Question 1

Considering each item independently and holding other things constant, which of the following actions would reduce a firm's need for additional capital (additional funds needed, AFN)?

Accepted Answer

Decreasing the firm's days sales outstanding (DSO) would mean that the firm is collecting its receivables faster, which would provide more cash inflows and reduce the need for additional capital (AFN). The other options would either decrease cash inflows (e.g., increasing dividend payout ratio) or increase cash outflows (e.g., increasing sales growth) and therefore increase the need for additional capital. Decreasing the profit margin would also decrease cash inflows and increase the need for additional capital. Decreasing accrual accounts would increase cash outflows and reduce the need for additional capital in the short term, but this would not be sustainable in the long term.

Question 2

The ______ forecast is the most important ingredient of the financial forecasting process. If this forecast is inaccurate, the consequences to the forecasting firm can be serious.

Accepted Answer

Sales forecast is the most important aspect of financial forecasting as it determines the revenue and cash flow projections of the company. Inaccurate sales forecasts can result in overestimation or underestimation of revenue, which can have serious consequences for the firm such as inventory problems, cash flow issues, missed growth opportunities, and even bankruptcy.

Question 3

Which of the following account balances is most likely to change spontaneously with changes in sales?

Accepted Answer

Accounts payable are a liability account that increases when a company purchases goods or services on credit from suppliers. As sales increase, a company is likely to purchase more goods or services from suppliers on credit, causing an increase in accounts payable.

Question 4

To fully account for financing feedbacks in financial forecasting, all of the steps in the projected balance sheet method must be repeated until _____ equal zero.

Accepted Answer

The projected balance sheet method involves forecasting a company's financial statements including the balance sheet, income statement, and statement of cash flows. When accounting for financing feedbacks, the additional funds needed (AFN) must be calculated, which represents the amount of funding required to support the projected growth of the company. To fully account for financing feedbacks, the steps of the projected balance sheet method must be repeated until the AFN equals zero, indicating that the company has achieved a sustainable level of growth without the need for additional external funding. Therefore, the correct answer is C - additional funds needed (AFN).

Question 5

Which of the following is the first step involved in constructing pro forma financial statements?

Accepted Answer

Forecasting the income statement is the first step involved in constructing pro forma financial statements. This involves estimating the expected revenues and expenses for the next period based on historical data, industry trends, and other relevant factors. Once the income statement is forecasted, it can be used to project the firm's future cash flows, which can then be used to construct pro forma balance sheets and cash flow statements.

Question 6

Which of the following actions can be taken to reduce the firm's average collection period?

Accepted Answer

More aggressively collecting delinquent credit accounts will reduce the number of past due accounts and therefore decrease the average collection period. Increasing credit sales (Option A) might actually increase the average collection period as there will be more accounts to collect. Decreasing credit purchases (Option B) may have no impact on the average collection period. Changing inventory valuation method (Option D) and revising capital budgeting investment policy (Option E) are not relevant to reducing the average collection period.

Question 7

Compuvac Company just completed its initial forecasts of next year's financial statements using the projected balance sheet method. The firm determined that it needs $4 million in new debt, which can be issued at par with a 10 percent annual coupon. Additionally, the firm can sell 500,000 shares of new common equity, which will net $18.10 per share. Next year's expected dividend is $0.48 per share. After accounting for the financing feedbacks associated with raising the required funds, Compuvac expects its taxes to be $160,000 lower than were reported in the initial forecasts. Given this information, what should Compuvac find the change to be in the addition to retained earnings that is reported in the income statement that was initially forecasted after the financing feedbacks are included?

Accepted Answer

The answer of Compuvac Company just completed its initial forecasts...

Question 8

When constructing pro forma financial statements, which of the following equations can be used to estimate additional funds needed (AFN)?

Accepted Answer

The correct formula for estimating additional funds needed (AFN) is to take the forecasted increase in assets and subtract both the forecasted increase in liabilities and the forecasted increase in retained earnings. This approach helps determine how much external financing a company will need to support its growth.

Question 9

In the control phase of the financial planning process, projected financial statements must be evaluated to determine:

Accepted Answer

In the control phase, the projected financial statements are compared to the firm's financial targets to determine whether the forecasts meet those targets. This helps the firm to identify areas in which it is performing well and areas in which it needs to improve. Options A, B, C, and E may be evaluated during the planning phase of financial planning process.

Question 10

A firm that makes an overly optimistic sales forecast is likely to have a:

Accepted Answer

The answer of A firm that makes an overly optimistic...

Question 11

To compute the additional funds (AFN) the firm must raise using external financing sources to support a particular level of forecasted operations, the firm should _____.

Accepted Answer

The additional funds needed (AFN) formula involves subtracting internally generated funds from the total funds required to support forecasted sales.

Question 12

In which of the following situations will Firm A require greater amounts of external funding (additional funds needed, AFN) to meet its forecasted growth than Firm B? Assume the firms are identical in every other way.

Accepted Answer

If Firm A operates at full capacity, it will need more external funding to expand its operations to meet forecasted growth compared to Firm B, which has unused capacity and can grow without significant additional investment.

Question 13

Which of the following statements about funds that a firm generates spontaneously (internally) is correct?

Accepted Answer

Spontaneously generated funds are generated internally by the firm without the need for external financing, such as issuing new stocks or bonds. Current liabilities that change naturally with changes in sales, such as accounts payable and accrued expenses, provide spontaneously generated funds to the firm.

Question 14

Which of the following would be considered part of financing feedbacks in the financial forecasting process?

Accepted Answer

Financing feedbacks refer to the effects of financing decisions on the balance sheet and income statement. Option D describes the effects of actions taken by the firm to finance forecasted increases in assets, which is a part of financing feedbacks. Options A, B, C, and E do not directly relate to financing feedbacks.

Question 15

Which of the following account balances generally will not change when sales change?

Accepted Answer

Notes payable generally represents longer-term debt obligations that are not directly tied to sales levels, so they typically do not change with sales fluctuations.

Question 16

When forecasting income statements, which of the following is generally a key assumption firms make about their variable operating costs?

Accepted Answer

Firms generally assume that variable operating costs will increase at the same rate as sales because as sales increase, there will be a proportional increase in costs associated with producing and delivering the goods or services sold.

Question 17

Which of the following statements about the financial planning process is correct?

Accepted Answer

The decision as to how a firm should raise additional funds needed (AFN) to meet its financial goals depends on various factors such as the ability of the firm to handle additional debt, conditions in financial markets, and restrictions imposed by existing debt agreements. Therefore, option C is the correct statement. Option A is incorrect because the AFN is estimated by subtracting the expected operating income from the sum of expected changes in assets and liabilities that fluctuate with sales. Option B is incorrect because the projected balance sheet method requires both the income statement and balance sheet to determine a firm's expected financial needs. Option D is incorrect because the projected balance sheet method considers expected dividends to be paid. Option E is incorrect because economic prospects for the nation and the industry are important factors to consider in financial planning as they can impact the firm's financial performance.

Question 18

Current liabilities accounts that change "naturally" with changes in sales provide funds that tend to change at the same rate as sales. These funds are referred to as ______ funds.

Accepted Answer

Spontaneously generated funds refer to those that are generated as a natural result of a business's operations, without any additional effort or investment. Current liabilities that change "naturally" with changes in sales, such as accounts payable and accrued expenses, provide funds in this manner, which tend to change at the same rate as sales. Hence, choice A is the most appropriate.

Question 19

The primary reason the income statement is forecast prior to the balance sheet in the financial planning process is because ______ must be estimated.

Accepted Answer

The amount of retained earnings a company expects to generate during the year is a key figure that is derived from the income statement and is necessary for forecasting the balance sheet. Retained earnings are affected by the net income, which is calculated in the income statement, hence the need to forecast the income statement first.

Question 20

In the financial control phase of the financial planning process, a firm is primarily concerned with:

Accepted Answer

In the financial control phase, the firm is focused on implementing financial plans and making any necessary adjustments to meet its goals. This involves monitoring financial performance, comparing actual results to projected results, and taking corrective actions if there are any deviations from the plan. While considerations such as generating internal funds, determining investments, financial breakeven point, and financial leverage may be relevant, they are not the primary concern in this phase.

Quiz 16: Financial Planning and Control

Considering each item independently and holding other things constant, which of the following actions would reduce a firm's need for additional capital (additional funds needed, AFN) ?