Financial Management (Chapter 17: Financial Forecasting

and Planning) 11) Pro forma financial statements are a required part of the

17.1   An Overview of Financial Planning
1) 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.
2) 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.
3) 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.
4) 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.
5) 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.
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.
7) 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.
firm's tax returns.
Answer:  FALSE
12) One purpose of long-term financial plans is to estimate
the firm's future capital spending and financing needs.
Answer:  FALSE
13) Cash budgets usually include details such as the timing
of materials purchases, interest payments, and the like.
Answer:  TRUE
14) One disadvantage of long-term plans is a loss of
flexibility in responding to unexpected events.
Answer:  FALSE
15) Long-term financial plans require that the firm have well-
defined goals and objectives.
Answer:  TRUE
16) Discuss the basic functions that budgets perform for a
firm.
Answer:  The budget is a short-term financial plan. It
forecasts in detail sales, payments for variable and fixed
costs, and other required payments such as interest,
dividends, and taxes. One of the budgets most important
functions is anticipating financing needs so that
arrangements can be made well in advance. It is also a good
instrument for monitoring performance and making
adjustments as the budgeting period unfolds.
17) What are the key questions that a strategic plan attempts
to answer? How does it relate to financial plans?
Answer:  The strategic plan asks such fundamental
questions as: "Who are we and what do we do?" "Who are
our customers?" "Who are our competitors and how do we
compete?" The strategic plan provides the broader context
for short and long-term financial plans.
18) Why is financial planning important in a highly uncertain
financial environment.
Answer:  Even when conditions are changing rapidly and in
ways that are difficult to foresee, the process of financial
planning forces managers to think carefully about the future.
As a result, they will be better prepared to respond to
contingencies even if they eventually turn out to be quite
different from what was anticipated.

8) Typical steps in the financial planning process include

A) preparing a sales forecast. 17.2   Developing a Long-Term Financial Plan
B) analyzing cost data.
C) estimating tax expense. 1) What is the most important ingredient in developing a
D) all of the above. firm's financial plan?
A) A forecast of sales revenues
9) The financial planning process is the responsibility of B) Determining the amount of dividends to pay shareholders
A) financial analysts. C) Projecting the rate of interest on proposed new debt
B) operations staff. D) Deciding upon which method of depreciation a firm
C) marketing staff should utilize
D) financial analysts, marketing staff, and operations staff
interacting as a group. 2) The percent-of-sales method can be used to forecast
A) expenses.
10) The key ingredient in a firm's financial planning is the B) assets.
sales forecast. C) liabilities.
Answer:  TRUE D) all of the above.

3) 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
4) 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.
5) 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.
6) 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.
7) 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.
8) 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
9) 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
10) 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.
11) 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.
12) 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
13) 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
14) 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
15) 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
16) 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
17) 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
18) 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.
19) 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.
20) 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.
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
22) A discretionary form of financing would be
A) notes payable.
B) accounts payable.
C) accrued expenses.
D) none of the above.
23) An increase in projected ________ will increase
discretionary funds needed.
A) cash dividends
B) sales
C) retained earnings
D) both A and B
24) 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.
25) 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.
26) 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
27) 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
28) 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)
29) 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
30) 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
31) Which of the following is a spontaneous source of
financing?
A) Accrued expenses
B) Notes payable
C) Common stock
D) Paid-in capital
32) Swings in discretionary financing needed can be caused 38) Banner's projected long-term debt for 2015 is
by A) $700,000.
A) firm profitability. B) $880,000.
B) the growth rate of sales. C) $380,000.
C) the need to upgrade technology and physical assets from D) $300,000.
time to time.
D) all of the above. 39) Banner's projected retained earnings for 2015 are
A) $260,000.
33) Which of the following will reduce the firm's financing B) $280,000.
requirements? C) $340,000.
A) The firm operates at full capacity D) $350,000.
B) The firm has excess capacity
C) The firm expects rapid growth in sales 40) Banner's projected discretionary financing needed for
D) The firm increases its dividend payout ratio 2015 is
A) $420,000.
B) $440,000.
Use the following information and the percent-of-sales C) $360,000.
method to answer the following question(s). D) $370,000.

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
34) Banner's projected current assets for 2015 are
A) $1,000,000.
B) $1,120,000.
C) $1,500,000.
D) $1,260,000.
35) Banner's projected fixed assets for 2015 are
A) $1,120,000.
B) $1,260,000.
C) $1,000,000.
D) $2,380,000.
41) The projected change in retained earnings equals
projected net income less any dividends to be paid.
Answer:  TRUE
42) The initiation of a major advertising campaign would be
an example of an event that would affect past trends in sales
when projecting statements.
Answer:  TRUE
43) The percentages used in the percent-of-sales method
comes from pro forma financial statements.
Answer:  FALSE
44) The percent-of-sales method is a commonly used
method for estimating a firm's financing needs.
Answer:  TRUE
45) Long-term financial plans must include capital
expenditures.
Answer:  TRUE
46) Asset purchases frequently precede a rapid increase in
sales and require increased discretionary financing.
47) Holding all other variables constant, as the dividend
payout ratio decreases, the sustainable growth rate
increases.
Answer:  TRUE
48) Pro forma statements provide single point estimates of
each budgeted item.
Answer:  TRUE
49) Pro forma statements are important since they formally
report the performance of the firm during a previous
reporting period.
Answer:  FALSE

36) Banner's projected accounts payable balance for 2015 is 50) When forecasting statements, assets always increase
A) $160,000. proportionately to sales regardless of capacity.
B) $120,000. Answer:  FALSE
C) $200,000.
D) $300,000. 51) The most commonly used method for making financial
forecasts is the percent-of-sales method.
37) Banner's projected accrued expenses for 2015 are Answer:  TRUE
A) $120,000.
B) $160,000. 52) It is common practice to develop optimistic and
C) $100,000. pessimistic scenarios when projecting financial statements.
D) $200,000. Answer:  TRUE
53) Discretionary sources of financing are those sources that assets and accounts payable vary as a percent of sales, and
vary automatically with a firm's level of sales. fixed assets remain at the present level. Use notes payable
Answer:  FALSE as a source of discretionary financing.

54) When fixed expenses increase relative to sales, it Answer:

indicates that there is not enough productive capacity to                                                               Jackson Company
absorb an increase in sales.                                                         Pro Forma Balance
Answer:  TRUE Sheet
                                                                 March 31, 2015
55) If the firm's current fixed assets are sufficient to support                                                              (Millions of dollars)
the projected level of new sales, then these assets would be                                 Current assets $15.4        Accounts
projected to remain unchanged for the forecast period. payable     $7.7
Answer:  TRUE                                 Fixed assets        18.0        Notes
payable               1.7
                                Total                   $33.4        Long-term
56) Because accounts payable and accrued expenses debt          12.0
increase with sales, they represent sources of spontaneous                                                                                 Common
financing. equity         12.0
Answer:  TRUE                                                                                
Total                            $33.4
57) What is meant by spontaneous financing?

Answer:  Certain types of financing typically increase

"spontaneously" with sales and are "free" in the sense that 60) Au Courant Bakery is a new firm specializing in gluten
no interest expense is incurred. Examples: Inventory free pastry products. In attempting to determine what the
typically increases with sales and accounts payable increase financial position of the firm should be, the financial manager
with inventory. Accounts payable are interest-free loans obtained the following average data for the baking industry
provided by the firm's vendors to finance inventory for 2014.  All data is expressed as a percentage of sales.
purchases. Also, as sales increase, we would expect payroll,
and therefore accrued salaries and wages payable to Fill in the dollar amounts on Au Courant's pro forma balance
increase. Accrued wages and salaries are interest-free loans sheet assuming 2015 sales are $450,000.
from employees to their employers.
                                                   Au Courant Bakery
58) What is meant by discretionary financing?                                               Pro Forma Balance Sheet
                                                    December 31, 2015
Answer:  Discretionary financing could be any type of short-                  Cash, 2.22%                                       Accounts
term or long-term loan whether it be a line of credit from a payable, 6.67%
bank to finance working capital needs or a major bond issue.                  Accounts receivable, 2.78%           Long-term
The major point is that the firm must initiate a formal debt, 6.67%
borrowing process, subject itself to a credit review, and incur                  Inventory, 3%
a cost in the form of interest. Discretionary financing could                  Total current assets ?                      Common
also take the form of issuing new preferred or common equity, ?
stock. Again, a cost is incurred in the form of return to the                  Fixed assets ?                                     Total
stockholders. liabilities and equity, ?
                 Total assets, 33%

59) The balance sheet of the Jackson Company is presented Answer:

below:                                                            Au Courant Bakery
                                                     Pro Forma Balance Sheet
                                                 Jackson Company Balance                                                            December 31, 2015
Sheet                 Cash                                 $9,900        Current debt
                                                                 March 31, 2014 $30,000
                                                             (Millions of Dollars)                 Accounts receivable     12,510        Long-term
                                Current assets     $12        Accounts debt      30,000
payable         $6                 Inventory                         13,500       
                                Fixed assets            18        Long-term                 Total current assets  $35,910        Common
debt              12 equity    90,000
                                Total                       $30        Common                 Fixed assets                  114,090        Total
equity            12 liabilities
                                                                                Total                 Total assets                $150,000        and equity
$30 $150,000

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
61) 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.
Answer:  DFN = $4.2m + $4.5m - $6.1m - $.58m - $1.26m = $.76m
                                       Amalgamated Enterprises
                                        Pro Forma Balance Sheet
                                                Projected
                                                Present                Percent
Based on
                                                Level                    of Sales
of
                                                (Mil)                     Sales
$10 Mil
Current assets                        $2                        .375
$3.75
Fixed assets                            12                      1.500
15.00
Total assets                          $15
$18.75
Accounts payable                 $4                          .50
$5.00
Accrued expenses                $1                        .125
1.25
Long-term debt                        3                             a.
4.02d.
Common stock                        2                             a.
3.00b.
Retained earnings                  5                             a.
5.48c.
Total liabilities
and net worth                     $15
$18.75
Notes
a. Not applicable. These accounts are assumed not to vary
directly with sales.
b. The company issued $1 million in new common stock.
c. The increase in retained earnings is equal to net profit
minus dividends paid. Increase in retained earnings = (.08)
($1M)(1 - .40) = $.48M
d. The long-term debt on the projected balance sheet is
equal to total assets minus accounts payable, accrued
expenses, common stock, and retained earnings. Long-term
debt = $18.75M = $5.0M + $1.25M + $3.0M + $5.48M =
$4.02M
62) 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?
Answer:  
a. Projected Financing Needs = Projected Total Assets =
Projected Current Assets + Projected Fixed Assets =
($3m/$10m) × $14m + $4m + $.5m = $8.7m
b. DFN = Projected Current Assets + Projected Fixed Assets
- Present LTD - Present Owner's Equity - [Projected Net
Income - Dividends] - Spontaneous Financing = ($3m/$10m)
× $14m + $4.5m - $1.1m - $5m - [.07 × $14m - $.4m] -
($.9m/$10m) × $14m
17.3   Developing a Short-Term Financial Plan
1) 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.
2) 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
3) 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.
4) 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.
5) Which of the following is always a non-cash expense?
A) Income taxes
B) Salaries
C) Depreciation
D) None of the above
6) 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
7) 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.
                                                                  Tabl
e1
Dorian Industries' projected sales for the first six months of
2014 are given below:
Jan.         $200,000               April      $400,000
Feb.        $240,000               May       $320,000
March   $280,000               June       $320,000
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, 2004 will be $40,000. Excess
cash will be used to retire short-term borrowing (if any).
Dorian has no short-term borrowing as of February 28, 2014.
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.
8) Based on the information in Table 1, what are Dorian
Industries' total cash receipts (collections) for April 2014?
A) $400,000
B) $300,000
C) $100,000
D) ($60,000)
9) Based on the information in Table 1, what is Dorian
Industries' total disbursement in May (not including interest
on short-term borrowing)?
A) $300,000
B) $240,000
C) $25,900
D) ($60,000)
10) Based on the information in Table 1, what is Dorian
Industries' ending cash balance (before borrowing) in
March?
A) $10,000
B) $25,000
C) $20,000
D) ($30,000)
11) Based on the information in Table 1, what is Dorian's
projected cumulative short-term borrowing as of April 30,
2014?
A) $15,000
B) $60,000
C) $35,150
D) $75,000
12) Based on the information in Table 1, what is Dorian's
projected EBIT for March 2014?
A) ($10,000)
B) ($30,000)
C) $70,000
D) None of the above
                                                                     Table 2
Fielding Wilderness Outfitters had projected its sales for the
first six months of 20 14 to be as follows:
Jan.        $50,000                 April      $180,000
Feb.        $60,000                 May       $240,000
March   $100,000               June       $240,000
Cost of goods sold is 60% of sales. Purchases are made
and paid for two months prior to the sale. 40% of sales are
collected in the month of the sale, 40% are collected in the
month following the sale, and the remaining 20% in the
second month following the sale. Total other cash expenses
are $40,000/month. The company's cash balance as of
March 1, 2014 is projected to be $40,000, and the company
wants to maintain a minimum cash balance of $15,000.
Excess cash will be used to retire short-term borrowing (if
any exists). Fielding has no short-term borrowing as of
March 1, 2014. Assume that the interest rate on short-term
borrowing is 1% per month.
13) Based on the information contained in Table 2, what are
Fielding's projected total receipts (collections) for April?
A) $124,000
B) $180,000
C) ($4,000)
D) $36,000
14) Based on the information in Table 2, what was Fielding's
projected loss for March?
A) $184,000
B) $110,000
C) $84,000
D) None of the above
15) Based on the information in Table 2, how much short-
term financing is needed by March 30, 2014?
A) $110,000
B) $15,000
C) $70,000
D) $85,000
16) Miller Metalworks had sales in November of $60,000, in
December of $40,000, and in January of $80,000. Miller
collects 40% of sales in the month of the sale and 60% one
month after the sale. Calculate Miller's cash receipts for
January.
A) $44,000
B) $56,000
C) $64,000
D) $72,000
                                                                  Table 3
Thompson Manufacturing Supplies' projected sales for the
first six months of 2014 are given below.
Jan.         $250,000               April      $400,000
Feb.        $300,000               May       $450,000
March   $400,000               June       $400,000
40% of sales is collected in the month of the sale, 50% is
collected in the month following the sale, and 10% is written
off as uncollectible. Cost of goods sold is 70% of sales.
Purchases are made the month prior to the sale and are paid
during the month the purchases are made (i.e. goods sold in
March are bought and paid for in February). Total other cash
expenses are $50,000/month. The company's cash balance
as of February 1, 2014 will be $40,000. Excess cash will be
used to retire short-term borrowing (if any). Thompson has
no short-term borrowing as of February 28, 2014. 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.
17) Based on the information in Table 3, what are
Thompson's projected total receipts (collections) for March?
A) $400,000
B) $310,000
C) ($20,000)
D) $320,000
18) Based on the information in Table 3, what is Thompson's
projected cumulative borrowing as of March 1, 2014?
A) $85,000
B) $45,000
C) $70,000
D) - 0 -
19) Based on the information in Table 3, what is Thompson's
projected cash balance as of April 1, 2014?
A) $32,000
B) $4,300
C) $25,000
D) None of the above
20) The primary purpose of a cash budget is to
A) determine the level of investment in current and fixed
assets.
B) determine accounts payable.
C) provide a detailed plan of future cash flows.
D) determine the estimated income tax for the year.
21) Your firm is trying to determine its cash disbursements
for the next two months (June and July). In any month, the
firm makes purchases of 60% of that month's sales, which
are paid the following month. In addition, the firm incurs the
following costs every month and pays for them in the month
the expenses are incurred: wages/salaries of $10,000, rent
of $4,000, and miscellaneous cash expenses of $1,000.
Depreciation amortized on a monthly basis is $2,000. June's
sales are expected to be $100,000, and July's sales are
expected to be $150,000. Cash disbursements for the month
of July are expected to be
A) $105,000.
B) $107,000.
C) $77,000.
D) $75,000.
22) As of December 31, Budget, Inc. had a cash balance of
$50,000. December sales were $150,000 and are expected
to be $100,000 in January. 20% of sales in any month are
cash sales, and 80% of sales are collected during the
following month. In January, Budget is expected to have total
cash disbursements of $120,000, and Budget requires a
minimum cash balance of $50,000. Budget's expected cash
receipts for January are
A) $80,000.
B) $100,000.
C) $110,000.
D) $140,000.
23) Which of the following is NOT an element of the cash
budget?
A) Cash receipts
B) Cash disbursements
C) Depreciation expense
D) New financing needed
24) Which of the following will decrease cumulative
borrowing on the cash budget?
A) A decrease in interest expense
B) A decrease in collections
C) An increase in equipment purchases
D) Both A and B
25) Home to House Distributors is preparing a cash budget.
The initial conclusion is that the firm will need to borrow
more money than its bank is willing to lend. Which of the
following actions could Home to House Distributors perform
to reduce its need for bank financing this year?
A) Pay cash for purchasing inventory instead of having to
rely on trade credit
B) Prepay next year's quarterly income tax payments
C) Try to collect the firm's accounts receivable faster
D) Purchase larger quantities of inventory to take advantage
of trade discounts
26) Which of the following expenses should be included as a
cash outlay in the preparation of a cash budget?
A) The payment of accounts payable
B) The payment of depreciation expense
C) The payment of accrued income taxes
D) All of the above
27) The preparation of a cash budget serves which of the
following purposes?
A) To estimate the amount and timing of cash flows that are
needed in order to optimize the price of the firm's common
stock
B) To calculate the amount of future cash flows that would
be needed in order to achieve the optimal level of financing
during the forecast period
C) To determine the amount and timing of short-term
financing that would be required for the operation of a
business during the forecast period
D) To estimate the amount of sales volume that would be
required in order to achieve the break-even point
28) The timing of collections from sales made in past months
is an important consideration for cash budgeting.
Answer:  TRUE
29) Depreciation expense is a deduction from cash flow in
the cash budget.
Answer:  FALSE
30) The percent-of-sales method is more detailed than the
cash budget method.
Answer:  FALSE
31) Depreciation expense is always included in the cash
budget as it reflects the impact of fixed asset purchases.
Answer:  FALSE
32) The cash budget can be used to provide an estimate of
the firm's future financing needs.
Answer:  TRUE

33) The cash budget ignores discretionary financing.
Answer:  FALSE
34) A budget is a forecast of future events.
Answer:  TRUE
35) Broad Cloth, Inc.'s average collection period is 15 days.
The vice-president of marketing has projected credit sales of
$2. million for October, $2.5 million for November and $3
million for December. Compute cash collections for
November and December. Assume that all months have 30
days.
Sales                                                             $261,900
Less: cost of goods sold                            145,800
Gross profits                                              $116,100
Less:
Depreciation expense                                  $8,775
Wages and salaries                                      22,275
Other expenses                                                4,050
Net operating income                               $81,000
Less: interest expense                                  15,000
Earnings before taxes                                $66,000
Less: income taxes                                       17,415
Net income                                                   $48,585

Answer:  38) The treasurer for Brookdale Clothing must decide how
November collections = last 50% of October + first 50% of much money the company needs to borrow in July. The
November = .5(2,000,000) + .5(2,500,000) = $2,250,000. balance sheet for June 30, 2014 is presented below:
December collections = last 50% of November + first 50% of
December = .5(2,500,000) + .5(3,000,000) = $2,750,000.                                                Brookdale Clothing Balance
Sheet
36) Broad Cloth, Inc.'s average collection period is 15 days.                                                                    June 30, 2014
The vice-president of marketing has projected credit sales of Cash                                       $75,000                Accounts
$2. million for October, $2.5 million for November and $3 payable            $400,000
million for December. Purchases equal 60% of sales and are Marketable securities        100,000                Long-term debt
made one month in advance of budgeted sales. Payments 300,000
are made 1 month after the date of purchase. Compute Accounts receivable           300,000                Common stock
payments for purchases for the months of November and 100,000
December. Inventory                               250,000                Retained
earnings              200,000
Answer:  Total current assets            725,000                Total liabilities
October purchases = .6(2,500,000) = $1,500,000. This and
payment will be made in November. Fixed assets                          275,000                stockholder's
November purchases = .6(3,000,000) = $1,800,000. This equity     $1,000,000
payment will be made in December. Total assets                     $1,000,000

The company expects sales of $250,000 for July. The

37) The cash budget for Parker Process Meats, Inc. for the company has observed that 25% of its sales is for cash and
fourth quarter of 2014 is given below: that the remaining 75% is collected in the following month.
The company plans to purchase $400,000 of new clothing.
Parker Process Meats, Inc. Usually 40% of purchases is for cash and the remaining 60%
Cash Budget for the Three Months Ending December 31, of purchases is paid in the following month. Salaries are
2014 $100,000 per month, lease payments are $50,000 per
Cash receipts                                                      Oct. month, and depreciation charges are $20,000 per month.
Nov.               Dec. The company plans to purchase a new building for $200,000
Total collections                                         $31,050               in July and sell its marketable securities for $100,000. If the
$4,050         $49,950 company must maintain a minimum cash balance of
Cash disbursements: $50,000, how much money must the company borrow in
Purchases                                                       July?
44,550               48,600           52,650 Answer:  Brookdale Clothing
Wages and salaries                                        Cash Budget for July 2014
7,425                  7,425              7,425 Cash Inflows
Other expenses                                                Reduction in cash                                              $25,000
2,025                  1,350                 675 Sale of marketable securities                          100,000
Taxes                                         17,415 Collection of accounts receivable                  300,000
Total disbursements                                 $54,000             Cash sales (.25)($250,000)                                 62,500
$57,375         $78,165 Total cash inflows                                           $487,500
Cash Outflows
The expected sales for the period are as follows: Repayment of accounts payable                 $400,000
Oct.: $86,400 Nov.: $91,800 Dec.: $83,700 Cash purchases                                                  160,000
The total depreciation expense for the period will be $8,775. Salaries                                                                  100,000
An interest payment on outstanding debt of $15,000 will be Lease payments                                                    50,000
made in December. Purchase of building                                         200,000
Total cash outflows                                         $910,000
Using the information given, construct a pro forma income Net inflow (outflows)                                   ($422,500)
statement for the final quarter of 2014 for Parker. The company needs to borrow                   $422,500.
Diff: 2
Answer: AACSB:  3.  Analytic thinking
                     Parker Processed Meats, Inc. Question Status:  Revised
                    Pro Forma Income Statement
        For the Quarter Ended December 31, 2014
Objective:  17.3  Prepare a cash budget and use it to
evaluate the amount and timing of a firm's short-term
financing requirements. the Baa bond would have lower default risk.
Keywords:  cash budgets
Principles:  Principle 3: Cash Flows Are the Source of Value
default risks would differ but yields would be equal.
39) The ZYX Corporation is planning to request a line of
credit from its bank and wants to estimate its cash needs for
2. A firm's degree of operating leverage (DOL) depends primarily
the month of September. The following sales forecasts have
been made for 2014: upon its

July                               $500,000 sales variability.

August                         $400,000
September                   $300,000
October                        $200,000 level of fixed operating costs.
November                   $100,000

Collection estimates were obtained from the credit collection closeness to its operating break-even point.
department as follows: 20% collected within the month of
sale; 70% collected the first month following the sale; and
10% collected the second month following the sale.
debt-to-equity ratio.
Payments for labor and raw materials are typically made in
the month in which these costs are incurred. Total labor and
raw material costs each month are 50% of sales. General 3. An EBIT-EPS indifference analysis chart is used for           
administrative expenses are $30,000 per month, lease
payments are $10,000 per month, and depreciation charges evaluating the effects of business risk on EPS.
are $20,000 per month. The corporation tax rate is 40%;
however, no corporate taxes are paid in September. Prepare
a cash budget for September. examining EPS results for alternative financing plans at
varying EBIT levels.

Answer: 
ZYX Corporation  determining the impact of a change in sales on EBIT.
Pro Forma Income Statement
September 2015
Sales                                                             $300,000 showing the changes in EPS quality over time.
Total cost of goods sold                            150,000
Gross profit                                                $150,000 4. EBIT is usually the same thing as:
Depreciation                                                  20,000
General administrative expenses            30,000 funds provided by operations.
Lease payments                                            10,000
Operating income                                      $90,000
Taxes                                                                36,000
earnings before taxes.
Net income                                                   $54,000

ZYX Corporation
Cash Budget net income.
September 2005
Cash Inflows
Collections from September sales         $60,000 operating profit.
Collections from August sales               280,000
Collections from July sales                        50,000 5. In the context of operating leverage break-even analysis, if
 Total cash inflows                                  $390,000 selling price per unit rises and all other variables remain
Cash Outflows constant, the operating break-even point in units will:
Labor and raw materials                       $150,000
General administrative expenses            30,000 fall.
Lease payments                                            10,000
Total cash outflow                                   $190,000
Net cash inflow                                        $200,000
rise.

1. If I believe in the basic principle of a risk-reward relationship,

my conclusion regarding security ratings and yields between an stay the same.
Aaa bond and a Baa bond would be that:

the Aaa bond would have the lower yield. still be indeterminate until interest and preferred
dividends paid are known.

the Aaa bond would have the higher yield. 6. If a firm has a DOL of 5 at Q units, this tell us that:
 if sales rise by 5%, EBIT will rise by 5%.

if sales rise by 1%, EBIT will rise by 1%.

if sales rise by 5%, EBIT will fall by 25%.

if sales rise by 1%, EBIT will rise by 5%.

7. This statistic can be used as a quantitative measure of relative

"financial risk."

coefficient of variation of earnings per share (CVEPS)

coefficient of variation of operating income (CVEBIT)

(CVEPS - CVEBIT)

(CVEPS + CVEBIT)

8. A firm's degree of total leverage (DTL) is equal to its degree of

operating leverage            its degree of financial leverage (DFL).

plus

minus

divided by

multiplied by

9. The further a firm operates above its operating break-even

point, the closer its degree of operating leverage (DOL) measure
approaches           

minus one.

zero.

one.

infinity.