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Proforma Statements, Forecasting, Capital Intensity

Which of the following statements is CORRECT?

a. One of the key steps when developing pro forma financial statements is to determine the breakdown of common equity between common stock and retained earnings.

b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.

c. Pro forma financial statements as discussed in the text are used primarily as a part of the managerial compensation program where management's historical performance is evaluated.

d. The capital intensity ratio gives us an idea of the condition of the firm's fixed assets.

e. The percent of sales method produces more accurate forecasts than the forecasted financial statement method when fixed assets are lumpy and economies of scale exist.

Solution Preview

The correct answer is b. When performing capital budgeting, the entire process begins with a sales forecast. Once sales has been forecast, the related expenses can be determined, as can the expected cash flows; both of these projections help to create a pro forma balance sheet. ...

Solution Summary

This is true/false question covering the topics listed in the title. I expand upon each aspect of the question with a short discussion of the topic and why the possible response is right or wrong.