Deck 17: Financial Forecasting and Planning

Question 1

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

Answer 1

True

Question 2

Pro forma financial statements are a required part of the firm's tax returns.

Answer 2

False

Question 3

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.

Answer 3

A

Question 4

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.

Question 5

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 6

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 7

One disadvantage of long-term plans is a loss of flexibility in responding to unexpected events.

Question 8

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 9

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 10

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

Question 11

One purpose of long-term financial plans is to estimate the firm's future capital spending and financing needs.

Question 12

Cash budgets usually include details such as the timing of materials purchases,interest payments,and the like.

Question 13

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 14

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 15

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.

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

Long-term financial plans require that the firm have well-defined goals and objectives.

Question 18

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

Question 19

Discuss the basic functions that budgets perform for a firm.

Question 20

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 21

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 22

Discretionary financing needs implies

A)that management may choose between various forms of debt and equity.
B)that the purchases being financed are optional rather than necessary.
C)that management has considerable discretion in how to dispose of retained earnings.
D)that management may choose between debt,new equity or retained earnings.

Question 23

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 24

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 25

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.

Question 26

Assume that Gatsby Enterprises has sales of $83 million and fixed assets of $22.4 million in 2013.The corporation utilizes 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.

A)$19.8 million
B)$26.4 million
C)$16.2 million
D)$25.4 million

Question 27

Which of the following assumptions is not required by the percent of sales method?

A)The inventory turnover will remain constant 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)The debt to equity ratio will remain constant throughout the forecast period.

Question 28

A discretionary form of financing would be

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

Question 29

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 30

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 31

Which of the following require adjustments when forecasting asset needs as a percent of sales?

A)If assets must be purchased in large,discrete quantities
B)When the firm has excess capacity
C)When assets can be leased rather than purchased
D)Both A and B

Question 32

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 33

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 34

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 35

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014;sales were $3,450,000 in fiscal 2013.Assume the following figures for the fiscal year ending 2013: 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 2014.

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

Question 36

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

Question 37

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014;sales were $3,450,000 in fiscal 2013.Assume the following figures for the fiscal year ending 2013: 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 2014.

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

Question 38

Apple Two Enterprises expects to generate sales of $5,950,000 for fiscal 2014;sales were $3,450,000 in fiscal 2013.Assume the following figures for the fiscal year ending 2013: 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 2014.

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

Question 39

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 40

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 41

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)

Question 42

An increase in projected ________ will increase discretionary funds needed.

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

Question 43

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2014 year-end balance sheet for Banner,Inc.Sales for 2014 were $1,600,000 and are expected to be $2,000,000 during 2015.In addition,we know that Banner plans to pay $90,000 in 2015 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,Inc.Balance Sheet
December 31,2014
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners' Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in capital)360,000
Retained earnings 270,000
Common equity 630,000
Total 1,890,000
Banner's projected long-term debt for 2015 is

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

Question 44

Swings in discretionary financing needed can be caused by

A)firm profitability.
B)the growth rate of sales.
C)the need to upgrade technology and physical assets from time to time.
D)all of the above.

Question 45

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2014 year-end balance sheet for Banner,Inc.Sales for 2014 were $1,600,000 and are expected to be $2,000,000 during 2015.In addition,we know that Banner plans to pay $90,000 in 2015 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,Inc.Balance Sheet
December 31,2014
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners' Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in capital)360,000
Retained earnings 270,000
Common equity 630,000
Total 1,890,000
Banner's projected retained earnings for 2015 are

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

Question 46

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2014 year-end balance sheet for Banner,Inc.Sales for 2014 were $1,600,000 and are expected to be $2,000,000 during 2015.In addition,we know that Banner plans to pay $90,000 in 2015 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,Inc.Balance Sheet
December 31,2014
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners' Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in capital)360,000
Retained earnings 270,000
Common equity 630,000
Total 1,890,000
Banner's projected accrued expenses for 2015 are

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

Question 47

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

Question 48

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 49

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

Question 50

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2014 year-end balance sheet for Banner,Inc.Sales for 2014 were $1,600,000 and are expected to be $2,000,000 during 2015.In addition,we know that Banner plans to pay $90,000 in 2015 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,Inc.Balance Sheet
December 31,2014
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners' Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in capital)360,000
Retained earnings 270,000
Common equity 630,000
Total 1,890,000
Banner's projected discretionary financing needed for 2015 is

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

Question 51

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

Question 52

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2014 year-end balance sheet for Banner,Inc.Sales for 2014 were $1,600,000 and are expected to be $2,000,000 during 2015.In addition,we know that Banner plans to pay $90,000 in 2015 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,Inc.Balance Sheet
December 31,2014
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners' Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in capital)360,000
Retained earnings 270,000
Common equity 630,000
Total 1,890,000
Banner's projected accounts payable balance for 2015 is

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

Question 53

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2014 year-end balance sheet for Banner,Inc.Sales for 2014 were $1,600,000 and are expected to be $2,000,000 during 2015.In addition,we know that Banner plans to pay $90,000 in 2015 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,Inc.Balance Sheet
December 31,2014
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners' Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in capital)360,000
Retained earnings 270,000
Common equity 630,000
Total 1,890,000
Banner's projected fixed assets for 2015 are

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

Question 54

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

Question 55

Which of the following is a spontaneous source of financing?

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

Question 56

An exceptionally high growth rate in sales will typically

A)initially increase the firm's need for discretionary financing.
B)generate enough cash flow to cover asset expansion.
C)allow the firm to increase its dividend in anticipation of higher cash flows.
D)allow the firm to finance expansion with spontaneous sources of financing.

Question 57

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 58

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 59

Use the following information and the percent-of-sales method to answer the following question(s).
Below is the 2014 year-end balance sheet for Banner,Inc.Sales for 2014 were $1,600,000 and are expected to be $2,000,000 during 2015.In addition,we know that Banner plans to pay $90,000 in 2015 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,Inc.Balance Sheet
December 31,2014
Assets
Current assets $890,000
Net fixed assets 1,000,000
Total $1,890,000
Liabilities and Owners' Equity
Accounts payable $160,000
Accrued expenses 100,000
Notes payable 700,000
Long-term debt 300,000
Total liabilities 1,260,000
Common stock (plus paid-in capital)360,000
Retained earnings 270,000
Common equity 630,000
Total 1,890,000
Banner's projected current assets for 2015 are

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

Question 60

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 61

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

Question 62

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

Question 63

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 64

Asset purchases frequently precede a rapid increase in sales and require increased discretionary financing.

Question 65

Long-term financial plans must include capital expenditures.

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:
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
Common stock 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.

Question 67

The balance sheet of the Jackson Company is presented below:
Jackson Company Balance Sheet
March 31,2014
(Millions of Dollars)
Current assets $12 Accounts payable $6
Fixed assets 18 Long-term debt 12
Total $30 Common equity 12
Total $30
For the year ending March 31,2014,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 31,2015 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 68

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

Question 69

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 70

Au Courant Bakery is a new firm specializing in gluten free pastry products.In attempting to determine what the financial position of the firm should be,the financial manager obtained the following average data for the baking industry for 2014.All data is expressed as a percentage of sales.
Fill in the dollar amounts on Au Courant's pro forma balance sheet assuming 2015 sales are $450,000.
Au Courant Bakery
Pro Forma Balance Sheet
December 31,2015
Cash,2.22% Accounts payable,6.67%
Accounts receivable,2.78% Long-term debt,6.67%
Inventory,3%
Total current assets ? Common equity,?
Fixed assets ? Total liabilities and equity,?
Total assets,33%

Question 71

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

Question 72

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

Question 73

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

Question 74

What is meant by spontaneous financing?

Question 75

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

Question 76

What is meant by discretionary financing?

Question 77

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

Question 78

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

Question 79

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

Question 80

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