Balance Sheet and Inventory

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Chapter 4

Discussion Questions

|4-1. |What are the basic benefits and purposes of developing pro forma statements and a cash budget? | | | | | |The pro-forma financial statements and cash budget enable the firm to determine its future level of asset needs and the| | |associated financing that will be required. Furthermore, one can track actual events against the projections. Bankers | | |and other lenders also use these financial statements as a guide in credit decisions. | | | | |4-2. |Explain how the collections and purchases schedules are related to the borrowing needs of the corporation. | | | | | |The collections and purchase schedules measure the speed at which receivables are collected and purchases are paid. To | | |the extent collections do not cover purchasing costs and other financial requirements, the firm must look to borrowing | | |to cover the deficit. | | | | |4-3. |With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of | | |goods sold? | | | | | |LIFO inventory valuation assumes the latest purchased inventory becomes part of the cost of goods sold, while the FIFO | | |method assigns inventory items that were purchased first to the cost of goods sold. In an inflationary environment, the| | |LIFO method will result in a higher cost of goods sold figure and one that more accurately matches the sales dollars | | |recorded at current dollars. | | | | |4-4. |Explain the relationship between inventory turnover and purchasing needs. | | | | | |The more rapid the turnover of inventory, the greater the need for purchase and replacement. Rapidly turning inventory | | |makes for somewhat greater ease in foreseeing future requirements and reduces the cost of carrying inventory. | | | | |4-5. |Rapid corporate growth in sales and profits can cause financing problems. Elaborate on this statement. | | | | | |Rapid growth in sales and profits is often associated with rapid growth in asset commitment. A $100,000 increase in | |...
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