Question 1

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Accepted Answer

A sales forecast is usually based on recent historical trends and events, along with forecasts of economic prospects to predict future sales.

Question 2

Today, computer simulations models can calculate multiple breakeven charts providing management with an idea of how the firm's breakeven point would change under different assumptions for key variables.

Accepted Answer

Computer simulations can indeed calculate multiple breakeven charts for different assumptions.

Question 3

As a firm's sales grow, its current asset accounts tend to increase.For instance, as sales increase, the firm's purchases increase and its level of accounts payable will increase.Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase.

Accepted Answer

As sales increase, the firm's current asset accounts (such as accounts receivable, inventory, and cash) tend to increase, leading to spontaneously generated funds. Additionally, accounts payable will also increase due to increased purchases, providing additional sources of funds.

Question 4

Two key objectives of financial planning and control are to avoid cash squeezes and to improve profitability.

Accepted Answer

Avoiding cash squeezes and improving profitability are indeed two key objectives of financial planning and control.

Question 5

Any firm with a positive growth rate in sales will require some amount of external funding, assuming all existing ratios are to be maintained.

Accepted Answer

The answer of Any firm with a positive growth rate...

Question 6

One situation where operating breakeven analysis can be valuable is when a firm plans to increase fixed investment in order to lower variable cost, such as labor costs.

Accepted Answer

Operating breakeven analysis can help a firm determine if the increase in fixed investment will result in a lower overall breakeven point, and therefore lead to increased profitability in the long term.

Question 7

One limitation of operating breakeven analysis is that variable cost must be assumed constant throughout the analysis in order to completely analyze changes in fixed investment.

Accepted Answer

The answer of One limitation of operating breakeven analysis is...

Question 8

Two firms which have the same operating leverage must also have the same ROA, since operating leverage and ROA both measure the effective utilization of assets by the firm.

Accepted Answer

Operating leverage and ROA measure different aspects of a firm's performance. Operating leverage measures the extent to which a firm uses fixed costs in its operations, while ROA measures how efficiently a firm uses its assets to generate profits. Two firms with different levels of operating leverage may have the same ROA if one firm has higher sales volume and lower fixed costs than the other.

Question 9

When a small change in sales results in a large change in operating income, one possible reason is that the firm is employing a relatively high degree of operating leverage.

Accepted Answer

This statement is true. Operating leverage refers to the degree to which a firm uses fixed costs in its operations. When a firm has high fixed costs, even a small increase in sales can result in a significant increase in operating income due to the leverage effect. However, the opposite is also true - a small decrease in sales can result in a significant decrease in operating income, making the firm vulnerable to losses.

Question 10

At the firm's operating breakeven point, total revenues and total variable costs are exactly equal.

Accepted Answer

At the firm's operating breakeven point, total revenues are equal to total fixed and variable costs combined, not just variable costs.

Question 11

If EBIT doubles when sales doubles, then the firm's degree of operating leverage must be exactly two.

Accepted Answer

The degree of operating leverage (DOL) measures the percentage change in operating income (EBIT) for a given percentage change in sales. A DOL of exactly two means that EBIT would increase by 2% for every 1% increase in sales. However, if EBIT doubles when sales double, it indicates a proportional (1:1) relationship between sales and EBIT, not a leverage effect of exactly two. The DOL could be different based on other factors affecting costs and sales.

Question 12

The DOL is an index number that measures the effect of a change in sales price on the operating breakeven point.

Accepted Answer

The Degree of Operating Leverage (DOL) measures the effect of a change in sales volume on operating income, not the effect of a change in sales price on the operating breakeven point.

Question 13

The higher the percentage of a firm's total costs that are fixed, the higher the degree of operating leverage and the lower the operating breakeven point.

Accepted Answer

A higher percentage of fixed costs increases the degree of operating leverage, but it raises the operating breakeven point because more revenue is needed to cover the fixed costs before the company can start making a profit.

Question 14

Operating costs include variable costs, depreciation and interest charges.

Accepted Answer

Operating costs include variable costs and depreciation but not interest charges. Interest charges are considered non-operating expenses and are not included in operating costs.

Question 15

To determine the amount of additional funds needed, you may subtract the expected increase in liabilities (a source of funds) from the sum of the expected increases in retained earnings and assets (both uses of funds).

Accepted Answer

To determine the amount of additional funds needed, you subtract the expected increase in assets (a use of funds) from the sum of expected increases in liabilities and retained earnings (both sources of funds).

Question 16

Errors in the sales forecast can be offset by similar errors in costs and income forecasts.Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

Accepted Answer

Errors in the sales forecast can have a significant impact on the firm's performance and profitability, even if costs and income forecasts are accurate. An inaccurate sales forecast can result in overstocks or stock shortages, missed sales opportunities, and suboptimal pricing decisions, among other issues. Therefore, sales forecast accuracy is critical to the firm.

Question 17

The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.

Accepted Answer

The answer of The term "spontaneously generated funds" generally refers...

Question 18

Breakeven analysis can be used to determine how large sales of a new product must be for the firm to achieve profitability, but it is not useful in studying the effects of a general expansion in the firm's operations.

Accepted Answer

Breakeven analysis can also be used to study the effects of a general expansion in the firm's operations as it helps in understanding the minimum level of revenue needed to cover the total costs and expenses associated with the expansion.

Question 19

An increase in the firm's inventory balance normally will require additional financing unless the increase is matched by an equally large decrease in some other asset account.

Accepted Answer

When inventory increases, it ties up cash and may require additional financing unless it is sold and converted to accounts receivable or cash. Therefore, an increase in inventory normally requires additional financing unless there is a corresponding decrease in some other asset account, such as accounts receivable or cash.

Question 20

Other things held constant, if a firm is operating at a profit and then sales increase, the degree of operating leverage will decline.

Accepted Answer

When a firm is operating at a profit and experiences an increase in sales, its fixed costs are spread over a larger number of units, reducing the proportion of fixed costs per unit. This decreases the firm's degree of operating leverage, as the firm becomes less sensitive to changes in sales volume.

Quiz 8: Financial Planning and Control