6. Which one of the following is correct in relation to pro forma statements?

• Fixed assets must increase if sales are projected to increase.

• Net working capital is affected only when a firm's sales are expected to exceed the firm's current production capacity.

• The addition to retained earnings is equal to net income less cash dividends.

• Long-term debt varies directly with sales when a firm is currently operating at maximum capacity.

• Inventory changes are not proportional to sales changes.

7. When constructing a pro forma statement, net working capital generally:

Multiple Choice

• remains fixed.

• varies only if the firm is currently producing at full capacity.

• varies only if the firm maintains a fixed debt-equity ratio.

• varies only if the firm is producing at less than full capacity.

• varies proportionally with sales.

8. A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:

Multiple Choice

• accounts payable.

• long-term debt.

• fixed assets.

• retained earnings.

• common stock.

9. When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance?

Multiple Choice

• Net working capital policy

• Capital structure policy

• Dividend policy

• Capital budgeting policy

• Capacity utilization policy

10. When compiling a pro forma statement, which policy most directly affects the projection of the retained earnings account balance?

Multiple Choice

• Net working capital policy

• Capital structure policy

• Dividend policy

• Capital budgeting policy

• Capacity utilization policy