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Preparation of Pro Forma Financial Statements and Boeing Corp

Please explain your answer to each question.

1. Boeing Corp. buys on 2/10, net 30 days. What is the nominal cost of interest if Boeing does not take advantage of the trade discount offered? Assume a 360-day year.

a. 2.0%
b. 72.3%
c. 48.1%
d. 36.7%

2. Which of the following is the initial and most important step in the preparation of pro forma financial statements?:

a. Estimate the levels of investment in current and fixed assets.
b. Determine the rate of interest that will be required for borrowed funds.
c. Project the firm's sales revenues for the planning period.
d. Approximate the cost of raw materials.

3. Determine the effective annualized cost of forgoing the trade discount on terms 2/10 net 45 (round to nearest .01%).

a. 21.0%
b. 16.3%
c. 16.0%
d. 20.6%

4. The "percent of sales method" is a method of preparing pro forma financial statements. Which of the following would be an example of how the "percent of sales method" is developed?

a. Forecast expenses by applying a percent of projected sales, using last year's expenses as a percent of last year's sales.
b. Forecast assets by applying a percent of projected sales, using current year's assets as a percent of current year's sales.
c. Approximate liabilities by applying a percent of projected sales, using the last five-year average of liabilities as a percent of sales.
d. All of the above are correct
e. None of the above.

Solution Preview

1. Boeing Corp. buys on 2/10, net 30 days. What is the nominal cost of interest if Boeing does not take advantage of the trade discount offered? Assume a 360-day year.

a. 2.0%
b. 72.3%
c. 48.1%
d. 36.7%

Number of days extra credit is available = 30-10=20
Discount if payment done by 10th day = 2%
Nominal cost of interest = 2%/(1-2%)*360/20=36.7%
Answer is d.

2. Which of the following is the initial and most important step in the preparation of pro forma financial statements?:

a. Estimate the levels of ...

Solution Summary

The solution prepares a pro forma financial statement. Boeing Corps nominal cost of interest is determined.

$2.19