Deck 17: Financial Forecasting and Planning

Question 1

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002;sales were $3,450,000 in fiscal 2001.Assume the following figures for the fiscal year ending 2001: cash $70,000;accounts receivable $250,000;inventory $400,000;net fixed assets $520,000;accounts payable $235,000;and accruals $155,000.Use the percent-of-sales method to forecast cash for the fiscal year ending 2002.

A)$120,725
B)$75,003
C)$216,418
D)$319,604

Answer 1

A

Question 2

Long-term financial planning results in:

A)a cash budget.
B)pro forma financial statements.
C)a sales forecast for the next 1 to 3 years.
D)a general narrative detailing near-term scenarios.

Answer 2

B

Question 3

Typical steps in the financial planning process include:

A)preparing a sales forecast.
B)analyzing cost data.
C)estimating tax expense.
D)all of the above.

Answer 3

D

Question 4

What are the key questions that a strategic plan attempts to answer? How does it relate to financial plans?

Question 5

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

Question 6

Short-term financial planning results in:

A)a cash budget.
B)pro forma financial statements.
C)a sales forecast for the next 1 to 3 years.
D)a general narrative detailing near-term scenarios.

Question 7

Long-term financial plans typically encompass:

A)6 to 12 months.
B)about 5 years.
C)5 to 10 years.
D)the entire lifecycle of the corporation.

Question 8

Which of the following statements about the percent-of-sales method of financial forecasting is true?

A)It is the least commonly used method of financial forecasting.
B)It is a much more precise method of financial forecasting than a cash budget would be.
C)It involves estimating the level of an expense,asset,or liability for a future period as a percent of the forecast for sales revenues.
D)It projects all liabilities as a fixed percentage of sales.

Question 9

The "percentage" used in the percent-of-sales calculation can be obtained from:

A)the most recent financial statement item as a percent of current sales.
B)an average computed over several years.
C)an analyst's judgment.
D)all of the above.

Question 10

Short-term financial plans span a period of:

A)up to five years.
B)one to three years.
C)a year or less.
D)1 month or less.

Question 11

A sales forecast for the coming year would reflect:

A)any past trend which is expected to continue.
B)the influence of any events that might materially affect the past trend.
C)both A and B.
D)neither A nor B.

Question 12

The first step involved in predicting financing needs is:

A)projecting the firm's sales revenues and expenses over the planning period.
B)estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
C)determining the firm's financing needs throughout the planning period.
D)none of the above.

Question 13

Types of plans that businesses typically use to guide their operations include:

A)strategic plans.
B)long-range financial plans.
C)short-range financial plans.
D)all of the above.

Question 14

Because financial planning usually takes place in a highly uncertain environment,

A)it is rarely worth the time and expense.
B)time horizons should be limited to a few months.
C)it is important to develop contingency plans to respond to unexpected events.
D)it should avoid such specific issues as what sources of financing to use.

Question 15

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

A)A forecast of sales revenues
B)Determining the amount of dividends to pay shareholders
C)Projecting the rate of interest on proposed new debt
D)Deciding upon which method of depreciation a firm should utilize

Question 16

The percent-of-sales method can be used to forecast:

A)expenses.
B)assets.
C)liabilities.
D)all of the above.

Question 17

Discuss the basic functions that budgets perform for a firm.

Question 18

Why is financial planning important in a highly uncertain financial environment.

Question 19

Strategic planning encompasses all of the following EXCEPT:

A)a cash budget.
B)a description of the firm's core competencies and activities.
C)a definition of the firm's customers.
D)a description of the firm's competitors and its own competitive strengths and weaknesses.

Question 20

The financial planning process is the responsibility of:

A)financial analysts.
B)operations staff.
C)marketing staff
D)financial analysts,marketing staff,and operations staff interacting as a group.

Question 21

Assume all else remains the same.Which of the following statements is true?

A)The lower the dividend payout,the less a firm will have to reinvest.
B)The higher the dividend payout,the more discretionary financing a firm will require.
C)The lower the dividend payout,the more discretionary financing a firm will require.
D)The higher the dividend payout,the higher the retention percentage.

Question 22

An increase in projected ________ will increase discretionary funds needed.

A)cash dividends
B)sales
C)retained earnings
D)both A and B

Question 23

A discretionary form of financing would be:

A)notes payable.
B)accounts payable.
C)accrued expenses.
D)none of the above.

Question 24

The percent-of-sales method of forecasting makes which of the following assumptions?

A)The inventory turnover will remain the same during the forecast period.
B)The profit margin will remain constant during the forecast period.
C)Cash,as a percent of sales,will remain constant throughout the forecast period.
D)All of the above.
E)None of the above.

Question 25

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002;sales were $3,450,000 in fiscal 2001.Assume the following figures for the fiscal year ending 2001: cash $70,000;accounts receivable $250,000;inventory $400,000;net fixed assets $520,000;accounts payable $235,000;and accruals $155,000.Use the percent-of-sales method to forecast accruals for the fiscal year ending 2002.

A)$890,001
B)$412,316
C)$267,319
D)$350,814

Question 26

Assume that Helaron,Inc.has sales of $83 million and fixed assets of $22.4 million.The corporation utilizes the percent-of-sales method of financial forecasting.If Helaron is expected to generate sales of $94 million next year,what will the firm's investment in fixed assets be?

A)$19.8 million
B)$28.8 million
C)$16.2 million
D)$25.4 million
E)None of the above

Question 27

Which of the following accounts would normally increase with an increase in sales and approximately in proportion to the sales increase?

A)Common stock
B)Inventory
C)Notes payable
D)Dividends
E)Accounts receivable

Question 28

Which of the following is the correct method of determining discretionary financing needed (DFN)?

A)Projected change in assets,divided by projected change in liabilities,plus projected change in owner's equity
B)Projected change in assets,times projected change in owner's equity,minus projected change in liabilities
C)Projected change in owner's equity,minus projected change in liabilities,plus projected change in assets
D)Projected change in assets,minus projected change in liabilities,minus projected change in owner's equity

Question 29

Which of the following are considered to be spontaneous sources of financing (i.e. ,they arise naturally during the course of doing business)?

A)Notes payable and common stock
B)Accounts receivable and bonds
C)Fixed assets and inventory
D)Accounts payable and accrued expenses

Question 30

Under which of the following conditions would the percent-of-sales method of financial forecasting be most accurate?

A)If assets must be purchased in discrete quantities
B)When asset requirements can be accurately forecasted as a constant percent of sales
C)If economic circumstances beyond a firm's control drastically change from one year to the next
D)When economies of scale can be realized from investing in specific assets

Question 31

Assume that Hercules Manufacturing has sales of $25 million and current assets of $5 million.The corporation utilizes the percent-of-sales method of financial forecasting.If Hercules is expected to generate sales of $31 million next year,what will the firm's investment in current assets be?

A)$8.3 million
B)$4.0 million
C)$6.2 million
D)$5.0 million
E)None of the above

Question 32

The percent-of-sales method of forecasting makes which of the following assumptions?

A)That some assets do not increase in direct proportion to an increase in sales.
B)The accounts receivable average collection period will remain constant throughout the forecast period.
C)The firm may acquire some "lumpy" assets.
D)All of the above.
E)None of the above.

Question 33

Marjen Manufacturing has purchases equal to 40% of sales.They purchase one month prior to sales and pay one month after sales.Given the following sales forecast,calculate Marjen's payments for March.

A)$40,000
B)$60,000
C)$80,000
D)$100,000

Question 34

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2002;sales were $3,450,000 in fiscal 2001.Assume the following figures for the fiscal year ending 2001: cash $70,000;accounts receivable $250,000;inventory $400,000;net fixed assets $520,000;accounts payable $235,000;and accruals $155,000.Use the percent-of-sales method to forecast accounts payable for the fiscal year ending 2002.

A)$212,036
B)$405,290
C)$619,619
D)$155,000

Question 35

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?

A)The dividend pay-out ratio
B)The profit margin
C)The accounts receivable average collection period
D)The expected growth rate in sales
E)The income tax rate

Question 36

Assume that Calamar Corp.has sales of $7.5 million and accounts payable of $450,000.The corporation utilizes the percent-of-sales method of financial forecasting.If Calamar is expected to generate sales of $9 million next year,what will the firm's accounts payable be?

A)$540,000
B)$450,000
C)$405,000
D)None of the above

Question 37

Assume all else remains the same.Which of the following statements is true?

A)The lower a firm's profit margin,the more discretionary financing a firm will require.
B)The higher a firm's profit margin,the more discretionary financing a firm will require.
C)The lower a firm's profit margin,the more cash a firm will have to reinvest.
D)A relationship between a firm's profit margin and its requirement for external financing does not exist.

Question 38

Assume that Zybo,Inc.has sales of $10 million and inventory of $2 million.The corporation utilizes the percent-of-sales method of financial forecasting.If Zybo is expected to generate sales of $14 million next year,what will the firm's investment in inventory be?

A)$1.4 million
B)$2.0 million
C)$2.8 million
D)None of the above

Question 39

The preparation of pro forma financial statements accomplishes which of the following objectives?

A)It allows management to pinpoint a firm's optimal stock price.
B)It is essential if the firm is to accurately estimate its weighted average cost of capital.
C)It assists management in making decisions with respect to raising the capital that is needed for growth.
D)It pinpoints periods when the firm will have short-term cash surpluses.

Question 40

Spontaneous sources of financing include:

A)accounts payable and accrued expenses.
B)notes payable and mortgages payable.
C)long-term debt and capital leases.
D)common stock and paid-in capital.

Question 41

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

Banner's projected discretionary financing needed for 2005 is:

A)$420,000.
B)$440,000.
C)$360,000.
D)$370,000.

Question 42

Long-term financial plans must include capital expenditures.

Question 43

Which of the following is a spontaneous source of financing?

A)Accrued expenses
B)Notes payable
C)Common stock
D)Paid-in capital

Question 44

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

Banner's projected long-term debt for 2005 is:

A)$700,000.
B)$880,000.
C)$380,000.
D)$300,000.

Question 45

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

Banner's projected accounts payable balance for 2005 is:

A)$160,000.
B)$120,000.
C)$200,000.
D)$300,000.

Question 46

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

Banner's projected current assets for 2005 are:

A)$1,000,000.
B)$1,120,000.
C)$1,500,000.
D)$1,260,000.

Question 47

Swings in discretionary financing needed can be caused by:

A)firm profitability.
B)economic activity.
C)industry influence.
D)all of the above.

Question 48

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

Banner's projected fixed assets for 2005 are:

A)$1,120,000.
B)$1,260,000.
C)$1,000,000.
D)$2,380,000.

Question 49

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

Question 50

One of the virtues of the percent-of-sales method is the precision of the estimate it provides for future financing needs.

Question 51

The percent-of-sales method is a commonly used method for estimating a firm's financing needs.

Question 52

The initiation of a major advertising campaign would be an example of an event that would affect past trends in sales when projecting statements.

Question 53

Which of the following is a source of external capital?

A)Retained earnings
B)Inventory
C)Long-term debt
D)Operating income (earnings before interest and taxes)
E)None of the above

Question 54

Which of the following will reduce the firm's financing requirements?

A)The firm operates at full capacity
B)The firm has excess capacity
C)The firm expects rapid growth in sales
D)The firm increases its dividend payout ratio

Question 55

The percentages used in the percent-of-sales method comes from pro forma financial statements.

Question 56

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

Banner's projected accrued expenses for 2005 are:

A)$120,000.
B)$160,000.
C)$100,000.
D)$200,000.

Question 57

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2004 year-end balance sheet for Banner,Inc.Sales for 2004 were $1,600,000 and are expected to be $2,000,000 during 2005.In addition,we know that Banner plans to pay $90,000 in 2005 dividends and expects projected net income of 4% of sales.(For consistency with the Answer selections provided,round your forecast percentages to two decimals. )

Banner's projected retained earnings for 2005 are:

A)$260,000.
B)$280,000.
C)$340,000.
D)$350,000.

Question 58

Which of the following will decrease discretionary funds needed?

A)An increase in projected accounts receivable
B)An increase in projected accounts payable
C)An increase in projected dividends
D)Both A and C

Question 59

The projected change in retained earnings equals projected net income less any dividends to be paid.

Question 60

Considering each action independently and holding other things constant,which of the following actions would increase a firm's discretionary financing needed (the need for additional capital)?

A)A decrease in the firm's accounts receivable average collection period
B)An increase in the firm's profit margin
C)A decrease in the firm's inventory turnover
D)A decrease in the expected growth rate in sales
E)A decrease in the firm's tax rate

Question 61

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

Question 62

If the firm's current fixed assets are sufficient to support the projected level of new sales,then these assets would be projected to remain unchanged for the forecast period.

Question 63

Which of the following is always a non-cash expense?

A)Income taxes
B)Salaries
C)Depreciation
D)None of the above

Question 64

Pro forma statements are important since they formally report the performance of the firm during a previous reporting period.

Question 65

The balance sheet of the Jackson Company is presented below:
For the year ending March 31,2004,Jackson had sales of $35 million.The common stockholders received all net earnings of the firm in the form of cash dividends,leaving no funds from earnings available to the firm for expansion (assume that depreciation expense is just equal to the cost of replacing worn-out assets).
Construct a pro forma balance sheet for March 31,2005 for an expected level of sales of $45 million.Assume current assets and accounts payable vary as a percent of sales,and fixed assets remain at the present level.Use notes payable as a source of discretionary financing.

Question 66

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 common stock 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:
Prepare a pro forma balance sheet for Amalgamated for next year using the percent-of-sales method and the information provided above.

Question 67

It is common practice to develop optimistic and pessimistic scenarios when projecting financial statements.

Question 68

What is meant by spontaneous financing?

Question 69

Frog Hollow Bakery is a new firm specializing in all-natural-ingredient pastry products.In attempting to determine what the financial position of the firm should be,the financial manager obtained the following average ratios for the baking industry for 2004:
Common equity to total assets = 60%
Total asset turnover = 3 times
Long-term debt to total capitalization = 25%
Current ratio = 1.2
Quick ratio = .75
Average collection period (360-day year)= 10 days
Complete the accompanying pro forma balance sheet for Frog Hollow Bakery assuming 2005 sales (all credit)are $450,000.

Question 70

Because accounts payable and accrued expenses increase with sales,they represent sources of spontaneous financing.

Question 71

What is meant by discretionary financing?

Question 72

When forecasting statements,assets always increase proportionately to sales regardless of capacity.

Question 73

Pro forma statements provide single point estimates of each budgeted item.

Question 74

The most commonly used method for making financial forecasts is the percent-of-sales method.

Question 75

All of the following are found in the cash budget EXCEPT:

A)a net change in cash for the period.
B)inventory.
C)cash disbursements.
D)new financing needed.

Question 76

Which of the following is NOT a basic function of a budget?

A)Budgets indicate the need for future short-term financing.
B)Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
C)Budgets compare historical costs of the firm with its current cost performance.
D)Budgets allow for performance evaluation.

Question 77

Which of the following will increase cumulative borrowing in the cash budget?

A)Slower collections from customers
B)Slower payments to suppliers
C)Higher interest rates
D)Faster collection of receivables

Question 78

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

Question 79

Lindsey 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,Lindsey has $900,000 in accounts payable,$1.1 million in long-term debt,and $5 million (including $2.5 million in retained earnings)in common equity.Next year,Lindsey projects that current assets will rise in direct proportion to the forecasted sales,and that fixed assets will rise by $500,000.Lindsey also plans to pay dividends of $400,000 to common shareholders.
a.What are Lindsey's total financing needs for the upcoming year?
b.Given the above information,what are Lindsey's discretionary financing needs?

Question 80

Purchases of plant and equipment can be determined from the:

A)current cash budget.
B)previous period's balance sheet.
C)pro forma income statement.
D)use of ratio analysis.