Question 1

If Excel Inc. has projected sales of $30,000 in January, $20,000 in February, and $20,000 in March, where 20% of sales are cash sales and the remaining credit sales are collected the month after, what are the cash receipts in March?

Accepted Answer

The answer of If Excel Inc. has projected sales of...

Question 2

When using the percent-of-sales method in forecasting the funds needed, which of the following is not true?

Accepted Answer

The answer of When using the percent-of-sales method in forecasting...

Question 3

If projected net cash outflow for January is ($6,500), the beginning cash balance is $16,000, the minimum cash balance is $5,000, and the beginning loan balance is $4,500, what will be cumulative amount of loan at the end of January?

Accepted Answer

The answer of If projected net cash outflow for January...

Question 4

If the actual A/R at the end of February was $12,000 and projected sales in March are $50,000, where 70% of sales are on credit, 60% of credit sales are collected in the month of the sale, and 40% are collected in the month after the sale, what is the projected A/R balance on the pro forma balance sheet for the end of March?

Accepted Answer

A/R Bal. end of March = A/R from March sales
= (40% of March credit sales)
= ($35,000 × 0.4) = $14,000, all of February's AR balance should be collected in March.

Question 5

Firms that successfully increase their inventory turnover ratio will, among other things,

Accepted Answer

Increasing the inventory turnover ratio means that the firm is selling its inventory more quickly. This leads to a decrease in inventory holding costs, which in turn reduces the firm's borrowing needs as it requires less working capital. So, Choice (A) is the correct answer. Choice (B) is incorrect because decreasing dividend payments does not necessarily relate to inventory turnover. Choice (C) is not correct because an increase in inventory turnover indicates improved financial health and a reduced credit risk, so suppliers may offer better credit terms. Choice (D) is not correct because an increase in inventory turnover reduces the need for high balances in cash accounts, as the firm generates more cash from operations.

Question 6

If projected net cash outflow for January is ($6,500), the beginning cash balance is $16,000, the minimum cash balance is $5,000, and the beginning loan balance is $4,500, what will be the cash balance on the pro forma cash budget at the end of January?

Accepted Answer

The cash balance at the end of January is $10,000. This is calculated by adding the beginning cash balance of $16,000 to the projected net cash outflow of ($6,500). The result is $9,500. However, the minimum cash balance is $5,000. Therefore, the company will need to borrow $4,500 to maintain the minimum cash balance. The ending cash balance will be $10,000 ($9,500 + $4,500).

Question 7

If projected net cash outflow for November is ($10,000), the beginning cash balance is $4,000, the minimum cash balance is $3,000, and the beginning loan balance is $8,000, what will be the cumulative loan balance at the end of November?

Accepted Answer

The beginning cash balance is $4,000, and the net cash outflow is $10,000, resulting in a cash deficit of $6,000. To maintain the minimum cash balance of $3,000, an additional $9,000 is needed. Adding this to the beginning loan balance of $8,000 results in a cumulative loan balance of $17,000.

Question 8

In the percent-of-sales method, if (A/S) and (L/S) both increase,

Accepted Answer

The answer of In the percent-of-sales method, if (A/S) and...

Question 9

If the actual A/R at the end of February was $12,000 and projected sales in March are $50,000, where 70% of sales are on credit, 60% of credit sales are collected in the month of the sale, and 40% are collected in the month after the sale, what amount of cash is collected during March?

Accepted Answer

Cash collected in March = cash sales + 60% of credit sales = (50,000 × 0.3) + (50,000 × 0.7 × 0.6) = 36,000

Question 10

BHS Inc. determines that sales will rise from $400,000 to $550,000 next year. Spontaneous assets are 60% of sales, and spontaneous liabilities are 30% of sales. BHS has an 8% profit margin and a 40% dividend payout ratio. What is the level of required new funds?

Accepted Answer

The increase in sales is $150,000 ($550,000 - $400,000). The increase in spontaneous assets is 60% of this, or $90,000 ($150,000 * 60%). The increase in spontaneous liabilities is 30% of the increase in sales, or $45,000 ($150,000 * 30%). The net increase in financing needed for assets after accounting for spontaneous liabilities is $45,000 ($90,000 - $45,000). The profit from the increase in sales is 8% of $150,000, which is $12,000. With a 40% dividend payout ratio, the retained earnings are 60% of $12,000, or $7,200. The required new funds are the net increase in financing needed for assets minus the retained earnings, which is $45,000 - $7,200 = $37,800. However, none of the options match this calculation, indicating a mistake in my calculation based on the provided options. Let's correct the approach:The correct calculation should consider the net increase in assets and liabilities, the profit generated from the sales increase, and how much of that profit is retained after dividends are paid.1. Increase in sales: $550,000 - $400,000 = $150,0002. Increase in spontaneous assets: $150,000 * 60% = $90,0003. Increase in spontaneous liabilities: $150,000 * 30% = $45,0004. Net increase in assets that need financing: $90,000 - $45,000 = $45,0005. Profit from the increase in sales: $150,000 * 8% = $12,0006. Retained earnings (not paid out as dividends): $12,000 * (1 - 40%) = $12,000 * 60% = $7,2007. Required new funds (RNF) = Net increase in assets - Retained earnings = $45,000 - $7,200 = $37,800Given the mistake in the initial explanation and the mismatch with the provided options, let's reassess the situation based on the options given:The correct approach to find the Required New Funds (RNF) involves calculating the increase in assets and liabilities due to the sales increase, determining the additional profits, and accounting for the portion of profits retained after dividends are paid out.1. Increase in sales = $550,000 - $400,000 = $150,0002. Increase in spontaneous assets = 60% of $150,000 = $90,0003. Increase in spontaneous liabilities = 30% of $150,000 = $45,0004. Net increase in assets after accounting for liabilities = $90,000 - $45,000 = $45,0005. Additional profits (8% of the increase in sales) = 8% of $150,000 = $12,0006. Retained earnings (60% of additional profits, since 40% is paid out as dividends) = 60% of $12,000 = $7,2007. Required New Funds (RNF) = Net increase in assets - Retained earnings = $45,000 - $7,200 = $37,800Given the recalculated explanation and the absence of $37,800 in the options, it appears there was an error in my recalculation or a misunderstanding of the question's requirements. The correct answer should be derived from understanding the relationship between the increase in sales, the corresponding increase in assets and liabilities, the profit generated, and how much of that profit is retained after dividends. Without a matching option, my explanation based on the provided options and calculations has led to confusion. The correct process involves calculating the net increase in financing needed after accounting for spontaneous liabilities and retained earnings, but the final answer should be carefully checked against the options provided.

Question 11

In forecasting a firm's cash needs for some future period

Accepted Answer

The percent-of-sales method is a broad-brush approach, while cash budgets are more exact. A cash budget approach can deal effectively with both level and seasonal production schedules. Therefore, all of the options are correct.

Question 12

Which of the following is untrue of the percent-of-sales method?

Accepted Answer

Changes in sales levels are a crucial aspect of the percent-of-sales method. The method uses a percentage of projected sales to estimate financial data, so any changes in sales levels will directly impact the estimated financial data. Therefore, choice D is untrue.

Question 13

If projected net cash outflow for November is ($10,000) and the beginning cash balance is $4,000, which is the minimum cash balance required by the bank, what amount of loan would be needed for November?

Accepted Answer

4000 − 10,000 = −6,000, so 10,000 is needed to be borrowed to satisfy an ending balance of 4,000.

Quiz 4: Financial Forecasting