Question 1

Using the percentage of sales method,forecasted retained earnings balance is equal to

Accepted Answer

A)   prior year retained earnings plus projected net income less projected dividends.
B)   the ratio of retained earnings to sales for the current year multiplied by projected sales for next year.
C)   the retained earnings balance for the current year as no changes are made to this financing account when using the percent of sales method.
D)   the ratio of retained earnings to sales for the current year multiplied by projected sales for next year, minus dividends paid.E) B) and D)
F) A) and D)

Question 2

Discretionary financing needed will be zero when the company's sales growth rate is zero.

Accepted Answer

A) True 
 B)False

Question 3

Budgets should not be used for performance evaluation because there is too much uncertainty involved and this makes it unfair to the person being evaluated.

Accepted Answer

A) True 
 B)False

Question 4

Fixed assets are often estimated incorrectly by the percent of sales method because

Accepted Answer

A)   fixed assets remain constant and the percent of sales method assumes all assets increase proportionally with sales.
B)   fixed asset are very expensive.
C)   fixed assets are typically purchased in "lumps" and therefore do not increase proportionally with sales.
D)   fixed assets are part of the capital budgeting process.E) A) and B)
F) A) and C)

Question 5

Using the 2010 financial statements for DRE Corporation and this additional information,prepare a pro forma income statement and balance sheet for the year 2011.Determine the discretionary financing needed (DFN)and assume that if the DFN is positive,the company will increase long-term debt,and if DFN is negative,the company will pay back some long-term debt.
Sales for next year (2011)are expected to increase by $300,000 to $1,800,000.The firm is running efficiently and at full capacity so that all assets and spontaneous liabilities are expected to increase proportionally with sales.The dividend payout ratio for 2011 will be 40%.
DRE Corporation
2010 Financial Statements

Accepted Answer

The answer of Using the 2010 financial statements for DRE...

Question 6

The percent of sales method provides a general estimate,but the more detailed cash budget will ultimately be used to estimate financing needs.

Accepted Answer

A) True 
 B)False

Question 7

In what way does a cash budget provide management with better information about financing requirements than a pro forma balance sheet?

Accepted Answer

A)   A pro forma cash budget gives greater details about the depreciation of fixed assets.
B)   A pro forma cash budget not only delineates the financing that is needed but it also pinpoints in greater detail when the financing is needed.
C)   A pro forma cash budget utilizes superior methods in determining a firm's income tax liability for the planned period.
D)   A pro forma cash budget does not offer better information to management regarding financing than a pro forma balance sheet.E) A) and B)
F) A) and C)

Question 8

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 its current assets,fixed assets,accounts payable,and accrued expenses increase directly with sales.The company's net profit margin on sales is 8 percent,and the company plans to pay 40 percent of its after-tax earnings in dividends.A copy of the company's current balance sheet is given below.
Amalgamated Enterprises Balance Sheet
  Prepare a pro forma balance sheet for Amalgamated for next year.

Accepted Answer

Amalgamated Enterprises
Pro Forma Balance Sheet
  Notes:
a.Not applicable.These accounts are assumed not to vary directly with sales.
b.The company issued $1M in new common stock.
c.The increase in retained earnings is equal to net profit minus dividends paid.
Increase in retained earnings = (.08)($10M)(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

Question 9

Spontaneous sources of funds refers to all of the below except:

Accepted Answer

A)   accruals.
B)   a bank loan.
C)   accounts payable.
D)   common stock.E) A) and B)
F) A) and C)

Question 10

Other things equal,if a firm increases its dividend payout ratio,its discretionary financing needed will also increase.

Accepted Answer

A) True 
 B)False

Question 11

The percent of sales method does not accurately estimate the balances for lumpy assets.Which of the following statements best describes the possible errors?

Accepted Answer

A)   if excess capacity exists, the percent of sales method will overestimate asset requirements
B)   the percent of sales method consistently underestimates the forecasted balances of lumpy assets
C)   the percent of sales method consistently overestimates the forecasted balances of lumpy assets
D)   if fixed assets are utilized at full capacity currently, the percent of sales method will underestimate the forecasted fixed asset balanceE) B) and C)
F) A) and D)

Question 12

Using the percent of sales method and assuming that no excess capacity exists,a 20% increase in sales will result in

Accepted Answer

A)   a 20% increase in total assets.
B)   a 20% increase in total liabilities.
C)   a 20% increase in retained earnings.
D)   a 20% increase in the company's profit margin.E) A) and C)
F) B) and C) A

Question 13

Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False  False

Question 15

In the percent of sales method,a company's asset requirements are based on the company's projected sales level.

Accepted Answer

A) True 
 B)False

Question 16

JR Textiles,a highly profitable company,is considering two growth strategies,one that will achieve sales growth of 20% in one year,and the other that will achieve 20% growth in sales,but over a 4-year time frame.Assuming JR Textiles uses the percent of sales method,which of the following statements is true?

Accepted Answer

A)   Discretionary financing needed will be much greater for the 4-year growth strategy.
B)   Discretionary financing needed could be much less for the 4-year growth strategy due to retained earnings.
C)   The asset balances at the end of 4 years for strategy two will be much greater than the asset balances required at the end of year one for strategy one.
D)   Discretionary financing needed could be much greater for the slow growth strategy because interest charges will accumulate on the company's debt.E) B) and C)
F) A) and B)

Question 17

Financial forecasting is the process of attempting to estimate a firm's future financing requirements.

Accepted Answer

A) True 
 B)False

Question 18

All of the following are examples of sources of discretionary financing except:

Accepted Answer

A)   bank loans.
B)   notes payable.
C)   trade credit.
D)   common stock.E) All of the above
F) B) and D)

Question 19

ABC Corporation began operations on January 1st of this year with a cash balance of $250,000.ABC had sales of $200,000 for the month of January,all on credit.ABC allows its customers 30 days to pay.ABC's expenses for January equal $150,000,and ABC's ending balance in accounts payable at January 31st is $50,000.In its cash budget for January,ABC's ending cash balance should be equal to

Accepted Answer

A)   $300,000 because of GAAP accrual accounting rules.
B)   $150,000.
C)   $200,000.
D)   $100,000.E) B) and C)
F) A) and D)

Question 20

A budget

Accepted Answer

A)   records the amount and timing of the firm's past financing needs.
B)   provides a basis for taking corrective action in the event that budgeted figures do not match actual or realized figures.
C)   remains independent of the human resource performance evaluation task.
D)   only makes sense for annual periods of timeE) All of the above
F) A) and D)

Exam 14: Short-Term Financial Planning

Using the percentage of sales method,forecasted retained earnings balance is equal to

Correct Answer
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Discretionary financing needed will be zero when the company's sales growth rate is zero.

Correct Answer
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Budgets should not be used for performance evaluation because there is too much uncertainty involved and this makes it unfair to the person being evaluated.

Correct Answer
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Fixed assets are often estimated incorrectly by the percent of sales method because

Correct Answer
verified

Correct Answer
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The percent of sales method provides a general estimate,but the more detailed cash budget will ultimately be used to estimate financing needs.

Correct Answer
verified

In what way does a cash budget provide management with better information about financing requirements than a pro forma balance sheet?

Correct Answer
verified

Spontaneous sources of funds refers to all of the below except:

Correct Answer
verified

Other things equal,if a firm increases its dividend payout ratio,its discretionary financing needed will also increase.

Correct Answer
verified

The percent of sales method does not accurately estimate the balances for lumpy assets.Which of the following statements best describes the possible errors?

Correct Answer
verified

Using the percent of sales method and assuming that no excess capacity exists,a 20% increase in sales will result in

Correct Answer
verified
A

Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.

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

Correct Answer
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False

In the percent of sales method,a company's asset requirements are based on the company's projected sales level.

Correct Answer
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Financial forecasting is the process of attempting to estimate a firm's future financing requirements.

Correct Answer
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All of the following are examples of sources of discretionary financing except:

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A budget

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Exam 14: Short-Term Financial Planning

Using the percentage of sales method,forecasted retained earnings balance is equal to

Correct AnswerverifiedShow Answer

Discretionary financing needed will be zero when the company's sales growth rate is zero.

Correct AnswerverifiedShow Answer

Budgets should not be used for performance evaluation because there is too much uncertainty involved and this makes it unfair to the person being evaluated.

Correct AnswerverifiedShow Answer

Fixed assets are often estimated incorrectly by the percent of sales method because

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The percent of sales method provides a general estimate,but the more detailed cash budget will ultimately be used to estimate financing needs.

Correct AnswerverifiedShow Answer

In what way does a cash budget provide management with better information about financing requirements than a pro forma balance sheet?

Correct AnswerverifiedShow Answer

Spontaneous sources of funds refers to all of the below except:

Correct AnswerverifiedShow Answer

Other things equal,if a firm increases its dividend payout ratio,its discretionary financing needed will also increase.

Correct AnswerverifiedShow Answer

The percent of sales method does not accurately estimate the balances for lumpy assets.Which of the following statements best describes the possible errors?

Correct AnswerverifiedShow Answer

Using the percent of sales method and assuming that no excess capacity exists,a 20% increase in sales will result in

Correct AnswerverifiedA

Discretionary financing needed is equal to the predicted change in total assets minus the change in retained earnings.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedFalse

In the percent of sales method,a company's asset requirements are based on the company's projected sales level.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Financial forecasting is the process of attempting to estimate a firm's future financing requirements.

Correct AnswerverifiedShow Answer

All of the following are examples of sources of discretionary financing except:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A budget

Correct AnswerverifiedShow Answer

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A

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False

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