average accounts receivable turnover was 30 days. Without the increased credit terms, accounts receivable turnover would have remained at 12/31/04 levels. The impact of the change in credit policy was:

The assumptions made about future changes in a company have a great effect on the quality of the projected financial statements.

The major use of cash for rapidly growing companies is sale of investments.

It is possible for a profitable company to go out of business because of severe short-term liquidity problems.

You have just prepared pro forma income statements and balance sheets for your company for the next three years. Describe three procedures you might perform to check the reasonableness of your projections, explaining how and why they are reasonableness checks.

If a company is to successfully remain in business over the long haul, which of the following statements is most correct?

What is the correct order of the following steps in preparing a projected income statement (not all steps may be shown)? I. Project future net sales II. Project future net income III. Project future cost of goods sold IV. Project future interest expense

Sensitivity analysis is used to examine the assumptions used in the preparation of projected financial statements.

In the residual income model, ROE is considered a value driver because it is a component of stock price.

Cyclical companies often like to retain extra cash or marketable securities during the "good" times, in order to ensure that they have sufficient liquidity when the inevitable downturn in the business cycle arrives.

a. Refer to Wal-Mart financial statements, above. Prepare a forecasted income statement for Year 8 assuming: • Total revenues are expected to increase by 12% from Year 7 to Year 8. • Operating income as a percentage of total revenues will remain unchanged from Year 7 to Year 8. • Total interest costs will increase by 10%. • Effective tax rate is 37%. b. What additional information will Wal-Mart need in order to assess whether it needs additional outside funding?