Exam 9: Prospective Analysis

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 is the anticipated inventory level at the end of March?

a. Developing pro forma financial statements and cash flow forecasts depends heavily upon sales forecasts. Imagine you are a financial analyst working for a major stockbroker, and you are trying to develop a one-year sales forecast for a major national department store. List five pieces of information you want to obtain to aid you in your forecast, explaining why this will aid you in your forecast.b. Now you have made your best prediction of next year's sales, you want to estimate next year's cost of goods sold. Pick two pieces of information you definitely want to obtain in order to help you with this task, being sure to explain why they will be helpful.

Common-size analysis of the statement of cash flows is a useful tool in determining major sources and uses of cash.

What is the correct order of the following steps in preparing a projected balance sheet (not all steps may be shown)? I. Project future cash II. Project future accounts receivable III. Project future accounts payable IV. Project future property plant and equipment

When forecasting future cash flows, it is useful to perform "what if" analyses to determine the effect of various unexpected events in order to assess the company's financial flexibility.

In determining long-term future cash flows, it is normal to project income statement and balance sheet first and construct cash flows from these.

Other things held constant, which of the following actions would increase the need for a company to Other things held constant, which of the following actions would increase the need for a company to borrow money in the short-term? I. Extending more credit to customers II. Increasing accounts receivable turnover III. Expensing advertising expenses rather than capitalizing them IV. Contributing more to pension plan

The reasonableness and feasibility of short-term cash forecasts can be evaluated by preparing:

When preparing a projected income statement, which of the following additional information, other than the financial statements would probably not be relevant?

You are an analyst examining a Real Estate Investment Trust (REIT) stock. REITs acquire and manage income-producing properties, such as offices, malls, apartment blocks, etc. They are unique in that they do not have to pay corporate taxes. However, they must distribute 90% of their income as dividends. What is the effect of this distribution requirement going to mean to REITs in terms of their need for external funding, growth and leverage?

Prospective analysis can only be used to project an income statement, a balance sheet, and a statement of cash flows.

Prospective analysis can only be conducted after historical financial statements have been adjusted.

When analyzing the liquidity of a company, the current ratio is a better indicator of liquidity than short-term cash forecasts.

Which of the following would be considered the most discretionary of the following cash outflows?

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. -In March, Hiruit should collect:

Free cash flow in a given year is a better indicator of profitability than earnings.

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. -Recorded bad debt expense for March should be:

Over time, what observation(s) best characterizes how ROE for a given firm should behave? I. ROE will increase because the firm becomes more efficient. II. ROE will decrease because competition will erode profitability. III. The answer depends on how conservative the firm's accounting policies are, which affects its reported earnings.

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 -Gertup has maintained the same inventory levels throughout 2005. If end of year inventory turnover was increased to 12 through more efficient relationships with suppliers, how much cash would be freed up (pick closest number)?

Which of the following is the most useful in assessing short-term liquidity of a company?