Deck 11: Forecasting Financial Requirements

Question 1

The income statement gives us all the information we need to know to determine the firm's cash flow.

Answer 1

False

Question 2

Many small firms have a tendency to overestimate the amount of capital the business requires.

Answer 2

False

Question 3

Financial forecasts are required by lenders who want to know how they will be paid back, but not by investors, because they are receiving equity for their investment.

Answer 3

False

Question 4

The conventional measure of liquidity is the current ratio, which compares the current assets to current liabilities on a relative basis.

Question 5

The term net working capital means current assets less current liabilities and is a measure of a company's liquidity.

Question 6

Unless the owner's personal living expenses during the initial period of operation are part of the business's capitalization, they need not be considered in the financial plan.

Question 7

High-tech businesses (such as computer manufacturers) generally require more assets than service businesses.

Question 8

The difference between the statement of cash flows and the pro forma statement of cash flows is that the latter deals with historical data and the former deals with projections into the future.

Question 9

The debt ratio expresses the firm's debt as a percentage of equity.

Question 10

Pro forma financial statements mean that the financial statements are prepared in the proper format.

Question 11

Although the asset-to-sales ratio varies over time and with individual businesses, it tends to be relatively constant within an industry. This allows the startup to use the method of estimating asset requirements called the percentage-of-sales technique.

Question 12

In a real world situation an entrepreneur should project the profits to two years into the future.

Question 13

Profits reward an owner for investing in a company and constitute a primary source of financing for future growth.

Question 14

To the greatest extent possible the entrepreneur should use other people's resources, a common way entrepreneurs accomplish more with less. This is called bootstrapping.

Question 15

The cost of goods sold can be either fixed or variable.

Question 16

Projections of a venture's profits, its asset and financing requirements and its cash flows are essential in determining whether a venture is economically viable.

Question 17

There must be a corresponding dollar of financing for every dollar of assets. Stated another way, debt plus assets must equal total equity.

Question 18

The cash budget is concerned only with dollars received and dollars paid out.

Question 19

A firm's sales are the primary force driving future asset needs.

Question 20

Profits that are retained within the company rather than being distributed to the owners are referred to as retained earnings.

Question 21

For every dollar of assets there must be a corresponding dollar of

A) liquidity
B) liabilities
C) financing
D) debt

Question 22

Working capital refers to current assets which include the following except

A) cash
B) accounts receivable
C) notes receivable due within 24 months
D) inventories

Question 23

Cecilia Levine purchased badly needed equipment from a customer who deducted an amount from his invoices to cover the cost of the equipment. This strategy on the part of Levine illustrates a growth strategy called

A) boondoggling
B) bootstrapping
C) bartering
D) trade credit

Question 24

Financial projections should be limited to the income statement to prevent information overload on lenders and investors.

Question 25

D&R Products forecast first year asset requirements of $143,000; therefore, the total debt requirement must be

A) $143,000
B) a set percentage of sales
C) equal to the current ratio
D) unknown; not enough information

Question 26

D&R Products forecast that it will require $10,000 for equipment and $40,000 for a building. These items will be reflected in the balance sheet as _____.

A) inventory
B) net fixed assets
C) current assets
D) gross fixed assets

Question 27

After projecting sales the next step in forecasting a company's income is to project

A) operating expenses
B) interest expense
C) taxes
D) cost of goods sold

Question 28

The greater a firm's sales, the greater need for financing because of greater _____ requirements.

A) asset
B) employee
C) marketing
D) operational

Question 29

The following tactics represent bootstrapping except

A) leasing instead of buying
B) utilizing "just in time" inventory strategy
C) "floating" checks
D) collecting money owed the firm before having to pay its bills

Question 30

The results of forecasting asset requirements for a startup business will only be as good as its

A) conjectures
B) assumptions
C) historical data
D) primary data

Question 31

Entrepreneurs tend to be conservative and usually underestimate what they can actually achieve when it comes to future sales.

Question 32

Most firms of any size need fixed assets which include

A) inventories
B) equipment
C) working capital
D) office supplies

Question 33

In a 2009 survey Inc.com asked its readers "What is the hardest part of owning a business right now?" The leading problem cited was

A) difficulty in obtaining credit
B) losing long-standing customers
C) employees worried about losing their jobs
D) difficulty in forecasting accurately

Question 34

Winston Wolfe believes it is important to produce a profit and loss statement every

A) day
B) week
C) month
D) year

Question 35

The assets-to-sales relationship tends to be relatively constant within an industry, allowing for a(n) _____ technique to be utilized in projecting asset requirements.

A) percentage-of-sales
B) bootstrap forecasting
C) asset turnover ratio
D) discounted sales

Question 36

A firm should finance its growth in such a way as to maintain adequate

A) liquidity
B) inventory
C) sales
D) volume

Question 37

D&R Products forecast its cash requirements for year one at 4% of sales, resulting in a $10,000 cash need. The cash will be reflected in the balance sheet as _____.

A) gross fixed assets
B) net fixed assets
C) current assets
D) accounts receivable

Question 38

Most firms of any size need working capital which includes the following except

A) owner's equity
B) accounts receivable
C) cash
D) inventories

Question 39

The most common way that entrepreneurs accomplish more with less is called

A) bootstrapping
B) downsizing
C) debt financing
D) credit card financing

Question 40

The conventional measure of a firm's liquidity is the

A) debt ratio
B) cash flow statement
C) current ratio
D) asset turnover ratio

Question 41

A simple listing of expected cash inflows and outflows provides the entrepreneur with a(n)

A) income statement
B) cash budget
C) pro forma balance sheet
D) net equity computation

Question 42

A wholesale sunglass company should break down its annual cash budget into shorter time units because

A) of the seasonality of its sales
B) one year is too far into the future to predict
C) its marketing plans may change during the year
D) production breakdowns may alter the company's situation

Question 43

What are the asset categories that constitute working capital?

Question 44

David Allen plans to invest $110,000 of his personal savings to provide the needed startup equity for D&R Products, Inc. He will receive _____ for his investment.

A) a note receivable
B) a corporate charter
C) common stock
D) an equity certificate

Question 45

A business plan should specify that at least _____ of the firm's financing should come from equity, and the rest will come from debt.

A) one-third
B) one-fourth
C) some
D) half

Question 46

As a general rule an entrepreneur should maintain a current ratio of _____ or have a good reason for not doing so.

A) 1
B) 2
C) 3
D) 4

Question 47

Explain the percentage-of-sales technique.

Question 48

Accounts payable and accrued expenses rise as a firm's sales increase. This phenomenon is known as

A) spontaneous debt financing
B) trade credit financing
C) escalating debt
D) asset-based financing

Question 49

According to the text the first step in preparing a cash budget is

A) estimate the amount of cash disbursements
B) calculate cash flow from operations
C) determine the amount of cash collections
D) determine beginning-of -the -month cash balance

Question 50

The overall approach to forecasting is straightforward - entrepreneurs make _____ and, based on these _____, determine financial requirements.

A) predictions
B) suggestions
C) assumptions
D) projections

Question 51

When developing pro forma cash flow statements the following numbers must be scrutinized carefully except

A) operating activities
B) investment activities
C) financing activities
D) marketing activities

Question 52

For the typical small firm the primary source of equity capital for financing growth is

A) operating profits
B) outside investors
C) spontaneous debt financing
D) retained earnings

Question 53

Briefly explain liquidity and its relationship to the current ratio.

Question 54

List the factors that drive net profits in the order that they should appear on the income statement.

Question 55

What are the two sources of equity ownership in a business?

Question 56

No single planning document is more important in the life of a company than the

A) income statement
B) cash budget
C) balance sheet
D) corporate charter

Question 57

One real danger in over-reliance on a cash budget is that it may lead to

A) inflexibility
B) pliability
C) exaggeration
D) errors