Deck 18: Financial Forecasting and Planning

Question 1

Long-term financial plans typically encompass

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

Answer 1

B

Question 2

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

A)A forecast of sales revenue
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

Answer 2

A

Question 3

There are two significant benefits to the firm from developing long-term and short-term financial plans.What are they?

Answer 3

First, the firm has a base plan that is consistent with the firm's long-term goals and strategy.In other words, by preparing a plan the firm's management can align their day-to-day activities to support the overriding goals and objectives set by the firm's top executives.Second, as former US President Eisenhower pointed out so succinctly many years ago, it is the planning process as much as-or more than-the actual plan that helps the firm prepare for an uncertain future.

Question 4

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 5

Long-term financial planning results in

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

Question 6

The 'percentage' used in the percentage-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 judgement.
D)all of the above.

Question 7

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 8

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 9

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

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

Question 10

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 11

Which of the following statements about the percentage-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 12

Which of the following is the first step in forecasting a firm future financing need using a long-term financial plan?

A)Prepare pro forma financial statements
B)Estimate the firm's financial needs
C)Construct a sales forecast
D)Any of these can be done first

Question 13

A typical corporate planning process will encompass

A)a short-term financial plan.
B)a long-term financial plan.
C)a strategic plan.
D)all of the above.

Question 14

Short-term financial planning results in

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

Question 15

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 16

Mitchell Wright Group expects to generate sales of $5,950,000 for fiscal 2018; sales were $3,450,000 in fiscal 2017.Assume the following figures for the fiscal year ending 2017: 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 percentage-of-sales method to forecast cash for the fiscal year ending 2018.

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

Question 17

The percentage-of-sales method can be used to forecast

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

Question 18

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

Question 19

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

Question 20

Short-term financial plans span a period of

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

Question 21

The percentage-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 22

Accounts payable and accrued expenses are often referred to as

A)forecast expenses.
B)structured sources of financing.
C)spontaneous sources of financing.
D)discretionary sources of financing.

Question 23

According to the text, the key ingredient in the financial-planning process is the

A)pro forma.
B)marketing team.
C)balance sheet.
D)sales forecast.

Question 24

[blank] = Dividends/Net profit

A)Projected sources of financing
B)Projected discretionary financing
C)Pro forma total assets
D)Dividend payout ratios

Question 25

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 payout ratio
B)The profit margin
C)The accounts receivable average collection period
D)The expected growth rate in sales

Question 26

Mitchell Wright Group expects to generate sales of $5,950,000 for fiscal 2019; sales were $3,450,000 in fiscal 2018.Assume the following figures for the fiscal year ending 2018: 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 percentage-of-sales method to forecast accounts payable for the fiscal year ending 2019.

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

Question 27

In 2018, Mango Corporation had net income of $5 million on sales of $50 million.The 2018 balance sheet showed current liabilities of $12 million, long-term debt of $18 million and equity of $45 million.The sales forecast for 2017 is $54 million.If Mango pays no dividends, what is the forecasted increase or decrease in equity at the end of 2019?

A)$49.5 million
B)$ 4.5 million
C)$5.4 million
D)$(5.4)million

Question 28

Discretionary financing needs imply

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 29

Assume that ABC Co.has sales of $10 million and inventory of $2 million.The corporation utilizes the percentage-of-sales method of financial forecasting.If ABC 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 30

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 31

Assume that Mittinger Tool & Die has sales of $25 million and current assets of $5 million.The corporation utilizes the percentage-of-sales method of financial forecasting.If Mittinger 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 32

Which of the following is considered a discretionary source of financing?

A)Notes payable
B)Long-term debt
C)Ordinary shares
D)All of these are correct

Question 33

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 34

A discretionary form of financing would be

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

Question 35

An increase in projected [blank] will increase discretionary funds needed.

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

Question 36

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 37

Assume that Wen-Group has sales of $7.5 million and accounts payable of $450,000.The corporation utilizes the percentage-of-sales method of financial forecasting.If Wen-Group 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 38

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 39

Assume that Gerber and Sons has sales of $83 million and fixed assets of $22.4 million in 2018.The corporation utilizes the percentage-of-sales method of financial forecasting.If Gerber is expected to generate sales of $94 million in 2019, 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 40

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 41

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

Richmond's projected long-term debt for 2018 is

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

Question 42

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

Richmond's projected retained earnings for 2018 are

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

Question 43

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

Richmond's projected accrued expenses for 2018 are

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

Question 44

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

Question 45

Queen City Winery projects that it will need $50 million in total assets to meet the sales projection of $65 million.The pro forma balance sheet shows accounts payable of $8 million, accrued expenses of $2 million, long-term debt of $10 million and equity of $25 million.If Queen City decides to meet discretionary financing needs with 5 year notes payable, how much will it need to borrow?

A)$10 million
B)$0, the firm will have excess funds
C)$5 million
D)Cannot be calculated without knowing the net profit margin

Question 46

Long-term financial plans must include capital expenditures.

Question 47

Discretionary financing needed is equal to total financing needed or pro forma total assets, less projected sources of financing.

Question 48

King County Enterprises projects that it will need $100 million in total assets to meet the sales projection of $130 million.The pro forma balance sheet shows accounts payable of $16 million, accrued expenses of $4 million, long-term debt of $20 million and equity of $65 million.If King decides to meet discretionary financing needs with five-year notes payable, how much will it need to borrow?

A)$20 million
B)$0, the firm has excess funds
C)$10 million
D)Cannot be calculated without knowing the net profit margin.

Question 49

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 50

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

Richmond's projected fixed assets for 2018 are

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

Question 51

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 52

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

Richmond's projected current assets for 2018 are

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

Question 53

Projected discretionary financing = Notes payable + Long-term debt + Equity

Question 54

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

Question 55

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

Richmond's projected discretionary financing needed for 2018 is

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

Question 56

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 57

Projected sources of financing are the sum of total liabilities plus total equity.

Question 58

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

Question 59

Use the following information and the percentage-of-sales method to answer the following question(s).
Below is the 2017 year-end balance sheet for Richmond Enterprises.Sales for 2017 were $1 600,000 and are expected to be $2 000,000 during 2018.In addition, we know that Banner plans to pay $90,000 in 2018 dividends and expects projected net income of 4% of sales.(For consistency with the answer selections provided, round your forecast percentages to two decimals.)
Richmond Enterprises Balance Sheet
December 31, 2017

Richmond's projected accounts payable balance for 2018 is

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

Question 60

Which of the following is a spontaneous source of financing?

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

Question 61

A company collects 60% of its sales during the month of the sale, 30% one month after the sale and 10% two months after the sale.The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October and $40,000 in November.How much money is expected to be collected in October?

A)$25 000
B)$15 000
C)$35 000
D)None of the above

Question 62

Table 1
Dunder Company's projected sales for the first six months of 2017 are given below:
25% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale and the remaining 25% is collected in the second month following the sale.Cost of goods sold is 75% of sales.Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale.Total other cash expenses are $60,000/month.The company's cash balance as of February 28, 2017, will be $40,000.Excess cash will be used to retire short-term borrowing (if any).Dunder has no short-term borrowing as of February 28, 2017.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $25,000 at the beginning of each month.Round all answers to the nearest $100.
Based on the information in Table 1, what is Dunder Company's projected EBIT for March 2017?

A)($10,000)
B)($30,000)
C)$70,000
D)None of the above

Question 63

What is meant by spontaneous financing?

Question 64

Table 1
Dunder Company's projected sales for the first six months of 2017 are given below:
25% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale and the remaining 25% is collected in the second month following the sale.Cost of goods sold is 75% of sales.Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale.Total other cash expenses are $60,000/month.The company's cash balance as of February 28, 2017, will be $40,000.Excess cash will be used to retire short-term borrowing (if any).Dunder has no short-term borrowing as of February 28, 2017.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $25,000 at the beginning of each month.Round all answers to the nearest $100.
Based on the information in Table 1, what is Dunder Company's total disbursement in May (not including interest on short-term borrowing)?

A)$300,000
B)$240,000
C)$25,900
D)($60,000)

Question 65

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

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

Question 66

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

Question 67

Sprinkles Cupcakes is a new firm specializing in gluten-free cupcakes.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 2017.All data are expressed as a percentage of sales.
Fill in the dollar amounts on Sprinkle's pro forma balance sheet assuming 2015 sales are $450,000.
Sprinkle's Cupcakes
Pro Forma Balance Sheet
December 31, 2017

Question 68

The function of a budget includes to

A)indicate the amount and time of future financing needs.
B)provide a basis for corrective action.
C)provide information for performance evaluations.
D)all of the above.

Question 69

The balance sheet of the James Group is presented below:
James Group Balance Sheet
March 31, 2017
(Millions of Dollars)
For the year ending March 31, 2017, James 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, 2018, 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 70

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 71

Table 1
Dunder Company's projected sales for the first six months of 2017 are given below:
25% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale and the remaining 25% is collected in the second month following the sale.Cost of goods sold is 75% of sales.Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale.Total other cash expenses are $60,000/month.The company's cash balance as of February 28, 2017, will be $40,000.Excess cash will be used to retire short-term borrowing (if any).Dunder has no short-term borrowing as of February 28, 2017.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $25,000 at the beginning of each month.Round all answers to the nearest $100.
Based on the information in Table 1, what is Dunder Company's ending cash balance (before borrowing)in March?

A)$10,000
B)$25,000
C)$20,000
D)($30,000)

Question 72

Table 1
Dunder Company's projected sales for the first six months of 2017 are given below:
25% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale and the remaining 25% is collected in the second month following the sale.Cost of goods sold is 75% of sales.Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale.Total other cash expenses are $60,000/month.The company's cash balance as of February 28, 2017, will be $40,000.Excess cash will be used to retire short-term borrowing (if any).Dunder has no short-term borrowing as of February 28, 2017.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $25,000 at the beginning of each month.Round all answers to the nearest $100.
Based on the information in Table 1, what is Dunder Company's projected cumulative short-term borrowing as of April 30, 2017?

A)$15,000
B)$60,000
C)$35,150
D)$75,000

Question 73

The [blank] is a tool for predicting the amount and timing of the firm's future financing requirements.

A)long-term financial plan
B)short-term financial plan
C)cash budget
D)strategic plan

Question 74

Table 1
Dunder Company's projected sales for the first six months of 2017 are given below:
25% of sales is collected in cash at the time of the sale, 50% is collected in the month following the sale and the remaining 25% is collected in the second month following the sale.Cost of goods sold is 75% of sales.Purchases are made in the month prior to the sale, and payments for purchases are made in the month of the sale.Total other cash expenses are $60,000/month.The company's cash balance as of February 28, 2017, will be $40,000.Excess cash will be used to retire short-term borrowing (if any).Dunder has no short-term borrowing as of February 28, 2017.Assume that the interest rate on short-term borrowing is 1% per month.The company must have a minimum cash balance of $25,000 at the beginning of each month.Round all answers to the nearest $100.
Based on the information in Table 1, what are Dunder Company's total cash receipts (collections)for April 2017?

A)$400,000
B)$300,000
C)$100,000
D)($60,000)

Question 75

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

Question 76

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.

Question 77

What is meant by discretionary financing?

Question 78

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 79

O'Connor Inc.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:
O'Connor Inc.Balance Sheet
Prepare a pro forma balance sheet for O'Connor for next year using the percentage-of-sales method and the information provided above.

Question 80

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