Exam 17: Financial Forecasting and Planning

Depreciation expense is a deduction from cash flow in the cash budget.

Home to House Distributors is preparing a cash budget.The initial conclusion is that the firm will need to borrow more money than its bank is willing to lend.Which of the following actions could Home to House Distributors perform to reduce its need for bank financing this year?

Which of the following is NOT an element of the cash budget?

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?

Holding all other variables constant,as the dividend payout ratio decreases,the sustainable growth rate increases.

What is the most important ingredient in developing a firm's long-term financial plan?

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

Amalgamated Enterprises is planning to purchase some new equipment.With this new equipment,the company expects sales to increase from $8,000,000 to $10,000,000.A portion of the financing for the purchase of the equipment will come from a $1,000,000 new ordinary shares issue.The company knows that current assets,fixed assets,accounts payable,and accrued expenses increase in direct proportion with sales.The company's net profit margin on sales is 8%,and the company plans to pay 40% of its after-tax earnings in dividends.A copy of the company's current balance sheet is given below: Amalgamated Enterprises Balance Sheet Current assets $3,000,000 Fixed assets 12,000,000 Total assets $15,000,000 Accounts payable $4,000,000 Accrued expenses 1,000,000 Long-term debt 3,000,000 Ordinary shares 2,000,000 Retained earnings 5,000,000 Total liabilities and net worth $15,000,000 Prepare a pro forma balance sheet for Amalgamated for next year using the percent-of-sales method and the information provided above.

Purchases of plant and equipment can be determined from the

As of December 31,Budget,Inc.had a cash balance of $50,000.December sales were $150,000 and are expected to be $100,000 in January.20% of sales in any month are cash sales,and 80% of sales are collected during the following month.In January,Budget is expected to have total cash disbursements of $120,000,and Budget requires a minimum cash balance of $50,000.Budget's expected cash receipts for January are

One purpose of cash budgets is to estimate the firm's future capital spending and financing needs.

When fixed expenses increase relative to sales,it indicates that there is not enough productive capacity to absorb an increase in sales.

A sales forecast for the coming year would reflect

The key ingredient in a firm's financial planning is the sales forecast.

Assume that Gatsby Enterprises has sales of $83 million and fixed assets of $22.4 million in 2013.The corporation utilises the percent-of-sales method of financial forecasting.If Gatsby is expected to generate sales of $94 million in 2014,what will the firm's investment in fixed assets be? The minimum fixed asset expansion costs $4,000,000.

The cash budget ignores discretionary financing.

The percent-of-sales method is more detailed than the cash budget method.

Depreciation expense is always included in the cash budget as it reflects the impact of fixed asset purchases.

Zurich Insurance Co.has current sales of $10 million and predicts next year's sales will grow to $14 million.Current assets are $3 million and fixed assets are $4 million.The firm's net profit margin is 7% after taxes.Presently,Zurich has $900,000 in accounts payable,$1.1 million in long-term debt,and $5 million (including $2.5 million in retained earnings)in ordinary equity.Next year,Zurich projects that current assets will rise in direct proportion to the forecasted sales,and that fixed assets will rise by $500,000.Zurich also plans to pay dividends of $400,000 to ordinary shareholders. a.What are Zurich's total financing needs for the upcoming year? b.Given the above information,what are Zurich's discretionary financing needs?

The primary purpose of a cash budget is to