Deck 4: Financial Planning and Forecasting

Question 1

In using the percentage of sales forecasting method the assumption is that

A) there is a direct relationship between long-term debt and sales
B) inventories will increase proportionately with sales
C) there is a direct relationship between notes payable and sales
D) retained earnings will increase proportionately with sales

Answer 1

B

Question 2

Computerized financial planning models may be classified as any of the following except:

A) deterministic
B) optimistic
C) probabilistic
D) none of the above

Answer 2

B

Question 3

Pro forma financial statements show the results of some ____ event rather than a (an) ____ event.

A) actual; assumed
B) assumed; actual
C) deterministic; probabilistic
D) none of the above

Answer 3

B

Question 4

Pro forma financial statements are used to:

A) find the contribution margin
B) show the results of some assumed event
C) predict the sensitivity of different output variables
D) show the results of an actual event

Question 5

CU Tech expects sales next year will be $4.8 million, a 25% increase over current sales. CU has total assets of $2.24 million and all assets will increase proportionately with sales. CU has $1.49 million in current liabilities and a current ratio of 1.60 to 1. What total financing will CU need to support the expected sales increase?

A) No financing needed, surplus of $139,700
B) $ 187,500
C) $ 48.800
D) $234,400

Question 6

ICU has current assets of $800,000 and net fixed assets of $1,400,000. The firm expects its sales to climb 25 percent next year from its current level of $3,500,000. ICU's only current liability is accounts payable of $1,200,000. If both current assets and current liabilities will increase proportionately with sales, what additional financing will be needed by ICU next year? Assume ICU has a net profit margin of 6 percent. An increase in net fixed assets of $500,000 will be required. The firm pays out 50 percent of its earnings as dividends.

A) $400,000
B) $358,750
C) $178,750
D) $268,750

Question 7

Which of the following is a financial model that attempts to maximize or minimize the value of a criterion function (e.g., profits, costs)?

A) static
B) dynamic
C) probabilistic
D) optimization

Question 8

In 1998, Hepler Company's sales were $26 million and its total assets were $10 million. Current liabilities were $4 million and total equity was $2 million. Hepler Company's sales for 1999 are forecasted to be $34 million, earnings after taxes are expected to be 5 percent of sales and dividends of $800,000 are expected to be paid. Assuming that the ratios "assets to sales" and "current liabilities to sales" in 1998 remain the same in 1999, determine the amount of additional financing required.

A) $1,746,154
B) $1,446,154
C) $6,946,154
D) $ 946,154

Question 9

____ financial planning models seek to maximize (or minimize) the value of some objective function, such as profits (or costs).

A) Deterministic
B) Optimization
C) Probabilistic
D) none of the above

Question 10

In the percent-of-sales forecasting method, all of the following balance sheet and income statement items are assumed to increase proportionately with sales EXCEPT:

A) dividends
B) accounts payable
C) long-term debt
D) a and c

Question 11

Cash budgeting can be employed effectively by management to

A) identify potential cash flow problems in advance
B) aid them in capital budgeting
C) control retained earnings
D) coordinate cash and deferred expenses

Question 12

The main advantage of deterministic models is that they

A) provide the user with more useful information than other models
B) allow the user to maximize some objective function
C) allow the user to perform sensitivity analyses quickly
D) allow the user to maximize or minimize some objective function

Question 13

All the following current liabilities normally vary directly with the sales except:

A) accounts payable
B) notes payable
C) accrued wages
D) accrued taxes

Question 14

In the percent-of-sales forecasting method, which of the following is (are) assumed to increase proportionately with sales?

A) cash
B) accounts receivable
C) accounts payable
D) all of the above

Question 15

The ____ is (are) used to forecast the amount of additional financing (i.e., cash) a company will need in some future period.

A) percentage of sales forecasting method
B) pro forma statement of cash flows
C) a and b
D) none of the above

Question 16

Peerless believes that its sales next year will increase 20 percent from the current level of $800,000. Management calculates that assets must increase $110,000 to support the new sales level, and current liabilities will increase $70,000. What total financing will be needed?

A) $40,000
B) $1,600
C) $33,600
D) $8,000

Question 17

The first step in cash budget preparation is the

A) estimation of credit sales
B) estimation of the expected cash disbursements
C) scheduling of disbursements
D) determination of estimated receipts

Question 18

ECG Monitors is forecasting that sales next year will be $8,640,000, a 20 percent increase over current sales. ECG has total assets of $3,840,000 and all assets will increase proportionately with sales. Of the current liabilities, only accounts payable (now $740,000) will increase with sales. What total financing will be needed by ECG to support the expected sales increase?

A) $317,600
B) $620,000
C) $465,600
D) $840,400

Question 19

The percentage of sales forecasting method is used by management to forecast the amount of

A) profit expected for a given percentage increase in sales
B) capital financing needed to promote marketing efforts
C) cash needed to finance future sales growth
D) debt financing needed

Question 20

To decrease the additional financing needed to support an increase in sales, management can

A) decrease notes payable
B) retire common stock
C) increase the dividend payout
D) cut dividends

Question 21

Calculate United's total assets if the firm expects sales to grow 15 percent this year and the earnings after tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10 percent this year. The firm will need additional financing of $25,000 to finance the expected growth. United started the year with $40,000 in accounts payable; $30,000 in notes payable; and $100,000 in long-term debt. The company is operating at full capacity.

A) $393,333
B) $590,000
C) $226,667
D) $616,000

Question 22

Which of the following is defined as the systematic allocation of the cost of an asset over more than one period?

A) Deferral
B) Expensing
C) Optimization
D) Depreciation

Question 23

Great Subs believes it can increase sales by 50% without any increase in net fixed assets. Earnings after tax are expected to be $2,000. The company pays no dividends. What additional financing will Subs need to finance this growth? Subs' balance sheet currently is as follows:

A) $3,350 surplus -- no additional financing needed
B) $1,650
C) $3,650
D) None of the above are correct.

Question 24

Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends.

A) $339,600
B) $283,200
C) No financing needed, surplus of $224,400
D) No financing needed, surplus of $524,400

Question 25

The Hudson River Line Company has a balance sheet as of the end of the year as follows:
Last year, the firm had sales of $148,750. This year the company expects sales to increase 25%, to generate earnings after tax of $16,000, and to pay a dividend of $5,000. Hudson operated its fixed assets at 85% capacity last year. What additional financing will be needed to support the sales increase?

A) $2,125
B) $4,625
C) $1,500
D) $375 surplus -- no financing needed.

Question 26

After-tax cash flow equals:

A) earnings after tax plus non-cash charges
B) net earnings plus deferred expenses
C) net earnings plus depreciation
D) earnings after tax

Question 27

Generally, which of the following non-cash charges is/are added to earnings after tax to calculate the after-tax cash flow?
I) Depreciation
II) Deferred taxes

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 28

Lullaby Lane Bedding, Inc. needs to determine the amount of growth the firm could experience without having to obtain external financing. The current sales level is $800,000, the net profit margin is 6%, and the dividend payout ratio is 40%. Assume the firm is currently operating at full capacity and all assets will increase proportionately with sales. Lane's current balance sheet follows:

A) 6.53%
B) 1.09%
C) 11.97%
D) 13.50%

Question 29

The financial statement that shows the effects of a company's operating, investing, and financing activities on its cash balance is known as the:

A) cash budget statement
B) pro forma financial statement
C) statement of cash flows
D) breakeven analysis

Question 30

Which of the following shows the effects of a company's operating, investing, and financing activities on its cash flows?

A) income statement
B) balance sheet
C) statement of cash flows
D) none of the above

Question 31

Last year Molex's net cash provided by operating activities was $14.1 million and its net cash used by investing activities was $20.7 million. If net cash provided by financing activities was $9.8 million, what was the net increase (or decrease) in cash and cash equivalents during the year? Molex started the year with $2.1 million in cash.

A) $44.6 million
B) $3.2 million
C) $25.0 million
D) $5.3 million

Question 32

Calculate United's total assets if the firm expects sales to grow by 15% this year and the earnings after tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10% this year. The firm will need additional financing of $25,000 to finance the expected growth.

A) $393,333
B) $590,000
C) $226,667
D) $616,000

Question 33

Ship-to-Shore earned $280,000 after taxes last year. Its expenses included depreciation of $55,000, interest expenses of $40,000 and deferred taxes of $20,000. The company also purchased two new fresh water fishing boats for $40,000 ($20,000) each. What is Ship-to-Shore's after-tax cash flow for last year?

A) $395,000
B) $355,000
C) $315,000
D) $280,000

Question 34

Last year Curative Technologies Inc. reported earnings after-tax of $23 million. Included in the expenses were depreciation of $3.7 million and interest expenses of $2.9 million. The year-end balance sheets shows an increase in deferred taxes of $2.6 million to a total of $14.2 million. What is Curative Technologies' after-tax cash flow for last year? Assume a marginal tax rate of 40%.

A) $20.1 million
B) $32.2 million
C) $29.3 million
D) $26.4 million

Question 35

In preparing a statement of cash flows, the ____ method involves adjusting net income to reconcile it to net cash flows from operating activities.

A) direct
B) indirect
C) accrual
D) none of the above

Question 36

Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what additional financing will be needed to support the increase in sales? Getrag does not pay dividends.

A) $339,600
B) $283,200
C) No financing needed, surplus of $224,400
D) No financing needed, surplus of $524,400

Question 37

In 20X3, the Fillmore Company's sales were $12.0 million. Its balance sheet at year end 20X3 is shown below. Fillmore's 20X4 sales are expected to be $15 million and its 20X5 sales are expected to be $18 million. Earnings after tax in both years is expected to be 5.0% of sales, and annual dividends of $250,000 are expected to be paid in both 20X4 and 20X5. The company presently has excess plant and equipment capacity. As a result, assume that the net fixed asset figure on the balance sheet will remain constant for both 20X4 and 20X5. Assuming that the ratios of assets (except fixed assets, net) to sales and accounts payable to sales in 20X3 remain the same in 20X4 and 20X5, calculate the total amount, i.e., one number, of external financing required during the 2 year period from 20X4 through 20X5, using the percentage of sales method.

A) $ 750,000
B) $ 250,000
C) $1,000,000
D) None of the above

Question 38

The Financial Accounting Standard Board (FASB) requires companies to prepare their statement of cash flows using the:

A) indirect method
B) direct method
C) reconciliation method
D) none of the above

Question 39

Scorch & Burn Fire Extinguishers, Inc. had an operating income (EBIT) of $260,00 last year. The firm had $18,000 in depreciation expenses, $15,000 in interest expenses and $60,000 in selling, general, and administrative expenses. If Scorch & Burn has a marginal tax rate of 40%, what was its after-tax cash flow for last year?

A) $165,000
B) $129,000
C) $174,000
D) $147,000

Question 40

The Danville Company is considering a $50 million expansion (capital expenditure) program next year. The company wants to determine approximately how much additional financing will be needed if the expansion program is undertaken. Next year the company expects to earn $25 million after interest and taxes. The company also plans to increase its dividends from $5 million to $7 million. If the expansion program is accepted, the company expects working capital requirements to increase by approximately $8 million next year. Long-term debt retirement obligations total $3 million next year and depreciation is expected to be $13 million. No fixed assets are expected to be sold next year.

A) $30 million
B) $43 million
C) $32 million
D) $22 million

Question 41

A good operational plan incorporates a plan for:

A) the unionization of its business.
B) a solid organizational chart with detailed job descriptions.
C) the resources a firm will need to obtain its long term objectives.
D) all of the above

Question 42

Which of the following statements is/are correct about deferred taxes?
I) Deferred taxes can occur because of geographical problems with the location of corporate headquarters.
II) Deferred taxes can occur because some companies use the straight-line depreciation method to calculate income reported to stockholders and accelerated depreciation to calculate taxable income. This practice reduces taxes owed.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 43

The first step in the preparation of a cash budget is:

A) Estimation of future spending
B) Estimation of asset value
C) Estimation of cash receipts
D) Estimation of future stock sales

Question 44

A firm's operational plan states objectives that define where the firm wants to be at the end of the planning period. These objectives must be:

A) specific.
B) flexible.
C) vague.
D) agreed upon by the union workers.

Question 45

In considering financial planning, the type of planning that focuses more on the overall direction of the business and the industry is:

A) Deterministic
B) Strategic
C) Operational
D) Probabilistic

Question 46

Short-term operational plans are generally conducted over what time frame?

A) 3 - 6 months
B) 8 - 12 months
C) 12 - 18 months
D) 2 - 5 years

Question 47

In those industries where capacity can be added only in discrete or "lumpy" increments, fixed assets are increased in a ____ manner as sales increase.

A) proportional
B) stepwise
C) direct relationship
D) discriminant

Question 48

Cash and cash equivalents include:
I) Money market accounts
II) Currency on hand.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 49

____ is the statistical technique that helps the analyst classify observations (firms) into two or more predetermined groups based on certain characteristics of the observation.

A) Deterministic analysis
B) Sensitivity analysis
C) Discriminant analysis
D) Optimization

Question 50

Dippity Doo-Dah Party Dips has revenues of $50,000, general & administrative expenses of $35,000, interest expense of $4,000 and depreciation expense of $4200. The firm is in the 38% tax bracket. What would be the firm's cash flow from operations?

A) $4216
B) $4000
C) $8416
D) $6,800

Question 51

Pro forma financial statements display the financial situation of a firm based on:

A) an actual event.
B) an assumed event.
C) a catastrophic event that recently happened to the firm.
D) the firm's worst sales year.

Question 52

Which of the following is an example of a deterministic model?

A) profit optimization model
B) budget simulator
C) probabilistic set
D) discriminant model

Question 53

Strategic planning for a firm deals with which of the following items?
I) The overall direction of the firm.
II) Marketing and production needs.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 54

The value of debt and equity securities is based upon:

A) The type of investment vehicle
B) The growth potential of the asset
C) The accounting method used for recording the asset
D) The present value of the cash flows that the securities are expected to provide.

Question 55

The category "Cash and Cash Equivalents" includes short term investments. The time frame for short-term is:

A) 30 days
B) 6 months
C) under 5 years
D) less than three months

Question 56

Using a cash budget is more useful than the percentage of sales method because:
I) It can more precisely estimate the amount of financing needed.
II) It can better estimate the time of financing need.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 57

Operational plans are generally conducted at two levels. Which length of time is considered long-term?

A) 2 years
B) 12 - 18 months
C) 5 years
D) 10 years

Question 58

Jones Company sales last year were $25 million and its total assets were $8 million. Accounts payable were $2 million and common stock and retained earnings were $5 million. Jones sales are forecasted to be $30 million this year, earnings after tax are expected to be 3% of sales, and dividends of $250,000 are expected to be paid. Assuming that the ratio of assets to sales and current liabilities to sales remain the same this year as last year, determine the amount of additional financing required.

A) $550,000
B) $1,200,000
C) $300,000
D) None of the above

Question 59

An example of an investing activity is:

A) Issuing new corporate stock
B) Paying corporate income taxes
C) Buying new computers
D) Taking out a new loan.

Question 60

The financial plan that is a "blueprint" detailing where the firm wants to be at some future point in time is the:

A) Executive Manifest
B) Strategic Plan
C) FASB Plan
D) Operational plan

Question 61

Explain the cash flow generation process:

Question 62

What information does a long-term financial plan offer?

Question 63

In developing a firm's financial plan, the firm develops a strategic plan and an operational plan. What is the difference between a strategic plan and an operational plan?

Question 64

An operational plan is necessary to determine what the firm wants to be at some future point in time. What does an operational plan consist of?

Question 65

Financial planning models have two classifications. What are they and how do they differ from each other?

Question 66

Why would a firm want to develop a cash budget since it is only a projection of cash inflows and outflows over some future period of time?

Question 67

Why would a firm experience cash flow difficulties immediately after a good sales period?