Question 1

Which statement is most correct regarding how pro forma financial statements can be used to estimate additional funds needed?

Accepted Answer

Pro forma financial statements allow for iterative refinement by adjusting assumptions and projections to more accurately estimate the additional funds needed. This iterative process helps in fine-tuning the financial needs of a business.

Question 2

Which of the following are considered "chunky" or "lumpy" assets?

Accepted Answer

Fixed assets, such as machinery, buildings, and land, are considered "chunky" or "lumpy" because they are typically large, indivisible items that a company purchases infrequently, but which represent significant capital investments.

Question 3

If a firm has excess capacity when calculating AFN (Additional Funds Needed), A* will most likely equal which of the following?

Accepted Answer

B

Question 4

Which of the following defines MAPE?

Accepted Answer

MAPE stands for Mean Absolute Percentage Error, which is a common metric used to measure the accuracy of forecasts. It calculates the average of the absolute percentage errors between the forecasted and actual values, providing insight into the accuracy of forecasting models.

Question 5

Forecasted sales drive all of the following EXCEPT

Accepted Answer

Forecasted sales directly influence the amount of assets, liabilities, and external funds a company may need to support its operations and growth. However, earnings per share (EPS) on the annual report are determined by actual performance, not forecasts. EPS is calculated based on actual earnings and the number of shares outstanding, making it a reflection of past performance rather than a projection influenced by forecasted sales.

Question 6

Which of the following defines the term deseasonalize?

Accepted Answer

Deseasonalizing data means adjusting the data to remove the effects of seasonality, making it easier to identify underlying trends by eliminating seasonal fluctuations.

Question 7

Financial planning involves estimating projected cash flows, which is useful for all of the following EXCEPT

Accepted Answer

Financial planning involves estimating future cash flows to set goals, inform stakeholders, and estimate financing needs. It does not directly involve auditors determining the accuracy of annual reports, as their role is to audit existing financial statements rather than projections.

Question 8

Which of the following is used to remove the effects of seasonality from historic data?

Accepted Answer

The deseasonalized approach is specifically used to remove the effects of seasonality from historical data, allowing for a clearer analysis of underlying trends.

Question 9

Which of the following is the amount of external financing a firm must seek in order to change the asset base as necessary to support a different level of sales?

Accepted Answer

The "Additional funds needed" is the amount of external financing a firm must seek to adjust its asset base to support a different level of sales. This concept is crucial for financial planning and analysis, helping businesses understand the external financing requirements to achieve their growth objectives.

Question 10

Suppose a firm has had the historical sales figures shown as follows. What would be the forecast for next year's sales using the naïve approach?
$$\begin{array} { c c c c c c } 
\text { Year } & 2013 & 2014 & 2015 & 2016 & 2017 \
\text { Sales } & \$ 1,000,000 & \$ 2,000,000 & \$ 1,700,000 & \$ 1,800,000 & \$ 2,200,000
\end{array}$$

Accepted Answer

The naïve approach to forecasting simply assumes that the actual sales in the most recent period will be the sales in the next period. Therefore, since the sales in 2017 were $2,200,000, the forecast for next year's sales would also be $2,200,000.

Question 11

The simplest approach to estimating a future period's sales is to assume that they will be equal to those of the latest observed period. In statistics, this is often simply referred to as which of the following?

Accepted Answer

The naïve approach in statistics involves making forecasts based on the assumption that future values will be the same as the most recent values. This method does not account for trends, seasonal patterns, or other factors that might affect future outcomes.

Question 12

Which of the following is a set of financial statements depicting an operating division of a firm's expected financial situation in the foreseeable future under the most reasonable set of assumptions concerning relevant factors?

Accepted Answer

Pro forma financial statements are used to project the future financial performance of a company or division, based on assumptions and hypothetical scenarios.

Question 13

The set of assumptions underlying the firm's financial plan and the resulting projected financial statements are accordingly often referred to as which of the following?

Accepted Answer

The answer of The set of assumptions underlying the firm's...

Question 14

Which of the following can be computed as: necessary increase in assets minus spontaneous increase in liabilities minus projected increase in retained earnings?

Accepted Answer

The formula described is used to calculate the Additional Funds Needed (AFN). AFN is a financial measure that estimates the amount of external financing a company will need to support its expected growth. It takes into account the necessary increase in assets to support sales growth, the spontaneous increase in liabilities that naturally comes with that growth, and the projected increase in retained earnings that can finance some of the growth.

Question 15

Which of the following defines iterative calculation?

Accepted Answer

Iterative calculation refers to the process where a spreadsheet program or calculator repeatedly computes an answer to handle circular dependencies in equations, allowing for the resolution of values that depend on each other.

Question 16

Which of the following is the practice of one firm selling to another on credit terms?

Accepted Answer

Trade credit refers to the practice where suppliers sell goods or services to another company on credit, allowing the buyer to pay for the goods or services at a later date. This is a common practice in business-to-business transactions.

Question 17

First order effects are defined as which of the following?

Accepted Answer

First order effects refer to the immediate and directly observable impacts that occur as a result of a change, distinguishing them from subsequent or less directly observable effects.

Question 18

Which of the following is defined as assuming that future sales will be equal to the average historical value across some relevant period?

Accepted Answer

The average approach involves predicting future sales by taking the average of historical sales data over a relevant period.

Question 19

The additional funds needed by the firm can be calculated by assuming which of the following?

Accepted Answer

The answer of The additional funds needed by the firm...

Question 20

What is computed by dividing the amount of assets tied directly to sales (A*) by the amount of current sales (S0)?

Accepted Answer

The capital intensity ratio is computed by dividing the amount of assets tied directly to sales (A*) by the amount of current sales (S0). This ratio indicates how much in assets is needed to generate a dollar in sales, reflecting the company's capital intensity.

Quiz 15: Financial Planning and Forecasting