Assignment Chapter 14

True/False
Indicate whether the statement is true or false.

__F__ 1. Pro forma financial statements, as discussed in the text, are used primarily to assess a firm's historical performance.

__T__ 2. The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast.

__T__ 3. A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

__F__ 4. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

__T__ 5. As a firm's sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated funds arise from transactions brought on by sales increases.

__T__ 6. The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

__F_ 7. A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset. ((( Increase in liabilities to suppliers)

__F__ 8. If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it will require some amount of external funding.

_ F 9. To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of