Deck 11: Forecasting Financial Requirements

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

The cost of goods sold is always fixed.

Question 8

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 9

Mary likes 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 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 capitalisation of the business.

Question 16

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 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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 23

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

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

Question 24

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 industry averages.
D)Talk to others in the industry.

Question 25

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

Question 26

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

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

Question 27

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

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

Question 28

Where should Rose 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 29

Martin 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 30

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 31

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 32

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

Question 33

Projecting financials may present a challenge because in a start-up business:

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

Question 34

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 35

Liquid assets include:

A)trade payables.
B)equipment.
C)working capital.
D)office supplies.

Question 36

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

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

Question 37

D & R Products forecasts that it will require R10 000 for equipment and depreciation will be over five years.The R10 000 will be reflected in the statement of financial position as _____.

A)inventory
B)gross fixed assets
C)net fixed assets
D)trade payables

Question 38

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

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

Question 39

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

Question 40

William 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 41

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

A)statement of profit and loss.
B)cash budget.
C)pro forma statement of financial position.
D)net equity computation.

Question 42

As Will'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 43

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)should ignore projections until after one year of operations when she can realistically project.

Question 44

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 45

Jill's business has current assets of R50 000 and current liabilities of R25 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 R25 000 and is not acceptable for most industries.
D)Current ratio cannot be determined from the information given.

Question 46

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

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

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

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

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

Question 49

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 50

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 51

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

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

Question 52

David has a company decorating houses for the holidays.He has secured a R25 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)Labour 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 53

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

A)statement of profit and loss.
B)cash budget.
C)statement of financial position.
D)corporate charter.

Question 54

D & R Products forecast a first year asset requirement of R143 500; therefore, the total debt requirement is

A)R143 500.
B)a set percentage of sales.
C)equal to the current ratio.
D)dependent on the owner's equity amount.

Question 55

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 56

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 57

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 58

Zenzo 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 business's financing.

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

Question 59

Entrepreneurs determine financial requirements based on ________.

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

Question 60

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 61

Faith is developing a statement of cash flows for Yummy Gummies, a candy company that she owns.She has a net profit of R15 000 and an increase in inventory of R7 500.She took out a line of credit with her bank to finance her business and has decreased trade receivables by R4 000.She has also invested in equipment for shaping her candy.How will the above information be listed on the statement of cash flows?

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 method of forecasting asset requirements.

Question 63

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

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 listing of cash receipts and cash disbursements, usually for a relatively short time period.

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
A short-term loan.

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
Short-term debts, such as trade payables that automatically increase in proportion to a business's sales.

Question 67

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 business's financial performance and condition, including projected profits, assets and financing requirements and cash flows.

Question 68

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

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
Current assets less current liabilities.

Question 70

Briefly explain liquidity and its relationship to the current ratio.

Question 71

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

Question 72

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