Deck 11: Forecasting Financial Requirements

Question 1

A line of credit is a short-term loan used in a business to help with financing fixed assets.

Answer 1

False

Question 2

After pro forma statements are prepared,they should be checked against actual results every month so projections can be modified.

Answer 2

True

Question 3

Bettina plans to draw an income from her new business but her personal living expenses are not needed in the financial plan unless these expenses are part of the capitalization of the business.

Answer 3

False

Question 4

Profits reward an owner for investing in a company and constitute a primary source of financing for future growth.

Question 5

Many small firms have a tendency to underestimate the amount of capital the business requires when beginning operations.

Question 6

Cash flow can be projected in two ways: using the income statement to project cash flows or preparing a cash budget.

Question 7

The cash budget is concerned only with dollars received and dollars paid out.

Question 8

High-tech businesses (such as computer manufacturers)generally require fewer assets than service businesses.

Question 9

Profits that are retained within the company rather than being distributed to the owners are referred to as retained income.

Question 10

The percentage-of-sales technique is an effective method for a new company to estimate asset requirements because asset-to-liabilities ratios tend to be relatively constant within an industry.

Question 11

Financial forecasts are required by lenders since they will want to know how they will be paid back;investors will use the forecasts to value the company.

Question 12

Pro forma financial statements are statements that have been prepared in the proper format by a CPA.

Question 13

To project pro forma financial statements,speaking to others in the industry and researching industry averages are good starting points.

Question 14

The conventional measure of liquidity is the current ratio,which compares the current assets to current liabilities on a relative basis.

Question 15

The cost of goods sold are always fixed.

Question 16

Spontaneous debt financing results when accounts payable increase in proportion to a firm's profits.

Question 17

The projection of profits,asset requirements,financing requirements and cash flows are essential in determining whether a venture is economically viable.

Question 18

The term net working capital equals current assets less total liabilities and is a measure of a company's liquidity.

Question 19

Because Liam's new restaurant had a high volume of sales,his inventory needs increased illustrating that a firm's asset needs are the primary force driving sales.

Question 20

Marcia like to use other people's money when financing her business.In this way she "does more with less" by controlling resources without actually owning them.

Question 21

Liquid assets include

A)accounts payable.
B)equipment.
C)working capital.
D)office supplies.

Question 22

The greater a firm's sales,the greater need for financing because of greater _____ requirements.

A)asset
B)employee
C)marketing
D)operational

Question 23

Investors would like to know if Arthur's new business will have adequate cash flows.Arthur can provide this information in

A)pro forma financial statements.
B)historical financial statements.
C)pro bono financial statements.
D)quid pro quo financial statements.

Question 24

Roland has already projected his company's sales.The next step in forecasting his company's income is to project:

A)operating expenses.
B)interest expense.
C)taxes.
D)cost of goods sold.

Question 25

The method of forecasting asset requirements is called the ____________ technique.

A)percentage-of-inventory
B)percentage-of-equity
C)percentage-of-debt
D)percentage-of-sales

Question 26

An entrepreneur should always project at least two scenarios for financial forecasting and budgeting: best case and worst case

Question 27

Marcia uses other people's money whenever possible to finance her business.She prefers to minimize and control rather than maximize and own.This practice is known as:

A)high-stepping.
B)bootstrapping.
C)unethical business practice.
D)taking advantage of others.

Question 28

D&R Products forecasts that it will require $10,000 for equipment and depreciation will be over 5 years.The $10,000 will be reflected in the balance sheet as _____.

A)inventory
B)gross fixed assets
C)net fixed assets
D)accounts payable

Question 29

To be realistic,an entrepreneur should project profits only one year into the future.

Question 30

Verlin wants to avoid a common mistake often made by new entrepreneurs.What advice would you give him?

A)Spend as little as possible.
B)Carry no inventory.
C)Make sure he has adequate financing.
D)Do without anything that is not absolutely essential.

Question 31

Financial projections should be limited to the income statement to prevent information overload on lenders and investors.

Question 32

Where should Rhonda put the administrative expenses for her business when she prepares the financial forecasts?

A)Administrative costs are subtracted from amount of sales.
B)In the operating expenses section
C)Administrative costs are included in cost of goods sold
D)In the interest expense section

Question 33

Which source of information would be the most inclusive for an entrepreneur determining information to complete the financial statements?

A)Attend trade shows
B)Contact the industry association
C)Examine RMA Annual Statement Studies
D)Talk to others in the industry

Question 34

Willar expects his new business to support him and his family.This means his asset and financing requirements will:

A)increase.
B)decrease.
C)remain the same.
D)depend on the size of his family.

Question 35

Yvonne is planning a coffee shop.The cost of producing the coffee should be included in the ________ section of the pro forma financial statement.

A)variable expense
B)amount of sales
C)cost of goods sold
D)operating expense

Question 36

Projecting financials may present a challenge because in a startup business,

A)things seldom goes as planned.
B)things always go as planned.
C)expenses are too complex.
D)expenses are simple.

Question 37

Which action will be a concern for a prospective investor?

A)Having too much cash in a bank account
B)Searching for information with a trade association
C)Inadequate provision for personal expenses of the entrepreneur
D)Obtaining a line of credit before beginning operations

Question 38

A firm should finance its growth in such a way as to maintain adequate

A)liquidity.
B)inventory.
C)sales.
D)volume.

Question 39

Mario has high hopes for his new business,anticipating a very large profit margin.For the preparation of his forecasts,he should use industry averages regardless of his hopes.

Question 40

The assets-to-sales relationship tends to be relatively constant within an industry,allowing for a(n)_____ technique to be utilized in projecting asset requirements.

A)percentage-of-sales
B)bootstrap forecasting
C)asset turnover ratio
D)discounted sales

Question 41

Even though Miriam projected an annual positive cash flow,she may run out of cash if:

A)customers use debit cards for their purchases.
B)her sales are seasonal.
C)sales exceed her projections.
D)she finds a less expensive supplier.

Question 42

Jill's business has current assets of $50,000 and current liabilities of $25,000.Which statement is true about the company's current ratio?

A)The ratio is 50% and is acceptable for most industries.
B)The ratio is 2 and is acceptable for most industries.
C)The ratio is $25,000 and is not acceptable for most industries.
D)Current ratio can not be determined from the information given.

Question 43

Mark wants to make sure he does not run out of cash so he is preparing a monthly cash budget.After determining the percentage of cash collections by month,he should

A)estimate the amount and timing of cash disbursements.
B)calculate cash flow from operations.
C)determine the end-of-month cash balance.
D)determine beginning-of-the-month cash balance.

Question 44

D&R Products forecast a first year asset requirement of $143,500;therefore,the total debt requirement is

A)$143,500.
B)a set percentage of sales.
C)equal to the current ratio.
D)dependent on the owner's equity amount.

Question 45

Zeno had a great idea but no cash so he asked the bank for a loan to finance the entire operation.It seems he forgot that a bank would never provide _______ % of the firm's financing.

A)25
B)50
C)75
D)100

Question 46

Entrepreneurs determine financial requirements based on ________.

A)predictions
B)suggestions
C)assumptions
D)projections

Question 47

A golf club should break down its annual cash budget into shorter time units because

A)of the seasonality of its sales.
B)one year is too far into the future to predict.
C)the marketing plans may change during the year.
D)production breakdowns may alter the company's situation.

Question 48

As Willard's business grows and propsers,his company's total assets requirements will equal ___________.

A)total sources of financing less owner's investment and retained earnings
B)spontaneous debt financing plus bank loans plus owner's investment less retained earnings
C)total sources of financing less net assets and owner's investment
D)spontaneous debt financing plus bank loans plus owner's investment plus retained earnings

Question 49

No single planning document is more important in the life of a company than the

A)income statement.
B)cash budget.
C)balance sheet.
D)corporate charter.

Question 50

Natasha has been in business for a little over a year with her Sips and Munchies Coffee Shop where she sells an array of coffees and pastries.She rents a building with a downtown location and manages the business and employees herself.Discuss factors that drive the company's profits.

Question 51

David has a company decorating houses for the holidays.He has secured a $25,000 line of credit from his bank.For which purpose is David more likely to use this credit line?

A)a warehouse to store decorations until they are sold
B)labor to install the decorations in November
C)a truck with a ladder to put up lights
D)a full-time,year-round office person to answer phones and take orders

Question 52

Alex wants to make sure he has enough liquid assets to pay his current bills.To do this,he should calculate his firm's:

A)debt ratio.
B)cash flow statement.
C)current ratio.
D)asset turnover ratio.

Question 53

Maria is projecting sales for her company for the upcoming new year.To be financially effective,she

A)can over-project for sales if she has done research.
B)should develop realistic sales projections.
C)would be better served by under-projecting sales so she won't be disappointed.
D)ignore projections until after 1 year of operations when she can realistic project.

Question 54

As her accounts payable and accrued expenses rose along with her firm's sales,Ariel noticed that ________ occurs.

A)spontaneous debt financing
B)trade credit financing
C)escalating debt
D)asset-based financing

Question 55

James is preparing his forecasts for the coming year.What kind of scenarios should he prepare when forecasting and budgeting?

A)best and worst case scenarios
B)most-likely and break-even case scenarios
C)break-even and worst case scenarios
D)most-likely and best case scenarios

Question 56

For the typical small firm,the primary source of equity capital for financing growth is

A)operating profits.
B)outside investors.
C)spontaneous debt financing.
D)retained earnings.

Question 57

A simple listing of expected cash inflows and outflows provides the entrepreneur with a(n)

A)income statement.
B)cash budget.
C)pro forma balance sheet.
D)net equity computation.

Question 58

Mark follows the cash budget like it was carved in stone.He has fallen prey to the one real danger in over-reliance on a cash budget:

A)inflexibility.
B)pliability.
C)exaggeration.
D)errors.

Question 59

Jake has prepared pro forma financial statements for his landscaping business.At the minimum,how often should he check results and make modifications as needed?

A)annually
B)quarterly
C)monthly
D)weekly

Question 60

Tony operates a computer retail business.Based on the industry,how often should sales projections be for the company in projecting sales?

A)monthly for Year 1;annual for Years 2 and 3
B)annual for Year 1;quarterly for Years 2 and 3
C)monthly for Year 1;quarterly for Years 2 and 3
D)annual for Year 1,monthly for Years 2 and 3

Question 61

Briefly explain liquidity and its relationship to the current ratio.

Question 62

Match the term with its definition.
a.Cash budget
b.Current ratio
c.Line of credit
d.Net working capital
e.pro forma financial statements
f.percentage-of-sales technique
g.spontaneous debt financing
A short-term loan

Question 63

Explain the percentage-of-sales technique.Will this technique differ by industry type?

Question 64

Match the term with its definition.
a.Cash budget
b.Current ratio
c.Line of credit
d.Net working capital
e.pro forma financial statements
f.percentage-of-sales technique
g.spontaneous debt financing
A method of forecasting asset requirements

Question 65

Match the term with its definition.
a.Cash budget
b.Current ratio
c.Line of credit
d.Net working capital
e.pro forma financial statements
f.percentage-of-sales technique
g.spontaneous debt financing
Short-term debts,such as accounts payable,that automatically increase in proportion to a firm's sales

Question 66

Match the term with its definition.
a.Cash budget
b.Current ratio
c.Line of credit
d.Net working capital
e.pro forma financial statements
f.percentage-of-sales technique
g.spontaneous debt financing
Current assets less current liabilities

Question 67

Andrea is working on forecasting her financial statements for her consulting business.Discuss three suggestions for Andrea to make her forecasting more effective.

Question 68

Match the term with its definition.
a.Cash budget
b.Current ratio
c.Line of credit
d.Net working capital
e.pro forma financial statements
f.percentage-of-sales technique
g.spontaneous debt financing
A listing of cash receipts and cash disbursements,usually for a relatively short time period

Question 69

Match the term with its definition.
a.Cash budget
b.Current ratio
c.Line of credit
d.Net working capital
e.pro forma financial statements
f.percentage-of-sales technique
g.spontaneous debt financing
Statements that project a firm's financial performance and condition,including projected profits,assets and financing requirements,and cash flows

Question 70

What are sources of equity ownership in a business? Are these sources cash resources?

Question 71

Faye is developing a statement of cash flows for Yummy Gummies,a candy company that she owns.She has a net profit of $15,000 and an increase in inventory of $7,500.She took out a line of credit with her bank to finance her business and has decreased accounts receivable by $4,000.She has also invested in equipment for shaping her candy.How will the above information be listed on the cash flow statement?

Question 72

What are the categories that constitute working capital versus net working capital?