Deck 23: Forecasting

Question 1

If accounts receivable are 15% of sales and sales double, the regression analysis says that accounts receivable will become 30% of sales.​

Answer 1

False

Question 2

​If percent of sales is used to forecast, increased sales implies inventory as a percent of sales increases.

Answer 2

False

Question 3

If accounts receivable are 20% of sales and the level of sales doubles, the percent of sales says that accounts receivable will be 40% of sales.​

Answer 3

False

Question 4

Accounts payable are illustrative of liabilities that spontaneously vary with the level of sales.​

Question 5

Regression analysis may be used to estimate the slope of the line relating sales and accounts receivable.​

Question 6

Higher levels of sales are associated with increased holding of cash when regression analysis is used to estimate a firm's need for funds.​

Question 7

If forecasting over-predicts the level of an asset, the firm will over-plan its financial needs.​

Question 8

Regression analysis as a forecasting tool is less restrictive than the percent of sales.​

Question 9

Regression analysis assumes that equity as a percent of total assets is fixed.​

Question 10

If a firm distributes a larger proportion of its earnings, the external need for finance is reduced.​

Question 11

​Long‑term debt spontaneously changes with the level of sales.

Question 12

The more a firm earns on additional sales, the less will be the need for external finance.​

Question 13

If profit margins increase as sales increase, the need for external finance is reduced.​

Question 14

Regression analysis assumes that inventory as a percent of sales is constant.​

Question 15

If regression analysis estimates that assets exceed liabilities and equity, the firm will require external sources of finance.​

Question 16

Long-term assets such as plant spontaneously vary with sales.​

Question 17

The percent of sales method of forecasting assumes that fixed assets vary proportionately with sales.​

Question 18

If fixed asset requirements increase with increases in sales, the firm will need more sources of finance.​

Question 19

The percent of sales method of forecasting assumes the level of some assets varies proportionately with the level of sales.​

Question 20

Which of the following tends to vary spontaneously with changes in the level of sales?​

A) ​long‑term debt
B) ​plant
C) ​accounts payable
D) paid‑in capital

Question 21

As the firm expands, the spontaneous increase in which of the following is a source of finance?​

A) ​equipment
B) ​inventory
C) ​accounts payable
D) ​accounts receivable

Question 22

​A firm with sales of $5,000 has the following balance sheet:
​ $\text { Assets, Liabilities and Equity as of } \mathrm{XX} / \mathrm{XX} / \mathrm{XX}$
$\begin{array}{lclc}\text { Assets }&&\text { Liabilities and Equity }\\\hline\text { Accounts receivable } & \$ 1,300 & \text { Accounts payable } & \$ 1,200 \\\text { Inventory } & 1,600 & \text { Long-term debt } & 2,500 \\\text { Plant } & 1,700 & \text { Equity } & 900 \\& \$ 4.600 & & \$ 4,600\end{array}$
​
​
The firm earns 5 percent on sales and expects sales to rise to $5,500. The increase may require additional financing. Regression analysis is used to estimate accounts receivable, inventory, and trade accounts (payables). These estimated equations are accounts receivable $= \$ 300 + 0.2$ Sales
inventory $= \$ 400 + 0.3$ Sales
accounts payable $= \$ 200 + 0.3$ Sales ​
Management expects to distribute 20% of earnings.
a. Determine the new balance sheet entries for sales of $5,500.
b. the firm need external financing to achieve sales of $5,500?
c. Construct the pro forma balance sheet for sales of $5,500. Any new financing should be obtained by issuing new long‑term debt. Any excess funds should be held in cash.

Question 23

Which of the following assets do not spontaneously vary with the level of sales?​
​1) accounts receivable
2) equipment
3) plant

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 24

Firm X has the following balance sheet:
​ $\text { Balance Sheet as of } 12 / 31 / \mathrm{XX}$
$\begin{array}{lrlr}\text { Assets }&&\text { Liabilities and Equity }\\\hline\text { Cash } & \$ 3,500 &\text { Accounts payable } & \$ 14,500 \\\text { Marketable securities } & 3,000&\text { Bank loans } & 35,000 \\\text { Accounts receivable } & 27,000&\text { Bonds } & 21,500 \\\text { Inventory } & 31,000&\text { Common stock } & 10,000 \\\text { Plant \& equipment } & 77,000&\text { Retained earnings } & 60,500\\&\$141,500&&\$141,500\end{array}$
​
Sales are currently $100,000 and management expects them to rise by 20 percent to $120,000. The profit margin on sales is 10 percent and the firm distributes 30 percent of its earnings as cash dividends.​
a. How much external finance will be required by the expansion according to the percent of sales technique?
​
b. If the firm needs external finance, the funds should be acquired by issuing long-term debt. If the firm has excess funds, they should be held in marketable securities. If the firm needs funds, management may also draw upon the firm's holdings of marketable securities. Construct a new projected balance sheet for the anticipated level of sales assuming that management does not increase the firm's holdings of cash.​

Question 25

​A firm with sales of $5,000 has the following balance sheet:
​ $\text { Assets, Liabilities and Equity as of } \mathrm{XX} / \mathrm{XX} / \mathrm{XX}$
$\begin{array}{lcll}\text { Assets }&&\text { Liabilities and Equity }\\\hline\text { Accounts receivable } & \$ 1,300 & \text { Accounts payable } & \$ 1,200 \\\text { Inventory } & 1,600 & \text { Long-term debt } & 2,500 \\\text { Plant } & 1,700 & \text { Equity } & 900 \\& \$ 4.600 & & \$ 4.600\end{array}$
​
​
The firm earns 20 percent on sales and expects those sales to rise to $5,500. The increased sales may require additional financing. Accounts receivable and inventory will increase, and trade accounts will also spontaneously increase with the increase in sales. Management expects to distribute 75% of earnings.​
a. Determine the new balance sheet entries for those assets and liabilities that spontaneously change with the level of sales using the percent of sales technique.
b. Will the firm need external financing to achieve sales of $5,500?
c. Construct the pro forma balance sheet for sales of $5,500. Any new financing should be obtained by issuing new long‑term debt. Any excess funds should be held in cash.

Question 26

​A firm with sales of $1000 has the following balance sheet. Corporation $X Y Z$
Balance Sheet as of June $30,20 X \mathrm { X }$
Assets Liabilities and Equity
Accounts receivable $\$ 200$ Accounts payable $\$ 200$
Inventory
400 Long-term debt 300
Plant
$\frac { 400 } { \$ 1,000 }$ Equity $\frac { 500 } { \$ 1,000 }$ ​
If the firm earns 10 percent after taxes on sales and pays no dividends,
​
a. Determine the entries for a new balance sheet for sales of $1,500 using the percent of sales.
a. If necessary, issue new stock to cover any external financing needs. If the firm has excess funds, retire the accounts payable.
b. the firm need external financing?
c. Construct a new balance sheet using the estimates obtained in

Question 27

As a firm expands, which of the following is an automatic source of finance?​

A) ​long‑term debt
B) ​accounts payable
C) ​mortgage loans
D) ​bank loans

Question 28

Regression analysis estimates​

A) ​the relationship between inventory and receivables
B) ​the tendency of firms to retain earnings
C) ​an equation relating sales and receivables
D) ​the firm's excess use of debt financing

Question 29

​Over‑estimation of the required level of assets will
1) cause the firm to acquire excess finance
2) reduce the firm's profitability
3) increase the firm's equity

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 30

The percent of sales method of forecasting assumes which of the following is constant?​

A) ​inventory as a percent of sales
B) ​equity as a percent of sales
C) ​long‑term debt as a percent of total assets
D) accounts payable as a percent of total assets

Question 31

A firm with sales of $1000 has the following balance sheet. Corporation $X Y Z$
$\text { Balance Sheet as of June 30, 20XX }$
$\begin{array}{lcl}\text { Assets } && \text { Liabilities and Equity } \\\hline\text { Accounts receivable } & \$ 200& \text { Accounts payable } & \$ 200 \\\text { Inventory } & 400 &\text { Long-term debt } & 300 \\\text { Plant } & 400 &\text { Equity } & 500\\&\$1,000&&\$1,000\end{array}$
​
If the firm earns 10 percent after taxes on sales and pays no dividends,
​
​
a. Determine the entries for a new balance sheet for sales of $1,500 using the following estimated equations:
accounts receivable = $120 + 0.21Sales
inventory = $331 + 0.37Sales
accounts payable = $132 + 0.29Sales.
a. If necessary, issue new stock to cover any external financing needs. If the firm has excess funds, retire the accounts payable.
b. Will the firm need external financing?
​c. Construct a new balance sheet using the estimates obtained in

Question 32

Regression analysis as a tool to forecast assumes that​
1) inventory varies based on an equation relating inventory to sales
2) equity varies based on an equation relating equity to sales
3) accounts payable vary based on an equation relating payables to sales
4) plant varies based on an equation relating plant to sales

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 33

A firm has the following balance sheet as of XX/XX/XX: $\begin{array}{lclc}\text { Assets }&&\text { Liabilities and Equity }\\\hline\text { Cash } & \$ 100 & \text { Accounts payable } & \$ 300 \\\text { Accounts receivable } & 300& \text { Long-term debt } & 800 \\\text { Inventory } & 400& \text { Equity } & 400 \\\text { Plant } & 700& \text { Retained earnings } & 0\\&\$1,500&&\$1,500\end{array}$ ​
Currently sales are $4,000 with a net profit margin of 15 percent. Management expects sales to increase to $5,000 and wants to determine if the firm will need external financing to cover this expansion. Construct a forecasted balance sheet for sales of $5,000 using the percent of sales technique of forecasting assets and liabilities that spontaneously vary with sales. If the firm needs funds, these funds may be acquired through a bank. If the firm has excess funds, they should be invested in marketable securities. Assume that cash does not increase with the increase in sales. If this assumption were not made, would your answer be different?

Question 34

If a firm's sales increase by 50 percent and inventory was $100,000, according to the percent of sales method of forecasting inventory will be​

A) ​$100,000
B) ​$120,000
C) ​$150,000
D) ​$175,000

Question 35

​A financial manager needs to forecast the level of inventory. Currently inventory is 60 percent of sales. If the anticipated level of sales is $20,000, what is the level of inventory forecasted by the percent of sales method of forecasting? If the equation relating inventory and sales is I = $789 + 0.54S, what is the level of inventory forecasted by the regression equation?

Question 36

Underestimation of the level of assets needed may​

A) ​cause the firm to increase sales
B) ​cause the firm to have excess financing
C) ​cause the firm to have insufficient finance
D) ​result in higher earnings