Question 1

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

Accepted Answer

Discretionary sources of financing are those sources that can be adjusted at the discretion of the firm's management, such as issuing new shares or taking on additional debt. They do not necessarily vary automatically with sales. Non-discretionary sources of financing, on the other hand, are those that are necessary to maintain a minimum level of operations, such as accounts payable or short-term debt.

Question 2

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

Accepted Answer

The percent-of-sales method is based on a predetermined percentage of sales being allocated to financing needs, and does not take into account changes in expenses or other factors that may affect financing needs. Therefore, it may not provide a precise estimate of future financing needs.

Question 3

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

Accepted Answer

Higher net profit margins typically mean that a company is generating more profit from its sales, reducing the need for discretionary financing since the company can fund more of its operations and growth internally through its profits.

Question 4

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

Accepted Answer

Spontaneous financing refers to the automatic increase in certain short-term sources of financing that occur naturally with an increase in sales, such as accounts payable and accruals, not last-minute financing due to poor planning.

Question 5

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.

Accepted Answer

This statement is true. The pro forma income statement provides the projected net income which is then used to calculate the expected retained earnings balance on the pro forma balance sheet. Therefore, the income statement must be prepared first before the balance sheet can be completed.

Question 6

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

Accepted Answer

Accounts payable and accrued expenses are considered non-discretionary sources of financing because they arise out of the normal course of business and are not typically subject to management's discretion in the same way that decisions about taking on new debt or issuing equity are.

Question 7

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

Accepted Answer

Purchasing supplies on credit and paying for them later is an example of trade credit, which is a form of spontaneous financing, not discretionary financing. Discretionary financing refers to funds raised through deliberate actions by management, such as issuing bonds or stocks.

Question 8

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.

Accepted Answer

The percent of sales method is typically used for projecting income statement accounts and variable balance sheet accounts (like accounts receivable, inventory, and accounts payable) based on a percentage of sales, not for projecting equity accounts like common stock, which do not vary directly with sales.

Question 9

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

Accepted Answer

When a firm increases its dividend payout ratio, it is distributing more profits to its shareholders and retaining less for future investments or financing needs. This means that its discretionary financing needed (the amount of financing needed for growth or operations that cannot be covered by internal funds) will also increase.

Question 10

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

Accepted Answer

Forecasts of revenues and expenses help firms to estimate their future cash flows and financing needs in order to plan accordingly.

Question 11

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?

Accepted Answer

Reducing the sales growth rate would decrease the amount of discretionary financing needed because the company would require less capital to support slower growth. The other options would not have a direct impact on the amount of discretionary financing needed. Reducing the net profit margin or increasing the dividend payout ratio would decrease the amount of retained earnings available for investment, potentially increasing the need for financing. Increasing the proportion of sales made on credit would increase the company's accounts receivable, potentially increasing the need for financing.

Question 12

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

Accepted Answer

Discretionary financing needed can be negative when a company generates more internal funds than required for its financing needs, indicating it has excess funds.

Question 13

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

Accepted Answer

The answer of Discretionary financing needed (DFN)is equal to projected...

Question 14

Accrued expenses represent a spontaneous form of financing.

Accepted Answer

Accrued expenses refer to expenses that have been incurred but not yet paid for. They represent a source of financing because they allow a company to delay payment of expenses until a later point in time, which can improve its cash flow in the short term. However, this form of financing is not a deliberate or intentional strategy, as the expenses are still owed and must eventually be paid.

Question 15

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

Accepted Answer

If a firm cannot obtain external financing due to poor market conditions, it can increase its retention ratio, which means retaining more earnings to finance its activities instead of distributing them to shareholders as dividends. This can reduce the amount of external financing needed.

Question 16

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

Accepted Answer

A set of worst and best case estimates provides a range of possible outcomes, which is important in financial forecasting for risk management and decision-making.

Question 17

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.

Accepted Answer

The planning process helps to prepare for potential risks and uncertainties, and is most valuable when the future is uncertain. By creating forecasts, businesses can anticipate potential challenges and develop strategies to mitigate them. Therefore, the planning process can be particularly useful when there is a higher likelihood of error in forecasts.

Question 18

The percent of sales method can be used to forecast

Accepted Answer

The percent-of-sales method is a financial forecasting model used to estimate various financial figures, such as expenses, assets, and liabilities, based on their relationship to sales. It assumes that these figures will maintain a constant ratio to sales over time.

Question 19

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

Accepted Answer

Pro forma financial statements are created to project the potential financial results of future operations based on certain assumptions and scenarios. They are used as a planning tool and typically include projected income statements, balance sheets, and cash flow statements. Therefore, they depict the end result of the planning period's operations.

Question 20

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

Accepted Answer

As a firm grows, it may require external financing such as loans or equity investment to fund expansion or acquisition of new assets. Meanwhile, increases in accounts payable and accruals can provide a source of discretionary financing, but this type of financing is typically less significant than the need for external financing. Therefore, external financing needed will most likely be greater than discretionary financing needed for a growing firm.

Quiz 14: Short-Term Financial Planning