1. A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

a. True b. False

2. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

a. True b. False

3. As a firm's sales grow its current asset accounts tend to increase. For instance, as sales increase the firm's inventories increase and its level of accounts payable will increase. Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.

a. True b. False

4. The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

a. True b. False

5. An increase in the firm's inventory balance will normally require additional financing unless the increase is matched by an equally large decrease in some other asset account.

a. True b. False

6. One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income.

a. True b. False

7. Pro forma financial statements, as discussed in the text, are used primarily to assess a firm's historical performance.

a. True b. False

8. The first, and most critical, step in constructing a set of pro forma financial statements is the sales forecast.

a. True b. False

9. Any firm with a positive growth rate in sales will require some amount of external funding, assuming all existing ratios are to be maintained.

a. True b.