Question

Answer true of false to each of the following. briefly explain your reasoning for each answer

a. All else equal, increasing the projected amount of accounts receivable in a financial forecast will increase external funding required.

b. Estimates of external funding required based on cash flow forecasts are usually higher than estimates based on pro forma financial statements.

c. An annual financial forecast for 2018 showing no external funding required assures a company that no cash shortfalls are likely to occur during 2018.

Answer 1

The additional funds equation is mentioned below

Additional funds equations = (Assets at year 0 X change in sales ( from 0 year to 1 ) / sales in zero period))

- (Liabilities at year 0 X change in sales ( from 0 year to 1) / sales in zero period))

- Sales in year 1 * profit margin % age * retention ratio

The below-mentioned parts can be answered on the basis of the above-mentioned equation

1. True - since an increase in the accounts receivable will increase the amount of working capital required in the subsequent year, leading to an increase in additional funds required.

2. True - the cash flow statement is based on a cash basis  and hence will not factor in the accrual effect unlike the proforma method which is based on accrual assumption

3. False - an estimate of the no additional fund requirement indicates that an entity will be able to meet its future working capital requirement by its profits of the previous years, however, this is not an assurance that no cash shortfall will occur hence the statement is false