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New Era University

College of Accountancy

FINANCIAL MANAGEMENT
Cash Flow and Financial Planning

1. A corporation:
a. must use the same depreciation method for tax and financial reporting purposes.
b. must use different depreciation methods for tax and financial reporting purposes.
c. may use different depreciation methods for tax and financial reporting purposes.
d. must use different (than for tax purposes), but strictly mandated, depreciation methods for
financial reporting purposes.

2. All of the following are non-cash charges, except:
a. depreciation. c. depletion.
b. accruals. d. amortization.

3. Given the financial managers preference for faster receipt of cash flows,
a. a longer depreciable life is preferred to a shorter one.
b. a shorter depreciable life is preferred to a longer one.
c. the manager is not concerned with depreciable lives, because depreciation is a non-cash expense.
d. the manager is not concerned with depreciable lives, because once purchased, depreciation is
considered a sunk cost.

4. Which of the following is a source of cash flows?
a. Cost of goods sold c. Interest expense
b. Depreciation d. Taxes

5. When preparing a statement of cash flows, retained earnings adjustments are required so that which
of the following are separated on the statement?
a. Revenue and cost c. Depreciation and purchases
b. Assets and liabilities d. Net profits and dividends

6. From a finance perspective, the cash flows from operating activities of the firm include:
a. interest expense. c. dividends paid.
b. cost of raw materials. d. stock repurchases.

7. All of the following are inflows of cash, except:
a. a decrease in accounts receivable.
b. net profits after taxes.
c. dividends.
d. an increase in accruals.

8. Johnson, Inc. has just ended the calendar year making a sale in the amount of P10,000 of
merchandise purchased during the year at a total cost of P7,000. Although the firm paid in full for
the merchandise during the year, it has yet to collect at year end from the customer. The net profit
and cash flow for the year are:
a. P3,000 and P10,000, respectively.
b. P3,000 and P7,000, respectively.
c. P7,000 and P3,000, respectively.
d. P3,000 and P7,000, respectively.

9. A corporation sold a fixed asset for P100,000, which was also its book value. This is:
a. an investment cash flow and a source of funds.
b. an operating cash flow and a source of funds.
c. an operating cash flow and a use of funds.
d. an investment cash flow and a use of funds.

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10. A corporation raises P500,000 in long-term debt to acquire additional plant capacity. This is
considered:
a. an investment cash flow.
b. a financing cash flow.
c. a financing cash flow and investment cash flow, respectively.
d. a financing cash flow and operating cash flow, respectively.

11. All of the following are financing cash flows, except:
a. sale of stock.
b. payment of stock dividends.
c. increasing debt.
d. repurchasing stock.

12. All of the following are operating cash flows, except:
a. net profit/earnings after tax.
b. increase or decrease in current liabilities.
c. increase or decrease in fixed assets.
d. depreciation expense.

Refer to the following balance sheets to answer the next nine (9) questions:

Ruff Sandpaper Co.
Balance Sheets
For the Years Ended 2012 and 2013
2013 2012
Assets
Cash 800 600
Marketable securities 200 200
Accounts receivable 1,200 1,000
Inventories 2,000 1,800
Gross fixed assets 3,000 2,800
Less Accumulated Depreciation 1,000 800
Net fixed assets 2,000 2,000
Total assets 6,200 5,600
Liabilities
Accounts payable 200 100
Notes payable 800 900
Accruals 100 100
Long-term debt 2,000 1,500
Stockholders equity
Common stock at par 500 500
Paid-in capital in excess of par 2,000 2,000
Retained earnings 600 500
Total liabilities and equity 6,200 5,600
Net profits after taxes for 2013: P150.00

13. The primary source of funds for the firm in 2013 is:
a. net profits after taxes.
b. an increase in notes payable.
c. an increase in long-term debt.
d. an increase in inventory.

14. Common stock dividends paid in 2013 amounted to:
a. P100. c. P600.
b. P50. d. P150.


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15. The firm may have increased long-term debts to finance:
a. an increase in gross fixed assets.
b. an increase in current assets.
c. a decrease in notes payable.
d. an increase in current assets, an increase in gross fixed assets, and a decrease in notes payable.

16. Inflows of funds for 2013 totaled:
a. P600. c. P800.
b. P700. d. P950.

17. The firm _________ fixed assets worth _________.
a. purchased; P0 c. sold; P0
b. purchased; P200 d. sold; P200

18. The smallest outflow of funds for the firm in 2013 is:
a. a decrease in notes payable.
b. an increase in inventory.
c. dividends.
d. a decrease in long-term debts.

19. The firms cash flow from operations is:
a. P350. c. P150.
b. P300. d. P950.

20. Outflows of funds for 2013 totaled:
a. P600. c. P800.
b. P700. d. P750.

21. The depreciation expense for 2013 is:
a. P0. c. P50.
b. P200. d. P1,000.

22. A firm has just ended the calendar year making a sale in the amount of P200,000 of merchandise
purchased during the year at a total cost of P150,500. Although the firm paid in full for the
merchandise during the year, it has yet to collect at year end from the customer. One possible
problem this firm may face is:
a. low profitability. c. inability to receive credit.
b. insolvency. d. high leverage.

23. The financial planning process begins with _________ financial plans that in turn guide the
formation of _________ plans and budgets.
a. short run; long run c. long run; strategic
b. short run; operating d. long run; short run

24. The key output(s) of the short run financial planning process are:
a. cash budget, pro forma income statement, and pro forma balance sheet.
b. cash budget, sales forecast, and income statement.
c. sales forecast and cash budget.
d. income statement, balance sheet, and source and use statement.

25. The key aspects of the financial planning process are:
a. cash planning and investment planning.
b. cash planning and financing.
c. investment planning and profit planning.
d. cash planning and profit planning.

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26. The primary purpose in preparing pro forma financial statements is:
a. for cash planning.
b. to ensure the ability to pay dividends.
c. for risk analysis.
d. for profit planning.

27. The primary purpose in preparing a budget is:
a. for profit planning. c. for risk analysis.
b. for cash planning. d. to estimate sales.

28. In general, firms that are subject to a high degree of _________, relatively short production cycles,
or both tend to use shorter planning horizons.
a. profitability c. operating uncertainty
b. financial certainty d. financial planning

29. _________ consider proposed fixed-asset outlays, research and development activities, marketing
and product development actions, and both the mix and major sources of financing.
a. Short-term financial plans c. Pro-forma statements
b. Long-term financial plans d. Cash budgeting

30. Key inputs to short term financial planning are:
a. operating budgets.
b. economic forecasts.
c. sales forecasts, and operating and financial data.
d. leverage analysis.

31. Once sales are forecasted, _________ must be generated to estimate a variety of operating costs.
a. a production plan c. an operating budget
b. a cash budget d. a pro forma statement

32. The firms final sales forecast is usually a function of:
a. economic forecasts.
b. salespersons estimates of demand.
c. internal and external factors in combination.
d. accounts receivable experience.

33. In cash budgeting, the _________ seasonal and uncertain a firms cash flows, the _________ the
number of budgeting intervals it should use.
a. more, greater c. less, greater
b. more, fewer d. less, fewer

34. One way a firm can reduce the amount of cash it needs in any one month is to:
a. slow down the payment of receivables.
b. delay the payment of wages.
c. accrue taxes.
d. speed up payment of accounts payable.

35. A projected excess cash balance for the month may be:
a. financed with short term securities.
b. financed with long term securities.
c. invested in marketable securities.
d. invested in long term securities.

36. If a firm expects short-term cash shortages, it can plan:
a. long-term investments. c. short-term lending.
b. short-term borrowing. d. leverage decisions.


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37. A firm has actual sales in November of P1,000 and projected sales in December and January of
P3,000 and P4,000, respectively. The firm makes 10 percent of its sales for cash, collects 40 percent
of its sales one month following the sale, and collects the balance two months following the sale.
The firms total cash receipts in November:
a. are P1,000.
b. are P100.
c. are P700.
d. cannot be determined with the information provided.

38. In April, a firm had an ending cash balance of P35,000. In May, the firm had total cash receipts of
P40,000 and total cash disbursements of P50,000. The minimum cash balance required by the firm is
P25,000. At the end of May, the firm had:
a. an excess cash balance of P25,000.
b. an excess cash balance of P0.
c. required financing of P10,000.
d. required financing of P25,000.

39. In the month of August, a firm had total cash receipts of P10,000, total cash disbursements of
P8,000, depreciation expense of P1,000, a minimum cash balance of P3,000, and a beginning cash
balance of P500. The excess cash balance (required financing) for August is:
a. required total financing of P500.
b. excess cash balance of P5,500.
c. excess cash balance of P500.
d. required total financing of P2,500.

40. A firm has prepared the coming years pro forma balance sheet resulting in a plug figure in a
preliminary statementcalled the external financing requiredof negative P250,000. The firm may
prepare to:
a. sell common stock totaling P250,000.
b. arrange for a loan of P250,000.
c. do nothing; the balance sheet balances.
d. invest in marketable securities totaling P250,000.

41. 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:
a. pro forma income statement, pro forma balance sheet, and cash budget.
b. pro forma balance sheet and cash budget.
c. cash budget and statement of retained earnings.
d. pro forma income statement and pro forma balance sheet.

Refer to the following information to answer the next four (4) questions:
The financial analyst for Sportif, Inc. has compiled sales and disbursement estimates for the coming
months of January through May. Historically, 75 percent of sales are for cash with the remaining
25 percent collected in the following month. The ending cash balance in January is P3,000.
Month Sales Disbursements
January P 5,000 P6,000
February 6,000 P7,000
March 10,000 P4,000
April 10,000 P5,000
May 10,000 P5,000

42. The total cash receipts for April are:
a. P5,000. c. P9,250.
b. P7,500. d. P10,000.


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43. The firm has a negative net cash flow in the month(s) of:
a. January, February, and March.
b. February and March.
c. January and February.
d. February.

44. At the end of May, the firm has an ending cash balance of:
a. P9,000. c. P14,250.
b. P16,750. d. P12,000.

45. Which of the following statements is true? If a pro forma balance sheet dated at the end of May was
prepared from the information presented,
I. the accounts receivable would total P2,500.
II. the marketable securities would total P16,750.
a. Both I and II c. I only
b. Neither I nor II d. II only

Refer to the following information to answer the next two (2) questions:
Use the percent-of-sales method to prepare a pro forma income statement for the year ended
December 31, 2014, for Hennesaw Lumber, Inc. Hennesaw Lumber, Inc. estimates that its sales in
2014 will be P4,500,000. Interest expense is to remain unchanged at P105,000 and the firm plans to
pay cash dividends of P150,000 during 2014. Hennesaw Lumber, Inc.s income statement for the
year ended December 31, 2013 is shown below:
Income Statement
Hennesaw Lumber, Inc.
For the Year Ended December 31, 2013
Sales Revenue P4,200,000
Less: Cost of goods sold 3,570,000
Gross profits P 630,000
Less: Operating
expenses
210,000
Operating profits P 420,000
Less: Interest expense 105,000
Net profits before taxes P 315,000
Less: Taxes (40%) 126,000
Net profits after taxes P 189,000
Less: Cash dividends 120,000
To: Retained earnings P 69,000

46. The pro forma cost of goods sold for 2014 is:
a. P3,500,000. c. P3,825,000.
b. P3,750,000. d. P4,000,000.

47. The pro forma accumulated retained earnings account on the balance sheet is projected to:
a. increase P52,500. c. increase P57,000.
b. decrease P52,500. d. decrease P57,000.

Refer to the following information to answer the next seven (7) questions:
A financial manager at General Talc Mines has gathered the financial data essential to prepare a pro
forma balance sheet for cash and profit planning purposes for the coming year ended Dec. 31, 2014.
Using the percent-of-sales method and the following data, prepare the pro-forma balance sheet.
The firm estimates sales of P1,000,000.
The firm maintains a cash balance of P25,000.
Accounts receivable represents 15 percent of sales.
Inventory represents 35 percent of sales.

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A new piece of mining equipment costing P150,000 will be purchased in 2014. Total
depreciation for 2014 will be P75,000.
Accounts payable represents 10 percent of sales.
There will be no change in notes payable, accruals, and common stock.
The firm plans to retire a long term note of P100,000.
Dividends of P45,000 will be paid in 2014.
The firm predicts a 4 percent net profit margin.

Balance Sheet
General Talc Mines
December 31, 2013
Assets
Cash P 25,000
Accounts receivable 120,000
Inventories 300,000
Total current assets P 445,000
Net fixed assets P 500,000
Total assets P 945,000
Liabilities and stockholders equity
Accounts payable P 80,000
Notes payable 350,000
Accruals 50,000
Total current liabilities P 480,000
Long-term debts 150,000
Total liabilities P 630,000
Stockholders equity
Common stock 180,000
Retained earnings 135,000
Total Stockholders equity P 315,000
Total liabilities and stockholders equity P 945,000

48. Which of the following statements is true?
I. The pro forma total current assets amount is P525,000.
II. The pro forma net fixed assets amount is P575,000.
a. Both I and II c. I only
b. Neither I nor II d. II only

49. Which of the following statements is true?
I. The pro forma current liabilities amount is P500,000.
II. The pro forma total liabilities amount is P550,000.
a. Both I and II c. I only
b. Neither I nor II d. II only

50. The pro forma accumulated retained earnings amount is:
a. P90,000. c. P140,000.
b. P175,000. d. P130,000.

51. The external financing required in 2014 will be:
a. P230,000. c. P0.
b. P240,000. d. P195,000.

52. General Talc Mines may prepare to:
a. arrange for a loan equal to the external funds requirement.
b. eliminate the dividend to cover the needed financing.
c. cancel the retirement of the long term note to cover the needed financing.
d. repurchase common stock equal to the external funds requirement.

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53. The external funds requirement results primarily from:
a. the payment of dividends.
b. the retirement of debt and purchase of new fixed assets.
c. low profit margin.
d. high cost of sales.

54. If General Talc Mines cannot raise the external financing required through traditional credit
channels, the firm may:
a. increase sales.
b. purchase additional fixed assets to raise productivity.
c. sell common stock.
d. factor accounts receivable.

55. A weakness of the percent of sales method to preparing a pro forma income statement is:
a. the assumption that the values of certain accounts can be forced to take on desired levels.
b. the assumption that the firm faces linear total revenue and total operating cost functions.
c. the assumption that the firms past financial condition is an accurate predictor of its future.
d. ease of calculation and preparation.

56. For firms with high fixed costs, the percent of sales approach for preparing a pro forma income
statement tends to:
a. overestimate profits when sales are increasing.
b. underestimate profits when sales are increasing.
c. be an accurate predictor of profits.
d. be a difficult model to apply.

57. The weakness of the judgmental approach to preparing a pro forma balance sheet is:
a. the assumption that the values of certain accounts can be forced to take on desired levels.
b. the assumption that the firm faces linear total revenue and total operating cost functions.
c. the assumption that the firms past financial condition is an accurate predictor of its future.
d. ease of calculation and preparation.

58. Bonn Corporation had net fixed assets of P2,000,000 at the end of 2013 and P1,800,000 at the end of
2012. In addition, the firm had a depreciation expense of P200,000 during 2013 and P180,000 during
2012. Using this information, Bonns net fixed asset investment for 2013 was:
a. P20,000. c. P380,000.
b. P0 d. P400,000.

59. Berlin Corporation had net current assets of P2,000,000 at the end of 2013 and P1,800,000 at the end
of 2012. In addition, Berlin had net spontaneous current liabilities of P1,000,000 in 2013 and
P1,500,000 in 2012. Using this information, Berlins net current asset investment for 2013 was:
a. P700,000. c. P300,000.
b. P300,000. d. P700,000.

60. During 2013, Nico Corporation had EBIT of P100,000, a change in net fixed assets of P400,000, an
increase in net current assets of P100,000, an increase in spontaneous current liabilities of P400,000,
a depreciation expense of P50,000, and a tax rate of 30 percent. Based on this information, Nicos
free cash flow is:
a. P630,000. c. P650,000.
b. P50,000. d. P30,000.



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