Review Questions MyLab Finance Solutions 4-1 What is the financial planning process? Contrast long-term (strategic) financial plans with short-term (operating) financial plans. Review Questions MyLab Finance Solutions 4-3 Briefly describe the first four modified accelerated cost recovery system (MACRS) property classes and recovery periods. Explain how the depreciation percentages are determined by using the MACRS recovery periods. 4-4 Describe the overall cash flow through the firm in terms of cash flow from operating activities, cash flow from investment activities, and cash flow from financing activities. 4-5 Explain why a decrease in cash is classified as a cash inflow (source) and why an increase in cash is classified as a cash outflow (use) in preparing the statement of cash flows. 4-6 Why is depreciation (as well as amortization and depletion) considered a noncash charge? 4-7 Describe the general format of the statement of cash flows. How are cash inflows differentiated from cash outflows on this statement? 4-8 Why do we exclude interest expense from operating cash flow? 4-9 Define and differentiate between a firm's operating cash flow (OCF) and its free cash flow (FCF). Review Questions MyLab Finance Solutions 4-10 What is the purpose of the cash budget? What role does the sales forecast play in its preparation? 4-11 Briefly describe the basic format of the cash budget. 4-12 How can the two "bottom lines" of the cash budget be used to determine the firm's short-term borrowing and investment requirements? 4-13 What is the cause of uncertainty in the cash budget, and what two techniques can be used to cope with this uncertainty? Review Question MyLab Finance Solutions 4-14 What is the purpose of pro forma statements? What inputs are required for preparing them using the simplified approaches? 4-15 How is the percent-of-sales method used to prepare pro forma income statements? 4-16 Why does the presence of fixed costs lead to errors in a pro forma income statement constructed using the percent-of-sales method? What is a better method? Review Questions MyLab Finance Solutions 4-17 Describe the judgmental approach for simplified preparation of the pro forma balance sheet. 4-18 What is the significance of the "plug" figure, external financing required? Differentiate between strategies associated with positive values and with negative values for external financing required. Review Questions MyLab Finance Solutions 4-19 What are the two basic weaknesses of the simplified approaches to preparing pro forma statements