Deck 14: Short-Term Financial Planning

Question 1

In order to reduce discretionary financing needed,a profitable company could decrease its dividend payout ratio.

Answer 1

True

Question 2

The percent of sales method does not provide a reasonable prediction of asset levels for instances when there are economies of scale in the use of the asset being forecast and when asset purchases are lumpy.

Answer 2

True

Question 3

Financial forecasting is the process of attempting to estimate a firm's future financing requirements.

Answer 3

True

Question 4

Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.

Question 5

When fixed costs are part of a firm's cost structure,the percent of sales method will understate net income and overstate discretionary financing needed,if sales are increasing.

Question 6

The percent of sales method assumes that all assets and all liabilities increase proportionally with sales,but retained earnings does not.

Question 7

Traditional financial forecasting takes the sales forecast as given and forecasts the corresponding expenses,assets,and liabilities of the firm.

Question 8

In the percent of sales method,a company's asset requirements are based on the company's projected sales level.

Question 9

The first step in a corporation's financial forecasting process is the determination of the firm's financing needs.

Question 10

Discretionary financing needed is equal to projected total assets minus projected total liabilities.

Question 11

The forecasted retained earnings balance is equal to (current retained earnings/current sales)times projected sales for next year.

Question 12

The cash budget can be used to provide an estimate of the firm's future financing needs.

Question 13

Issuing new short-term bonds to finance an expansion is an example of spontaneous financing.

Question 14

The key ingredient in a firm's financial planning is an accurate sales forecast.

Question 15

For a typical firm expecting higher sales,external financing needed will be greater than discretionary financing needed.

Question 16

Discretionary financing needed must be obtained through additional borrowing because additional equity measured by the increase in retained earnings has already been deducted.

Question 17

Notes payable and bonds payable are spontaneous liabilities.

Question 18

If the sales growth rate is greater than zero,then the discretionary financing needed will also be greater than zero.

Question 19

Discretionary financing needed will be zero when the company's sales growth rate is zero.

Question 20

A corporation that increases it net profit margin will need less discretionary financing,other things being equal.

Question 21

Discretionary sources of financing are those sources that vary automatically with a firm's level of sales.

Question 22

One of the virtues of the percent-of-sales method is the precision of the estimate of future financing needs.

Question 23

Other things equal,higher net profit margins mean higher discretionary financing needed.

Question 24

Spontaneous financing is financing obtained at the last minute due to poor financial planning.

Question 25

When preparing pro forma financial statement,the income statement must be prepared first because the projected retained earnings balance on the balance sheet is based on the expected net income.

Question 26

Accounts payable and accrued expenses are known as discretionary sources of financing.

Question 27

Purchasing supplies on credit and paying for them 45 days later is an example of discretionary financing.

Question 28

Using the percent of sales method,projected common stock on the 2010 pro forma balance sheet is equal to (Common Stock 2009/Sales 2009)times Projected Sales 2010.

Question 29

Other things equal,if a firm increases its dividend payout ratio,its discretionary financing needed will also increase.

Question 30

Forecasts of revenues and their related expenses are the basis on which firms forecast their future financing needs.

Question 31

A company calculates its discretionary financing needed and determines this amount of capital cannot be raised at a reasonable cost.Which of the following would reduce the amount of discretionary financing needed?

A)reduce the company's net profit margin
B)reduce the company's sales growth rate
C)increase the company's dividend payout ratio
D)increase the proportion of the company's sales that are made on credit

Question 32

Discretionary financing needed can be positive or zero,but not negative.

Question 33

Discretionary financing needed (DFN)is equal to projected total assets minus projected total liabilities minus projected owners' equity.

Question 34

Accrued expenses represent a spontaneous form of financing.

Question 35

If external financing needed cannot be obtained due to poor market conditions,a firm could reduce the amount needed by increasing its retention ratio.

Question 36

A set of estimates which corresponds to the worst and best case outcomes is often desired in preparing a financial forecast.

Question 37

It is often the case that the planning process has its greatest value when the resulting forecasts have the most error,because the planning process offers its greatest value when the future is the most uncertain.

Question 38

The percent of sales method can be used to forecast

A)expenses.
B)assets.
C)liabilities.
D)all of the above.

Question 39

Pro forma financial statements depict the end result of the planning period's operations.

Question 40

For a growing firm,external financing needed will most likely be greater than discretionary financing needed due to increases in accounts payable and accruals.

Question 41

Spontaneous sources of financing include

A)accounts payable and accrued expenses.
B)notes payable and mortgages payable.
C)long-term debt and capital leases.
D)common stock and paid-in capital.

Question 42

A sales forecast for the coming year would reflect

A)any past trend which is expected to continue.
B)the influence of any events that might materially affect that trend.
C)both A and B.
D)neither A nor B.

Question 43

Discretionary financing accounts include all of the following EXCEPT

A)long-term debt.
B)notes payable.
C)accrued liabilities.
D)common stock.

Question 44

Using the percentage of sales method,forecasted retained earnings balance is equal to

A)prior year retained earnings plus projected net income less projected dividends.
B)the ratio of retained earnings to sales for the current year multiplied by projected sales for next year.
C)the retained earnings balance for the current year as no changes are made to this financing account when using the percent of sales method.
D)the ratio of retained earnings to sales for the current year multiplied by projected sales for next year,minus dividends paid.

Question 45

All of the following are useful purposes of pro forma financial statements EXCEPT

A)they provide a useful tool for analyzing the effects of a firm's forecasts on its financial performance.
B)they satisfy the SEC requirement for audited financial disclosure.
C)they can be used to control,or monitor a firm's progress for a planning period.
D)they serve as a benchmark to compare actual results to planned activities.

Question 46

The CFO of Twine Enterprises expects sales to increase from $8,000,000 in 2010 to $12,000,000 in 2011.Current assets in 2010 are equal to $5,000,000.Using the percent of sales method,projected current assets for 2011 are equal to

A)$5,500,000.
B)$7,083,333.
C)$9,000,000.
D)$7,500,000.

Question 47

DAS,Inc.is preparing its financial forecast for next year and its discretionary financing needed is negative.This means that

A)sales growth must be negative.
B)the predicted change in total assets must be negative.
C)the predicted change in spontaneous liabilities and retained earnings must be greater than the predicted change in total assets.
D)the dividend payout ratio must be greater than the predicted growth rate in sales.

Question 48

The first step involved in predicting financing needs is

A)project the firm's sales revenues and expenses over the planning period.
B)estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
C)determining the firm's financing needs throughout the planning period.
D)estimating the cost of debt.

Question 49

When forecasting fixed asset requirements,the projected fixed asset balance will

A)not increase proportionally with sales if the existing level of fixed assets is sufficient to support current sales.
B)not increase proportionally if excess capacity exists.
C)remain the same since the balance is fixed.
D)always increase proportionally with sales.

Question 50

Gerentology Associates,a highly profitable company,is considering two growth strategies,one that will achieve sales growth of 20% in one year,and the other that will achieve 20% growth in sales,but over a 4-year time frame.Assuming Gerentology Associates uses the percent of sales method,which of the following statements is true?

A)Discretionary financing needed will be much greater for the 4-year growth strategy.
B)Discretionary financing needed could be much less for the 4-year growth strategy due to retained earnings.
C)The asset balances at the end of 4 years for strategy two will be much greater than the asset balances required at the end of year one for strategy one.
D)Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the company's debt.

Question 51

Using the percentage of sales method of forecasting

A)all asset and liability accounts increase or decrease proportionally with sales.
B)only asset accounts increase or decrease proportionally with sales.
C)accounts payable and accrued expenses are the only liabilities that increase or decrease proportionally with sales.
D)all balance sheet accounts increase or decrease proportionally with sales.

Question 52

All of the following will increase the discretionary financing needed EXCEPT

A)decrease the net profit margin.
B)decrease the dividend payout ratio.
C)decrease the sales growth rate.
D)decrease the spontaneous financing.

Question 53

The "percentage" used in the percent of sales calculation can come

A)from the most recent financial statement item as a percent of current sales.
B)from an average computed over several years.
C)from an analyst's judgment.
D)from any of the above or a combination of the above.

Question 54

Which of the following will most likely result in an increase in discretionary funding needed?

A)The company's profit margin increases.
B)The company's dividend payout ratio increases.
C)The company's assets are only operating at 50% of capacity.
D)The company pays its accounts payable in 50 days,up from 45 days.

Question 55

Potential sources of financing to support an increase in sales include all of the following EXCEPT

A)increase in the dividend payout ratio.
B)increase in spontaneous liabilities.
C)increase in accounts payable.
D)issuance of bonds and/or common stock.

Question 56

A discretionary form of financing would be

A)notes payable.
B)accounts payable.
C)accrued expenses.
D)A and B.

Question 57

Ribbon Industries reported sales of $3 million and net income of $400,000 for 2010.The retained earnings balance at the end of 2012 is $7 million.Ribbon Industries has a dividend payout ratio of 30%.If sales are expected to increase by 25% next year,what will be the projected balance in retained earnings using the percent of sales method?

A)$7,280,000
B)$6,720,000
C)$7,350,000
D)$8,750,000

Question 58

Fixed assets are often estimated incorrectly by the percent of sales method because

A)fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales.
B)fixed asset are very expensive.
C)fixed assets are typically purchased in "lumps" and therefore do not increase proportionally with sales.
D)fixed assets are part of the capital budgeting process.

Question 59

Which of the following is a spontaneous source of financing?

A)accrued expenses
B)notes payable
C)common stock
D)paid-in-capital

Question 60

Using the percent of sales method and assuming that no excess capacity exists,a 20% increase in sales will result in

A)a 20% increase in total assets.
B)a 20% increase in total liabilities.
C)a 20% increase in retained earnings.
D)a 20% increase in the company's profit margin.

Question 61

All of the following are examples of sources of discretionary financing EXCEPT

A)bank loans.
B)notes payable.
C)trade credit.
D)common stock.

Question 62

Spontaneous sources of funds refers to all of the below EXCEPT

A)accruals.
B)a bank loan.
C)accounts payable.
D)common stock.

Question 63

Discretionary financing needs will be higher if ________.Assume "all else equal."

A)the firm's net profit margin increases
B)sales decline
C)the dividend payout ratio is raised
D)excess capacity exists for fixed assets

Question 64

Which of the following statements would NOT be a valid use of pro forma financial statements?

A)to determine a firm's needs for financing
B)to enhance a firm's ability to offer shareholders guaranteed operating results
C)to analyze the effects of a firm's forecasts on its financial performance
D)to serve as a benchmark when comparing actual results to planned activities

Question 65

Discretionary financing needs will be lower if ________.Assume "all else equal."

A)the dividend payout ratio is raised
B)the firm's net profit margin increases
C)sales increase
D)fixed assets are currently at full capacity

Question 66

Lindsey Insurance Co.has current sales of $10 million and predicts next year's sales will grow to $14 million.Current assets are $3 million and fixed assets are $4 million.The firm's net profit margin is 7 percent after taxes.Presently,Lindsey has $900,000 in accounts payable,$1.1 million in long-term debt,and $5 million (including $2.5 million in retained earnings)in common equity.Next year,Lindsey projects that current assets will rise in direct proportion to the forecasted sales,and that fixed assets will rise by $500,000.Lindsey also plans to pay dividends of $400,000 to common shareholders.
a.What are Lindsey's total financing needs for the upcoming year?
b.Given the above information,what are Lindsey's discretionary financing needs?

Question 67

At a minimum,the sales forecast for the coming year would reflect

A)any future trend in sales that is expected to begin in the new year.
B)the influence of any anticipated events that might materially affect the sales trend.
C)both of the above are correct.
D)neither of the above are correct.

Question 68

What differentiates "discretionary financing needs" from "external financing needs"?

A)assets
B)retained earnings
C)sales
D)spontaneous liabilities

Question 69

The "percent of sales method" is a method of preparing pro forma financial statements.All of the following would be examples of how the "percent of sales method" is developed EXCEPT?

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)Forecast retained earnings by applying a percent of projected sales,using current year's retained earnings as a percent of current year's sales.

Question 70

When economies of scale exist,the percent of sales method will overestimate the assets required and therefore overestimate the amount of discretionary financing needed.

Question 71

Using the 2012 financial statements for DRE Corporation and this additional information,prepare a pro forma income statement and balance sheet for the year 2013.Determine the discretionary financing needed (DFN)and assume that if the DFN is positive,the company will increase long-term debt,and if DFN is negative,the company will pay back some long-term debt. Sales for next year (2013)are expected to increase by $300,000 to $1,800,000.The firm is running efficiently and at full capacity so that all assets and spontaneous liabilities are expected to increase proportionally with sales.The dividend payout ratio for 2013 will be 40%. DRE Corporation 2012 Financial Statements

Question 72

Which of the following is a limitation of the "percent of sales method" of preparing pro forma financial statements?

A)A firm's investment in accounts receivable is seldom related to sales volume.
B)Not all assets and liabilities increase or decrease as a constant percent of sales.
C)Inventory levels are seldom affected by changes in sales volume.
D)The dividend payout ratio may change from one year to the next.

Question 73

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.

Question 74

Predicting a firm's future financial needs includes all of the following steps EXCEPT

A)review of the firm's sales revenues and expenses over all past planning periods.
B)estimation of investment levels for current and fixed assets.
C)determination of the firm's financing needs for the period.
D)estimation of projected sales and expenses.

Question 75

The percent of sales forecasting method works well because it accounts for economies of scale in assets such as inventory.

Question 76

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts receivable.Make the following assumptions: current year's sales are $45,450,000; current year's cost of goods sold is $26,950,000; sales are expected to rise by 20%.The firm's investment in accounts receivable in the current year is $8,600,000.The firm's marginal tax rate is 35%.What is the projection for next year's accounts receivable?

A)$11,345,000
B)$10,320,000
C)$9,575,000
D)$8,772,000

Question 77

A budget

A)records the amount and timing of the firm's past financing needs.
B)provides a basis for taking corrective action in the event that budgeted figures do not match actual or realized figures.
C)remains independent of the human resource performance evaluation task.
D)only makes sense for annual periods of time.

Question 78

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's accounts payable.Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%.The firm's investment in accounts payable in the current year is $2,218,500.What is the projection for next year's accounts payable?

A)$2,127,000
B)$3,781,750
C)$2,884,050
D)$4,184,000

Question 79

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's inventory.Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%.The firm's investment in inventory in the current year is $5,890,200.What is the projection for next year's inventory?

A)$7,657,260
B)$6,981,250
C)$5,845,500
D)$4,526,600

Question 80

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's cost of goods sold.Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%.What is the projection for next year's cost of goods sold?

A)$20,481,000
B)$21,138,900
C)$21,459,200
D)$22,786,400