1) A forecast balance sheet could be estimated based on a firm's past financial ratios and statements *

True
False

2. A cash budget is a byproduct (secondary result) of producing forecast financial statements. *

True
False

3. The ending cash balance of the cash budget should be equal to the net income shown on the income statement. *

True
False

4. Other things held constant, the more debt a firm uses, the lower its return on total assets will be *

True
False

5. Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's. *

True
False

1. True

It's imposible to prepare forecast balance sheet ignoring historical records and past financial statements.

2.False

Cash budget and Forecast Financial statements are different tools. A cash budget is used to show the estimated cash flows of a business over a specific period of time. It's used to assess whether the particular business has sufficient fund to operate.

3. False

The net income is something that we get after deducting total expenses from total income. Since the business always follows acrrual concept it's easy to rule out the ending cash balance of the cash budget is not same as the net income.

4. True

When every thing held constant, the more debt a firm uses can increase the cost of debt by paying more interest on the same. Therefore Earnings before tax will stand reduce compare to a scenerio where debt amount is not increased. Therefore Return on total asset will be reduced significantly.

For eg: current situation debt @5% = 100 Asset = 1,000 Tax =50% EBIT= 50

Here Interest = 5

So EBT = 45

Earnings after tax = 22.5

ROA = 22.5*100/1000 = 2.25%

Where debt increased to 150, I = 7.5

EBT = 42.5

Earnings after tax = 21.25

ROA = 2.125%

5. False

Since A and B have the same CR = 0.75, the same amount of sales and current liability, Current Asset will also be equal. Quick asset = Current Asset - Inventory. Since A is having higher inventory turnover ratio than B. This means A's ability to convert inventory to sales is more than B. Therefore we can conclude that A's quick ratio is higher than that of B's