Question 1

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.

Accepted Answer

The higher the dividend payout, the less a firm retains for reinvestment, increasing its need for external or discretionary financing to fund any new projects or investments.

Question 2

An increase in projected ________ will increase discretionary funds needed.
A)cash dividends
B)sales
C)retained earnings
D)both A and B

Accepted Answer

The answer of An increase in projected ________ will increase...

Question 3

A discretionary form of financing would be:
A)notes payable.
B)accounts payable.
C)accrued expenses.
D)none of the above.

Accepted Answer

The answer of A discretionary form of financing would be:
A)notes...

Question 4

The percent-of-sales method of forecasting makes which of the following assumptions?
A)The inventory turnover will remain the same 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)All of the above.
E)None of the above.

Accepted Answer

The percent-of-sales method assumes that various financial statement items, such as inventory, profit margin, and cash, will remain constant as a percentage of sales during the forecast period.

Question 5

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002;sales were $3,450,000 in fiscal 2001.Assume the following figures for the fiscal year ending 2001: 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 2002.
A)$890,001
B)$412,316
C)$267,319
D)$350,814

Accepted Answer

The percent-of-sales method involves calculating the ratio of accruals to sales for 2001 and applying that ratio to the projected sales for 2002. The ratio is $155,000 / $3,450,000 = 0.0449. Applying this to the 2002 sales projection: $5,950,000 * 0.0449 = $267,319.

Question 6

Assume that Helaron,Inc.has sales of $83 million and fixed assets of $22.4 million.The corporation utilizes the percent-of-sales method of financial forecasting.If Helaron is expected to generate sales of $94 million next year,what will the firm's investment in fixed assets be?
A)$19.8 million
B)$28.8 million
C)$16.2 million
D)$25.4 million
E)None of the above

Accepted Answer

The percent-of-sales method of financial forecasting assumes that a certain percentage of sales will be invested in fixed assets. To calculate the investment in fixed assets, we can use the following formula:Investment in fixed assets = Sales * Fixed asset percentageThe fixed asset percentage is calculated by dividing the current fixed assets by the current sales:Fixed asset percentage = Fixed assets / Sales= $22.4 million / $83 million= 0.27Using this percentage, we can calculate the investment in fixed assets for next year:Investment in fixed assets = $94 million * 0.27= $25.4 millionTherefore, the correct answer is D) $25.4 million.

Question 7

Which of the following accounts would normally increase with an increase in sales and approximately in proportion to the sales increase?
A)Common stock
B)Inventory
C)Notes payable
D)Dividends
E)Accounts receivable

Accepted Answer

The answer of Which of the following accounts would normally...

Question 8

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

Accepted Answer

Discretionary Financing Needed (DFN) is calculated by taking the projected change in total assets and subtracting both the projected change in liabilities and the projected change in owner's equity. This formula helps in determining the additional financing needed or surplus funds a company will have after financing its projected growth.

Question 9

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 common stock
B)Accounts receivable and bonds
C)Fixed assets and inventory
D)Accounts payable and accrued expenses

Accepted Answer

Accounts payable and accrued expenses are considered to be spontaneous sources of financing because they are liabilities that arise naturally as a result of doing business. Accounts payable is the amount owed by a company for goods or services received but not yet paid for, while accrued expenses are costs that have been incurred but not yet paid. Both of these liabilities represent funds that will be available to the company without incurring additional interest expenses or diluting ownership through the issuance of new stock or bonds.

Question 10

Under which of the following conditions would the percent-of-sales method of financial forecasting be most accurate?
A)If assets must be purchased in discrete quantities
B)When asset requirements can be accurately forecasted as a constant percent of sales
C)If economic circumstances beyond a firm's control drastically change from one year to the next
D)When economies of scale can be realized from investing in specific assets

Accepted Answer

The percent-of-sales method assumes that asset requirements vary proportionally with sales. Therefore, it is most accurate when asset requirements can be accurately forecasted as a constant percent of sales.

Question 11

Assume that Hercules Manufacturing has sales of $25 million and current assets of $5 million.The corporation utilizes 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
E)None of the above

Accepted Answer

We can use the formula for the percent-of-sales method of financial forecasting:

Next year's investment in current assets = Current assets * (Next year's sales / Current year's sales)

Substituting the given values:

Next year's investment in current assets = $5 million * ($31 million / $25 million)

Next year's investment in current assets = $6.2 million

Therefore, the answer is C) $6.2 million.

Question 12

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.
E)None of the above.

Accepted Answer

The percent-of-sales method assumes that certain financial statement items, like accounts receivable, will vary directly with sales, implying that the average collection period remains constant.

Question 13

Marjen Manufacturing has purchases equal to 40% of sales.They purchase one month prior to sales and pay one month after sales.Given the following sales forecast,calculate Marjen's payments for March. 
A)$40,000
B)$60,000
C)$80,000
D)$100,000

Accepted Answer

The answer of Marjen Manufacturing has purchases equal to 40%...

Question 14

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002;sales were $3,450,000 in fiscal 2001.Assume the following figures for the fiscal year ending 2001: 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 2002.
A)$212,036
B)$405,290
C)$619,619
D)$155,000

Accepted Answer

The percent-of-sales method involves calculating the ratio of accounts payable to sales for 2001 and applying this ratio to the projected sales for 2002. The ratio is $235,000 / $3,450,000 = 0.0681. Applying this to the 2002 sales forecast: $5,950,000 * 0.0681 = $405,290.

Question 15

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
E)The income tax rate

Accepted Answer

An increase in the profit margin would generate more internal funds from sales, reducing the need for additional external financing.

Question 16

Assume that Calamar Corp.has sales of $7.5 million and accounts payable of $450,000.The corporation utilizes 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

Accepted Answer

The percent-of-sales method assumes that accounts payable will increase proportionally with sales, so we can set up a proportion: 
Current sales / current accounts payable = Next year's expected sales / next year's accounts payable 
Solving for the unknown variable (next year's accounts payable), we get: 
$7.5 million / $450,000 = $9 million / X 
X = $540,000, which is the expected accounts payable for next year. Therefore, the answer is choice A.

Question 17

Assume all else remains the same.Which of the following statements is true?
A)The lower a firm's profit margin,the more discretionary financing a firm will require.
B)The higher a firm's profit margin,the more discretionary financing a firm will require.
C)The lower a firm's profit margin,the more cash a firm will have to reinvest.
D)A relationship between a firm's profit margin and its requirement for external financing does not exist.

Accepted Answer

A firm with a lower profit margin will have less cash available to fund its operations and growth, therefore it will require more discretionary financing (such as borrowing) to make up for the shortfall. A higher profit margin means the firm is generating more cash and may not need as much discretionary financing.

Question 18

Assume that Zybo,Inc.has sales of $10 million and inventory of $2 million.The corporation utilizes 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

Accepted Answer

To find the investment in inventory, we need to use the inventory turnover ratio. Since the percent-of-sales method is being used, we assume a constant inventory turnover ratio. 
Inventory turnover ratio = Cost of goods sold / Average inventory

Since we do not know the cost of goods sold, we need to find it using the given information. 
Cost of goods sold = Sales * Gross profit margin

Gross profit margin = (Sales - Cost of goods sold) / Sales 
From the given information, we know sales and inventory for the current year. So, we can find the cost of goods sold for the current year using the above formula. Then, we can find the inventory turnover ratio for the current year, assuming it will remain constant for the next year as well. Finally, we can use the inventory turnover ratio and the forecasted sales for the next year to find the investment in inventory for the next year.

Cost of goods sold for the current year = $10 million * (1 - Gross profit margin) = $10 million * (1 - (2/10)) = $8 million 
Inventory turnover ratio = Cost of goods sold / Average inventory = $8 million / $2 million = 4

Investment in inventory for next year = Sales * (Inventory turnover ratio / 365 days) * Number of days of inventory 
Number of days of inventory = 365 days / Inventory turnover ratio

Investment in inventory for next year = $14 million * (4/365) * (365/4) = $2.8 million

Question 19

The preparation of pro forma financial statements accomplishes which of the following objectives?
A)It allows management to pinpoint a firm's optimal stock 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.

Accepted Answer

The preparation of pro forma financial statements assists management in making decisions with respect to raising the capital that is needed for growth. Pro forma financial statements are projected financial statements for a future period and are based on assumptions and estimates. They provide insight into the financial position, performance, and cash flows of a firm, which aids management in decisions related to financing and determining the amount and type of funding required for business expansion. Option A, B, and D are incorrect as they are not the primary objectives of preparing pro forma financial statements.

Question 20

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.

Accepted Answer

Accounts payable and accrued expenses are spontaneous sources of financing because they arise naturally as a result of a company's operations. They represent amounts owed to suppliers and vendors for goods and services received on credit. Unlike other sources of financing, such as long-term debt or equity financing, these obligations do not require the company to actively seek out external funding.

Quiz 17: Financial Forecasting and Planning

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

An increase in projected ________ will increase discretionary funds needed.

A discretionary form of financing would be:

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

Assume that Helaron,Inc.has sales of $83 million and fixed assets of $22.4 million.The corporation utilizes the percent-of-sales method of financial forecasting.If Helaron is expected to generate sales of $94 million next year,what will the firm's investment in fixed assets be?

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

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

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

Under which of the following conditions would the percent-of-sales method of financial forecasting be most accurate?

Assume that Hercules Manufacturing has sales of $25 million and current assets of $5 million.The corporation utilizes 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?

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

Marjen Manufacturing has purchases equal to 40% of sales.They purchase one month prior to sales and pay one month after sales.Given the following sales forecast,calculate Marjen's payments for March.

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?

Assume that Calamar Corp.has sales of $7.5 million and accounts payable of $450,000.The corporation utilizes 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?

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

Assume that Zybo,Inc.has sales of $10 million and inventory of $2 million.The corporation utilizes 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?

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

Spontaneous sources of financing include: