Module 11 I
Forecasting Financial Statements I I
Learning Objectives – coverage by question
I I I I I
True/False Multiple Exercises Problems Essays
IChoice
LO1 I– IExplain Ithe Iprocess
Iofforecasting I 1-5 1-3 1 1 1-2
Ifinancial Istatements.
LO2 I– IForecast Irevenues 6-7 4-9 2-11 2-4 3-5
I andthe I Iincome Istatement.
LO3 I– IForecast Ithe
8-10 10-16 12 2-4 5
I balancesheet. I
LO4 I– IForecast Ithe
11-12 17-21 13-20 5-6 6
I statementof I Icash Iflows.
LO5 I– IPrepare
I multiyearforecasts I Iof 13 22-23 21-22 7 -
Ifinancial Istatements.
LO6 I– IImplement Ia
Iparsimonious Imethod Ifor
Imultiyear Iforecasting Iof
14-15 24-25 23-25 8-10 7
Inetoperating I
Iprofit Iand Inet Ioperating
Iassets.
©Cambridge IBusiness IPublishers, I2013
Test
IBank, IModule I11 11-1
, Module 11: Forecasting Financial Statements
I I I I
True/False
Topic: IEliminating ITransitory
IActivitiesI LO: I1
1. To Iforecast Ifuture Iperformance, Iwe Ishould Ifirst Icreate Ia Iset Iof Ifinancial Istatements Ithat
Ireflects
Iitemswe I Iexpect Ito Ipersist.
Answer: ITrue
Rationale: IPersistent Iactivities Iare Ithose Ithat Iwill Irecur I– Ithat Iis Ithe Ipoint Iof Iforecasting, Ito
Ipredictwhat I Iwill Irecur.
Topic: IConservatism Iversus
IOptimism ILO: I1
2. When Iforecasting Ifuture Ievents, Iit Iis Ibetter Ito Itake Ia Imore Iconservative Iview Ifor Iitems
Isuch
IasrevenueI Igrowth Iand Iprofit Imargins.
Answer: IFalse
Rationale: IThe Ibest Iforecasts Iare Ithe Imost Irealistic Iones. IBeing Ioverly Iconservative Ican
Ilead Itomissed I Iopportunities.
Topic: IBias IResulting Ifrom
IAccruals ILO: I1
3. Accruals Ican Ibe Iused Ito Ibias Ifinancial Istatements Iin Iorder Ito Iachieve Icertain Ireporting
Iobjectives.
Answer: ITrue
Rationale: IManagers Ican Iuse Iaccruals Ito Idepress Icurrent Iperiod Iincome Iby Iwriting Ioff Ian
IexcessiveamountI Iof Iassets Iand Iaccruing Ian Iexcessive Iamount Iof Iliabilities I(big
Ibath). IManagers Ican Ialso Iincrease Icurrent Iperiod Iincome Iby Iaccruing Ian Iinsufficient
Iallowance Ifor Iuncollectible Iaccounts, Ifor Iexample.
Topic: IAdjusting
IProcess ILO: I1
4. The Iadjusting Iprocess Iis Iuseful Ifor Ihistorical Ianalysis, Ibut Inot Ifor Iprospective Ianalysis.
Answer: IFalse
Rationale: IThe Iadjusting Iprocess Iparses Ithe Ifinancial Istatements Iinto
Ioperating/nonoperating
Iandcore/transitory I Icomponents. IIt Iis Iuseful Ifor Iboth Ihistorical Iand Iprospective Ianalysis.
©Cambridge IBusiness IPublishers,
I 2013 I11-2 Financial IStatement IAnalysis I& IValuation, I3rd
,Topic: IOrder Iof
IProjectionsI LO: I1
5. The Iusual Ifinancial Istatement Iprojection Iprocess Iis Icompleted Iin Ithe Ifollowing Iorder:
Ibalance
Isheet,incomeI Istatement, Istatement Iof Icash Iflows.
Answer: IFalse
Rationale: IThe Iusual Iprojection Iprocess Ibegins Iwith Ithe Iincome Istatement, Ifollowed Iby
Ithe
Ibalancesheet, I Iand Ifinished Iwith Ithe Istatement Iof Icash Iflows.
Topic: IProjecting
IRevenues ILO: I2
6. An Iunbiased Iapproach Ito Iforecasting Ifuture Irevenues Igives Iequal Iweight Ito Ihistorical
Iorganic
Irevenuegrowth I Iand Irevenue Igrowth Ifrom Imergers Iand Iacquisitions.
Answer: IFalse
Rationale: IThe Imost Iaccurate Iforecast Iof Ifuture Irevenue Iis Ione Ithat Iconsiders Ifuture
Iorganic IversusM&A I Irevenue Igrowth. IHistoric Inumbers Iare Iinformative Ito Ithe Iextent
Ithat Iwe Iexpect Ipast Itrends Ito Icontinue.
Topic: IProjecting
IRevenues ILO: I2
7. Revenue Iforecasts Iderived Ifrom Iunit Isales Iand Icurrent Iprices Iare Iusually Imore Iaccurate
Ithan
Ithosederived I Ifrom Idollar Isales.
Answer: ITrue
Rationale: IUsing Iunits Iand Iprices Iallows Ithe Iforecaster Ito Ialter Ieach Iseparately Iwhich Iis Ia
Imoredynamic I Iand Iusually Imore Iaccurate Iway Ito Iforecast Idemand Iand Irevenue.
Topic: IProjections IUsing IMost ICurrent
IRatios ILO: I3
8. Projecting Ibalance Isheet Iitems Iis Imost Iaccurate Iif Iwe Iuse Ithe Imost Irecent Iratios.
Answer: IFalse
Rationale: IFor Iaccurate Iforecasts, Iwe Iwant Ito Iuse Ithe Imost Istable Iand Irelevant Iratios
Iconcerning Ithecompany’s I Ifinancial Icondition. ISometimes, Ithe Imost Irecent Iratios
Iare Inot I stable.
Topic: IProjecting IProperty, IPlant, Iand IEquipment I(PPE) ILO:
I3
9. To Iforecast Iproperty, Iplant, Iand Iequipment I(PPE) Iwe Ifirst Idetermine Icapital Iexpenditures
I(CAPEX)and I Iadd Ithat Ito Ihistorical IPPE.
Answer: ITrue
Rationale: IWe Ido Inot Iforecast Idisposals Iunless Ithe IMD&A Ispecifically Imentions Ithem.
Topic: IProjection Iof
©Cambridge IBusiness IPublishers, I2013
Test
IBank, IModule I11 11-3
, Cash ILO: I3
I
10. The Iforecasting Iprocess Iassumes Ithat Ithe Icash Ion Ithe Ibalance Isheet Ireflects Ian
Ieconomicallyappropriate I Ibalance Ithat Iwe Iforecast Isimilarly Ifor Ithe Inext Ifiscal Iyear.
Answer: ITrue
Rationale: IOur Iforecasting Iprocess Iis Ito Iforecast Ia Icash Ibalance Iand Iadjust Ithe Ilevel Iof
Iinvestmentsecurities I Ior Ishort-term Idebt Ito Ibalance Ithe Ibalance Isheet.
Topic: IProjected ICash-Flow
IStatementI LO: I4
11. The Iforecasted Istatement Iof Icash Iflow Iuses Ieither Ithe Iforecasted Iincome Istatement Ior
Ithe Ibalancesheet. I
Answer: IFalse
Rationale: IThe Istatement Iof Icash Iflow Iuses Iboth Ito Iexplain Ithe Ichange Iin Icash Ion Ithe
Ibalance Isheet.
©Cambridge IBusiness IPublishers,
I 2013 I11-4 Financial IStatement IAnalysis I& IValuation, I3rd
Forecasting Financial Statements I I
Learning Objectives – coverage by question
I I I I I
True/False Multiple Exercises Problems Essays
IChoice
LO1 I– IExplain Ithe Iprocess
Iofforecasting I 1-5 1-3 1 1 1-2
Ifinancial Istatements.
LO2 I– IForecast Irevenues 6-7 4-9 2-11 2-4 3-5
I andthe I Iincome Istatement.
LO3 I– IForecast Ithe
8-10 10-16 12 2-4 5
I balancesheet. I
LO4 I– IForecast Ithe
11-12 17-21 13-20 5-6 6
I statementof I Icash Iflows.
LO5 I– IPrepare
I multiyearforecasts I Iof 13 22-23 21-22 7 -
Ifinancial Istatements.
LO6 I– IImplement Ia
Iparsimonious Imethod Ifor
Imultiyear Iforecasting Iof
14-15 24-25 23-25 8-10 7
Inetoperating I
Iprofit Iand Inet Ioperating
Iassets.
©Cambridge IBusiness IPublishers, I2013
Test
IBank, IModule I11 11-1
, Module 11: Forecasting Financial Statements
I I I I
True/False
Topic: IEliminating ITransitory
IActivitiesI LO: I1
1. To Iforecast Ifuture Iperformance, Iwe Ishould Ifirst Icreate Ia Iset Iof Ifinancial Istatements Ithat
Ireflects
Iitemswe I Iexpect Ito Ipersist.
Answer: ITrue
Rationale: IPersistent Iactivities Iare Ithose Ithat Iwill Irecur I– Ithat Iis Ithe Ipoint Iof Iforecasting, Ito
Ipredictwhat I Iwill Irecur.
Topic: IConservatism Iversus
IOptimism ILO: I1
2. When Iforecasting Ifuture Ievents, Iit Iis Ibetter Ito Itake Ia Imore Iconservative Iview Ifor Iitems
Isuch
IasrevenueI Igrowth Iand Iprofit Imargins.
Answer: IFalse
Rationale: IThe Ibest Iforecasts Iare Ithe Imost Irealistic Iones. IBeing Ioverly Iconservative Ican
Ilead Itomissed I Iopportunities.
Topic: IBias IResulting Ifrom
IAccruals ILO: I1
3. Accruals Ican Ibe Iused Ito Ibias Ifinancial Istatements Iin Iorder Ito Iachieve Icertain Ireporting
Iobjectives.
Answer: ITrue
Rationale: IManagers Ican Iuse Iaccruals Ito Idepress Icurrent Iperiod Iincome Iby Iwriting Ioff Ian
IexcessiveamountI Iof Iassets Iand Iaccruing Ian Iexcessive Iamount Iof Iliabilities I(big
Ibath). IManagers Ican Ialso Iincrease Icurrent Iperiod Iincome Iby Iaccruing Ian Iinsufficient
Iallowance Ifor Iuncollectible Iaccounts, Ifor Iexample.
Topic: IAdjusting
IProcess ILO: I1
4. The Iadjusting Iprocess Iis Iuseful Ifor Ihistorical Ianalysis, Ibut Inot Ifor Iprospective Ianalysis.
Answer: IFalse
Rationale: IThe Iadjusting Iprocess Iparses Ithe Ifinancial Istatements Iinto
Ioperating/nonoperating
Iandcore/transitory I Icomponents. IIt Iis Iuseful Ifor Iboth Ihistorical Iand Iprospective Ianalysis.
©Cambridge IBusiness IPublishers,
I 2013 I11-2 Financial IStatement IAnalysis I& IValuation, I3rd
,Topic: IOrder Iof
IProjectionsI LO: I1
5. The Iusual Ifinancial Istatement Iprojection Iprocess Iis Icompleted Iin Ithe Ifollowing Iorder:
Ibalance
Isheet,incomeI Istatement, Istatement Iof Icash Iflows.
Answer: IFalse
Rationale: IThe Iusual Iprojection Iprocess Ibegins Iwith Ithe Iincome Istatement, Ifollowed Iby
Ithe
Ibalancesheet, I Iand Ifinished Iwith Ithe Istatement Iof Icash Iflows.
Topic: IProjecting
IRevenues ILO: I2
6. An Iunbiased Iapproach Ito Iforecasting Ifuture Irevenues Igives Iequal Iweight Ito Ihistorical
Iorganic
Irevenuegrowth I Iand Irevenue Igrowth Ifrom Imergers Iand Iacquisitions.
Answer: IFalse
Rationale: IThe Imost Iaccurate Iforecast Iof Ifuture Irevenue Iis Ione Ithat Iconsiders Ifuture
Iorganic IversusM&A I Irevenue Igrowth. IHistoric Inumbers Iare Iinformative Ito Ithe Iextent
Ithat Iwe Iexpect Ipast Itrends Ito Icontinue.
Topic: IProjecting
IRevenues ILO: I2
7. Revenue Iforecasts Iderived Ifrom Iunit Isales Iand Icurrent Iprices Iare Iusually Imore Iaccurate
Ithan
Ithosederived I Ifrom Idollar Isales.
Answer: ITrue
Rationale: IUsing Iunits Iand Iprices Iallows Ithe Iforecaster Ito Ialter Ieach Iseparately Iwhich Iis Ia
Imoredynamic I Iand Iusually Imore Iaccurate Iway Ito Iforecast Idemand Iand Irevenue.
Topic: IProjections IUsing IMost ICurrent
IRatios ILO: I3
8. Projecting Ibalance Isheet Iitems Iis Imost Iaccurate Iif Iwe Iuse Ithe Imost Irecent Iratios.
Answer: IFalse
Rationale: IFor Iaccurate Iforecasts, Iwe Iwant Ito Iuse Ithe Imost Istable Iand Irelevant Iratios
Iconcerning Ithecompany’s I Ifinancial Icondition. ISometimes, Ithe Imost Irecent Iratios
Iare Inot I stable.
Topic: IProjecting IProperty, IPlant, Iand IEquipment I(PPE) ILO:
I3
9. To Iforecast Iproperty, Iplant, Iand Iequipment I(PPE) Iwe Ifirst Idetermine Icapital Iexpenditures
I(CAPEX)and I Iadd Ithat Ito Ihistorical IPPE.
Answer: ITrue
Rationale: IWe Ido Inot Iforecast Idisposals Iunless Ithe IMD&A Ispecifically Imentions Ithem.
Topic: IProjection Iof
©Cambridge IBusiness IPublishers, I2013
Test
IBank, IModule I11 11-3
, Cash ILO: I3
I
10. The Iforecasting Iprocess Iassumes Ithat Ithe Icash Ion Ithe Ibalance Isheet Ireflects Ian
Ieconomicallyappropriate I Ibalance Ithat Iwe Iforecast Isimilarly Ifor Ithe Inext Ifiscal Iyear.
Answer: ITrue
Rationale: IOur Iforecasting Iprocess Iis Ito Iforecast Ia Icash Ibalance Iand Iadjust Ithe Ilevel Iof
Iinvestmentsecurities I Ior Ishort-term Idebt Ito Ibalance Ithe Ibalance Isheet.
Topic: IProjected ICash-Flow
IStatementI LO: I4
11. The Iforecasted Istatement Iof Icash Iflow Iuses Ieither Ithe Iforecasted Iincome Istatement Ior
Ithe Ibalancesheet. I
Answer: IFalse
Rationale: IThe Istatement Iof Icash Iflow Iuses Iboth Ito Iexplain Ithe Ichange Iin Icash Ion Ithe
Ibalance Isheet.
©Cambridge IBusiness IPublishers,
I 2013 I11-4 Financial IStatement IAnalysis I& IValuation, I3rd
