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Chapter 2: Question 4-7DQ (page 112)

What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?

Short Answer

Expert verified

The percent-of-sales forecast is only as good as the functional relationship of assets and liabilities to sales. Past cash budgets and financial statements accurately depict the future. The percent of sales method will give values that reasonably represents the value derived through the pro forma statements and the cash budgets.

Step by step solution

01

Cash budgets

Cash budgets is prepared by an organization to estimate the future cash flows of the business over the specified period of time.

02

Conditions that would helps in making the percent of sales forecast almost as accurate as pro forma financial statement and the cash budgets

The percent of sales method links sale data to company’s balance sheet and income statements. It is almost accurate as pro forma financial statements and the cash budgets because it is based on the past information that accurately represents the future. It gives a clear idea for cash flows in the future.

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Most popular questions from this chapter

Landers Nursery and Garden Stores has current assets of \(220,000 and fixed assets of \)170,000. Current liabilities are \(80,000 and long-term liabilities are \)140,000. There is $40,000 in preferred stock outstanding and the firm has

issued 25,000 shares of common stock. Compute book value (net worth)

per share.

Amigo Software Inc. has total assets of \(889,000, current liabilities of\)192,000, and long-term liabilities of \(154,000. There is \)87,000 in preferredstock outstanding. Thirty thousand shares of common stock have been issued.

a. Compute book value (net worth) per share.

b. If there is $56,300 in earnings available to common stockholders and the

firm’s stock has a P/E of 23 times earnings per share, what is the currentprice of the stock?

c. What is the ratio of market value per share to book value per share? (Round

to two places to the right of the decimal point.)

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

d. Total assets turnover ratio.

Times mirror and glass company

Sales

\)126,000

Less: Cost of goods sold

93,000

Gross profit

\(33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\)18,000

Less: Interest expenses

3,000

Earning before taxes

\(15,000

Less: Taxes (30%)

4,500

Earning after taxes

\)10,500

*equal income before interest and taxes

Why is trend analysis helpful in analyzing ratios?

Comment on why inflation may restrict the usefulness of the balance sheet as normally presented.
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