Exam 4: Cash Flow and Financial Planning

Identify each expense or revenue as a cash flow from operating activities (O), a cash flow from investment activities (I), or a cash flow from financing activities (F). Administrative expenses Rent payment Interest on a note payable Sale of equipment Dividend payment Stock repurchase Sale of finished goods Labor expense Sale of a bond issue Repayment of a long-term debt Selling expenses Depreciation expense Sale of common stock Purchase of fixed assets

Under MACRS, an asset which originally cost $10,000 is being depreciated using a 5-year normal recovery period. What is the depreciation expense in year 3?

Table 4.1 True Sandpaper Co. Balance Sheets For the Years Ended 2014 and 2015 -The firm may have increased long-term debts to finance ________. (See Table 4.1)

Gerry Jacobs, a financial analyst for Best Value Supermarkets, has prepared the following sales and cash disbursement estimates for the period August through December of the current year. Ninety percent of sales are for cash, the remaining 10 percent are collected one month later. All disbursements are on a cash basis. The firm wishes to maintain a minimum cash balance of $50. The beginning cash balance in September is $25. Prepare a cash budget for the months of October, November, and December, noting any needed financing or excess cash available.

The primary purpose in preparing pro forma financial statements is ________.

If the ending cash is greater than the minimum cash balance, excess cash exists.

The key input to any cash budget is ________.

A projected excess cash balance for the month may be ________.

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method used for ________ purposes.

Table 4.7 The income statement and balance sheet for the ZZZ Mattress Co. for the year ended December 31, 2015 follow. Balance Sheet ZZZ Mattress Company December 31, 2015 The ZZZ Mattress Co. has been requested by the 1st National Bank, a major creditor, to prepare a pro forma balance sheet for the year ending, December 31, 2016. Using the percent-of-sales method and the following financial data, prepare the pro forma income statement and balance sheet and discuss the resulting external financing required. (See Table 4.7) ∙ 2016 sales are estimated at $330,000. ∙ Accounts receivable represent 20 percent of sales. ∙ A minimum cash balance of $1,650 is maintained. ∙ Inventory represents 32 percent of sales. ∙ Fixed-asset outlays in 2006 are $20,000. Total depreciation expense for 2016 will be $15,000. ∙ Accounts payable represents 15 percent of sales. ∙ Notes payable and accruals will remain the same. ∙ No long-term debt will be retired in 2016. ∙ No common stock will be repurchased in 2016. ∙ The firm will pay dividends equal to 50 percent of its earnings after taxes.

For the year ended December 31, 2014, a corporation had cash flow from operating activities of -$10,000, cash flow from investment activities of $4,000, and cash flow from financing activities of $9,000. The statement of cash flows would show a ________.

In the next planning period, a firm plans to change its policy of all cash sales and initiate a credit policy requiring payment within 30 days. The statements that will be directly affected immediately are the ________.

Which of the following is a cash flow from financing activities?

To assess whether any developments have occurred that are contrary to a company's financial policies, the financial manager should pay special attention to both the major categories of cash flow and the individual items of cash inflow and outflow.

As the typical cash budget shows cash flows only on a monthly basis, the information provided by the cash budget is not necessarily adequate for ensuring solvency.

The MACRS depreciation method requires use of the half-year convention. Assets are assumed to be acquired in the middle of the year and only one-half of the first year's depreciation is recovered in the first year.

A firm has projected sales in May, June, and July of $100, $200, and $300, respectively. The firm makes 20 percent of sales for cash and collects the balance one month following the sale. The firm's total cash receipts in July is ________.

The depreciable value of an asset, under MACRS, is the ________.

One basic weakness of the simplified pro forma approaches lies in the assumption that certain variables, such as cash, accounts receivable, and inventories, can be forced to take on certain "desired" values.

The sales forecast and various forms of operating and financial data are the key outputs of the short-run (operating) financial planning.