Deck 17: Financial Forecasting and Planning

Question 1

The percent-of-sales method can be used to forecast

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

Answer 1

D

Question 2

One disadvantage of long-term plans is a loss of flexibility in responding to unexpected events.

Answer 2

False

Question 3

Short-term financial planning results in

A)a cash budget.
B)pro forma financial statements.
C)a sales forecast for the next 1 to 3 years.
D)a general narrative detailing near-term scenarios.

Answer 3

A

Question 4

Strategic planning encompasses all of the following EXCEPT

A)a cash budget.
B)a description of the firm's core competencies and activities.
C)a definition of the firm's customers.
D)a description of the firm's competitors and its own competitive strengths and weaknesses.

Question 5

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

Question 6

Short-term financial plans span a period of

A)up to five years.
B)one to three years.
C)a year or less.
D)1 month or less.

Question 7

Types of plans that businesses typically use to guide their operations include

A)strategic plans.
B)long-range financial plans.
C)short-range financial plans.
D)all of the above.

Question 8

Why is financial planning important in a highly uncertain financial environment?

Question 9

Because financial planning usually takes place in a highly uncertain environment

A)it is rarely worth the time and expense.
B)time horizons should be limited to a few months.
C)it is important to develop contingency plans to respond to unexpected events.
D)it should avoid such specific issues as what sources of financing to use.

Question 10

Long-term financial planning results in

A)a cash budget.
B)pro forma financial statements.
C)a sales forecast for the next 1 to 3 years.
D)a general narrative detailing near-term scenarios.

Question 11

The financial planning process is the responsibility of

A)financial analysts.
B)operations staff.
C)marketing staff
D)financial analysts,marketing staff,and operations staff interacting as a group.

Question 12

Long-term financial plans require that the firm have well-defined goals and objectives.

Question 13

What are the key questions that a strategic plan attempts to answer? How does it relate to financial plans?

Question 14

Discuss the basic functions that budgets perform for a firm.

Question 15

Long-term financial plans typically encompass

A)6 to 12 months.
B)about 5 years.
C)5 to 10 years.
D)the entire life cycle of the corporation.

Question 16

What is the most important ingredient in developing a firm's long-term financial plan?

A)A forecast of sales revenues
B)Determining the amount of dividends to pay shareholders
C)Projecting the rate of interest on proposed new debt
D)Deciding upon which method of depreciation a firm should utilise

Question 17

Typical steps in the financial planning process include

A)preparing a sales forecast.
B)analysing cost data.
C)estimating tax expense.
D)all of the above.

Question 18

One purpose of cash budgets is to estimate the firm's future capital spending and financing needs.

Question 19

Cash budget is a synonym for long-term financial plan.

Question 20

Cash budgets usually include details such as the timing of materials purchases,interest payments,and the like.

Question 21

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014;sales were $3,450,000 in fiscal 2013.Assume the following figures for the fiscal year ending 2013: cash $70,000;accounts receivable $250,000;inventory $400,000;net fixed assets $520,000;accounts payable $235,000;and accruals $155,000.Use the percent-of-sales method to forecast cash for the fiscal year ending 2014.

A)$120,725
B)$75,003
C)$216,418
D)$319,604

Question 22

The first step involved in predicting financing needs is

A)projecting 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)none of the above.

Question 23

Assume that Calamar Corp.has sales of $7.5 million and accounts payable of $450,000.The corporation utilises the percent-of-sales method of financial forecasting.If Calamar is expected to generate sales of $9 million next year,what will the firm's accounts payable be?

A)$540,000
B)$450,000
C)$405,000
D)None of the above

Question 24

Discretionary financing needs implies

A)that management may choose between various forms of debt and equity.
B)that the purchases being financed are optional rather than necessary.
C)that management has considerable discretion in how to dispose of retained earnings.
D)that management may choose between debt,new equity or retained earnings.

Question 25

Assume that Gatsby Enterprises has sales of $83 million and fixed assets of $22.4 million in 2013.The corporation utilises the percent-of-sales method of financial forecasting.If Gatsby is expected to generate sales of $94 million in 2014,what will the firm's investment in fixed assets be? The minimum fixed asset expansion costs $4,000,000.

A)$19.8 million
B)$26.4 million
C)$16.2 million
D)$25.4 million

Question 26

Which of the following is the correct method of determining discretionary financing needed (DFN)?

A)Projected change in assets,divided by projected change in liabilities,plus projected change in owner's equity
B)Projected change in assets,times projected change in owner's equity,minus projected change in liabilities
C)Projected change in owner's equity,minus projected change in liabilities,plus projected change in assets
D)Projected change in assets,minus projected change in liabilities,minus projected change in owner's equity

Question 27

A discretionary form of financing would be

A)notes payable.
B)accounts payable.
C)accrued expenses.
D)none of the above.

Question 28

The "percentage" used in the percent-of-sales calculation can be obtained from

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

Question 29

Which of the following assumptions is not required by the percent-of-sales method?

A)The inventory turnover will remain constant during the forecast period.
B)The profit margin will remain constant during the forecast period.
C)Cash,as a percent of sales,will remain constant throughout the forecast period.
D)The debt to equity ratio will remain constant throughout the forecast period.

Question 30

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014;sales were $3,450,000 in fiscal 2013.Assume the following figures for the fiscal year ending 2013: cash $70,000;accounts receivable $250,000;inventory $400,000;net fixed assets $520,000;accounts payable $235,000;and accruals $155,000.Use the percent-of-sales method to forecast accruals for the fiscal year ending 2014.

A)$890,001
B)$412,316
C)$267,319
D)$350,814

Question 31

Assume that Hercules Manufacturing has sales of $25 million and current assets of $5 million.The corporation utilises the percent-of-sales method of financial forecasting.If Hercules is expected to generate sales of $31 million next year,what will the firm's investment in current assets be?

A)$8.3 million
B)$4.0 million
C)$6.2 million
D)$5.0 million

Question 32

Which of the following are considered to be spontaneous sources of financing (i.e. ,they arise naturally during the course of doing business)?

A)Notes payable and ordinary shares
B)Accounts receivable and bonds
C)Fixed assets and inventory
D)Accounts payable and accrued expenses

Question 33

The percent-of-sales method of forecasting makes which of the following assumptions?

A)That some assets do not increase in direct proportion to an increase in sales.
B)The accounts receivable average collection period will remain constant throughout the forecast period.
C)The firm may acquire some "lumpy" assets.
D)All of the above.

Question 34

Which of the following statements about the percent-of-sales method of financial forecasting is true?

A)It is the least commonly used method of financial forecasting.
B)It is a much more precise method of financial forecasting than a cash budget would be.
C)It involves estimating the level of an expense,asset,or liability for a future period as a percent of the forecast for sales revenues.
D)It projects all liabilities as a fixed percentage of sales.

Question 35

The preparation of pro forma financial statements accomplishes which of the following objectives?

A)It allows management to pinpoint a firm's optimal share price.
B)It is essential if the firm is to accurately estimate its weighted average cost of capital.
C)It assists management in making decisions with respect to raising the capital that is needed for growth.
D)It pinpoints periods when the firm will have short-term cash surpluses.

Question 36

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 the past trend.
C)both A and B.
D)neither A nor B.

Question 37

Spontaneous sources of financing implies

A)that funding arises automatically in the course of business.
B)that management has autonomy.
C)that management has discretion on spending.
D)that the markets are amenable to share offerings.

Question 38

Which of the following require adjustments when forecasting asset needs as a percent of sales?

A)If assets must be purchased in large,discrete quantities
B)When the firm has excess capacity
C)When assets can be leased rather than purchased
D)Both A and B

Question 39

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014;sales were $3,450,000 in fiscal 2013.Assume the following figures for the fiscal year ending 2013: cash $70,000;accounts receivable $250,000;inventory $400,000;net fixed assets $520,000;accounts payable $235,000;and accruals $155,000.Use the percent-of-sales method to forecast accounts payable for the fiscal year ending 2014.

A)$212,036
B)$405,290
C)$619,619
D)$155,000

Question 40

Assume that Zybo,Inc.has sales of $10 million and inventory of $2 million.The corporation utilises the percent-of-sales method of financial forecasting.If Zybo is expected to generate sales of $14 million next year,what will the firm's investment in inventory be?

A)$1.4 million
B)$2.0 million
C)$2.8 million
D)None of the above

Question 41

The percent-of-sales method is a commonly used method for estimating a firm's financing needs.

Question 42

Holding other things constant,a firm's "discretionary financing needed" (the additional funds required in order to finance the firm)would be reduced if the firm experienced an increase in which of the following?

A)The dividend pay-out ratio
B)The profit margin
C)The accounts receivable average collection period
D)The expected growth rate in sales

Question 43

Which of the following accounts would normally increase with an increase in sales and approximately in proportion to the sales increase?

A)Ordinary shares
B)Inventory
C)Notes payable
D)Dividends

Question 44

An exceptionally high growth rate in sales will typically

A)initially increase the firm's need for discretionary financing.
B)generate enough cash flow to cover asset expansion.
C)allow the firm to increase its dividend in anticipation of higher cash flows.
D)allow the firm to finance expansion with spontaneous sources of financing.

Question 45

Which of the following will decrease discretionary funds needed?

A)An increase in projected accounts receivable
B)An increase in projected accounts payable
C)An increase in projected dividends
D)Both A and C

Question 46

Considering each action independently and holding other things constant,which of the following actions would increase a firm's discretionary financing needed (the need for additional capital)?

A)A decrease in the firm's accounts receivable average collection period
B)An increase in the firm's profit margin
C)A decrease in the firm's inventory turnover
D)A decrease in the expected growth rate in sales

Question 47

An increase in projected ________ will increase discretionary funds needed.

A)cash dividends
B)sales
C)retained earnings
D)both A and B

Question 48

Which of the following is a source of external capital?

A)Retained earnings
B)Inventory
C)Long-term debt
D)Operating income (earnings before interest and taxes)

Question 49

The projected change in retained earnings equals projected net income less any dividends to be paid.

Question 50

Which of the following will reduce the firm's financing requirements?

A)The firm operates at full capacity
B)The firm has excess capacity
C)The firm expects rapid growth in sales
D)The firm increases its dividend payout ratio

Question 51

Swings in discretionary financing needed can be caused by

A)firm profitability.
B)the growth rate of sales.
C)the need to upgrade technology and physical assets from time to time.
D)all of the above.

Question 52

Pro forma statements are important since they formally report the performance of the firm during a previous reporting period.

Question 53

The initiation of a major advertising campaign would be an example of an event that would affect past trends in sales when projecting statements.

Question 54

Pro forma statements provide single point estimates of each budgeted item.

Question 55

Holding all other variables constant,as the dividend payout ratio decreases,the sustainable growth rate increases.

Question 56

Which of the following is a spontaneous source of financing?

A)Long term debt
B)Notes payable
C)Ordinary shares
D)None of the above

Question 57

The percentages used in the percent-of-sales method come from pro forma financial statements.

Question 58

Assume all else remains the same.Which of the following statements is true?

A)The lower the dividend payout,the less a firm will have to reinvest.
B)The higher the dividend payout,the more discretionary financing a firm will require.
C)The lower the dividend payout,the more discretionary financing a firm will require.
D)The higher the dividend payout,the higher the retention percentage.

Question 59

Long-term financial plans must include capital expenditures.

Question 60

Asset purchases frequently precede a rapid increase in sales and require increased discretionary financing.

Question 61

Amalgamated Enterprises is planning to purchase some new equipment.With this new equipment,the company expects sales to increase from $8,000,000 to $10,000,000.A portion of the financing for the purchase of the equipment will come from a $1,000,000 new ordinary shares issue.The company knows that current assets,fixed assets,accounts payable,and accrued expenses increase in direct proportion with sales.The company's net profit margin on sales is 8%,and the company plans to pay 40% of its after-tax earnings in dividends.A copy of the company's current balance sheet is given below:
Amalgamated Enterprises Balance Sheet
Current assets $3,000,000
Fixed assets 12,000,000
Total assets $15,000,000
Accounts payable $4,000,000
Accrued expenses 1,000,000
Long-term debt 3,000,000
Ordinary shares 2,000,000
Retained earnings 5,000,000
Total liabilities and net worth $15,000,000
Prepare a pro forma balance sheet for Amalgamated for next year using the percent-of-sales method and the information provided above.

Question 62

All of the following are found in the cash budget EXCEPT

A)a net change in cash for the period.
B)inventory.
C)cash disbursements.
D)new financing needed.

Question 63

Which of the following will increase cumulative borrowing in the cash budget?

A)Slower collections from customers
B)Slower payments to suppliers
C)Higher interest rates
D)Faster collection of receivables

Question 64

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

Question 65

Au Courant Bakery is a new firm specialising in gluten free pastry products.In attempting to determine what the financial position of the firm should be,the financial manager obtained the following average data for the baking industry for 2014.All data is expressed as a percentage of sales.
Fill in the dollar amounts on Au Courant's pro forma balance sheet assuming 2015 sales are $450,000.
Au Courant Bakery
Pro Forma Balance Sheet
December 31,2015
Cash,2.22% Accounts payable,6.67%
Accounts receivable,2.78% Long-term debt,6.67%
Inventory,3%
Total current assets ? Ordinary equity,?
Fixed assets? Total liabilities and equity,?
Total assets,33%

Question 66

The function of a budget includes to

A)indicate the amount and time of future financing needs.
B)provide a basis for corrective action.
C)provide information for performance evaluations.
D)all of the above.

Question 67

When forecasting statements,assets always increase proportionately to sales regardless of capacity.

Question 68

Which of the following is always a non-cash expense?

A)Income taxes
B)Salaries
C)Depreciation
D)None of the above

Question 69

What is meant by discretionary financing?

Question 70

The most commonly used method for making financial forecasts is the percent-of-sales method.

Question 71

The balance sheet of the Jackson Company is presented below:
Jackson Company Balance Sheet
March 31,2014
(Millions of Dollars)
Current assets $12 Accounts payable $6
Fixed assets 18 Long-term debt 12
Total $30 Ordinary equity 12
Total $30
For the year ending March 31,2014,Jackson had sales of $35 million.The ordinary shareholders received all net earnings of the firm in the form of cash dividends,leaving no funds from earnings available to the firm for expansion (assume that depreciation expense is just equal to the cost of replacing worn-out assets).
Construct a pro forma balance sheet for March 31,2015 for an expected level of sales of $45 million.Assume current assets and accounts payable vary as a percent of sales,and fixed assets remain at the present level.Use notes payable as a source of discretionary financing.

Question 72

A company collects 60% of its sales during the month of the sale,30% one month after the sale,and 10% two months after the sale.The company expects sales of $10,000 in August,$20,000 in September,$30,000 in October,and $40,000 in November.How much money is expected to be collected in October?

A)$25,000
B)$15,000
C)$35,000
D)None of the above

Question 73

If the firm's current fixed assets are sufficient to support the projected level of new sales,then these assets would be projected to remain unchanged for the forecast period.

Question 74

Which of the following is NOT a basic function of a budget?

A)Budgets indicate the need for future short-term financing.
B)Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
C)Budgets compare historical costs of the firm with its current cost performance.
D)Budgets allow for performance evaluation.

Question 75

What is meant by spontaneous financing?

Question 76

Because accounts payable and accrued expenses increase with sales,they represent sources of spontaneous financing.

Question 77

When fixed expenses increase relative to sales,it indicates that there is not enough productive capacity to absorb an increase in sales.

Question 78

Purchases of plant and equipment can be determined from the

A)current cash budget.
B)previous period's balance sheet.
C)pro forma income statement.
D)use of ratio analysis.

Question 79

Zurich 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% after taxes.Presently,Zurich has $900,000 in accounts payable,$1.1 million in long-term debt,and $5 million (including $2.5 million in retained earnings)in ordinary equity.Next year,Zurich projects that current assets will rise in direct proportion to the forecasted sales,and that fixed assets will rise by $500,000.Zurich also plans to pay dividends of $400,000 to ordinary shareholders.
a.What are Zurich's total financing needs for the upcoming year?
b.Given the above information,what are Zurich's discretionary financing needs?

Question 80

It is common practice to develop scenarios with different rates of sales growth when projecting financial statements.