Financial And Managerial Accounting For MBAs 4th Edition By Coleman Easton – Test Bank

Topic: Eliminating Transitory Activities
LO: 1
1. To forecast future performance, we should first create a set of financial statements that reflects items we expect to persist.

Answer: True
Rationale: Persistent activities are those that will recur – that is the point of forecasting, to predict what will recur.

Topic: Conservatism versus Optimism
LO: 1
2. When forecasting future events, it is better to take a more conservative view for items such as revenue growth and profit margins.

Answer: False
Rationale: The best forecasts are the most realistic ones. Being overly conservative can lead to missed opportunities.

Topic: Bias Resulting from Accruals
LO: 1
3. Accruals can be used to bias financial statements in order to achieve certain reporting objectives.

Answer: True
Rationale: Managers can use accruals to depress current period income by writing off an excessive amount of assets and accruing an excessive amount of liabilities (big bath). Managers can also increase current period income by accruing an insufficient allowance for uncollectible accounts, for example.

Topic: Adjusting Process
LO: 1
4. The adjusting process is useful for historical analysis, but not for prospective analysis.

Answer: False
Rationale: The adjusting process parses the financial statements into operating/nonoperating and core/transitory components. It is useful for both historical and prospective analysis.

Topic: Order of Projections
LO: 1
5. The usual financial statement projection process is completed in the following order: balance sheet, income statement, statement of cash flows.

Answer: False
Rationale: The usual projection process begins with the income statement, followed by the balance sheet, and finished with the statement of cash flows.

Topic: Projecting Revenues
LO: 2
6. An unbiased approach to forecasting future revenues gives equal weight to historical organic revenue growth and revenue growth from mergers and acquisitions.

Answer: False
Rationale: The most accurate forecast of future revenue is one that considers future organic versus M&A revenue growth. Historic numbers are informative to the extent that we expect past trends to continue.

Topic: Projecting Revenues
LO: 2
7. Revenue forecasts derived from unit sales and current prices are usually more accurate than those derived from dollar sales.

Answer: True
Rationale: Using units and prices allows the forecaster to alter each separately which is a more dynamic and usually more accurate way to forecast demand and revenue.

Topic: Projections Using Most Current Ratios
LO: 3
8. Projecting balance sheet items is most accurate if we use the most recent ratios.

Answer: False
Rationale: For accurate forecasts, we want to use the most stable and relevant ratios concerning the company’s financial condition. Sometimes, the most recent ratios are not stable.

Topic: Projecting Property, Plant, and Equipment (PPE)
LO: 3
9. To forecast property, plant, and equipment (PPE) we first determine capital expenditures (CAPEX) and add that to historical PPE.

Answer: True
Rationale: We do not forecast disposals unless the MD&A specifically mentions them.

Topic: Projection of Cash
LO: 3
10. The forecasting process assumes that the cash on the balance sheet reflects an economically appropriate balance that we forecast similarly for the next fiscal year.

Answer: True
Rationale: Our forecasting process is to forecast a cash balance and adjust the level of investment securities or short-term debt to balance the balance sheet.