Question 1

When we use the AFN formula to forecast the additional funds needed, we are implicitly assuming that all financial ratios are constant. This means, for example, that if you plotted a graph of inventories versus sales, the regression line would be linear and would have a positive (non zero) Y-intercept.

Accepted Answer

A) True 
 B)False

Question 2

Other things being equal, firms pursuing which type of working capital strategy will need what type of long-term external financing?

Accepted Answer

A)   aggressive, less
B)   conservation, less
C)   moderate, less
D)   aggressive, moreE) A) and B)
F) A) and C)

Question 3

ABC Co. is planning its operations for next year, and Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN) . Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions. Last year's sales = S0
$350
Last year's accounts payable
$40
Sales growth rate = g
30%
Last year's notes payable (to bank) 
$50
Last year's total assets = A0
$500
Last year's accruals
$30
Last year's profit margin = M
5%
Target payout ratio
60%

Accepted Answer

A)   $102.8
B)   $108.2
C)   $113.9
D)   $119.9E) A) and B)
F) C) and D)

Question 4

Last year Emery Industries had $450 million of sales and $225 million of fixed assets, so its FA/Sales ratio was 50%. However, its fixed assets were used at only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions)  would it have generated?

Accepted Answer

A)   $74.81
B)   $78.75
C)   $82.69
D)   $86.82E) A) and B)
F) A) and C)

Question 5

High performance companies are likely to place more emphasis on forecasting, planning, and business strategy than on cost management and cost accounting.

Accepted Answer

A) True 
 B)False

Question 6

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following best defines the term "spontaneously generated funds"?

Accepted Answer

A)   the amount of assets required per dollar of sales
B)   a forecasting approach in which the forecasted percentage of sales for each item is held constant
C)   funds that a firm must raise externally through borrowing or by selling new common or preferred stock
D)   funds that are obtained automatically from normal operations, which include spontaneous increases in accounts payable and accruals, plus additions to retained earningsE) B) and D)
F) B) and C)

Question 8

Which of the following statements is correct?

Accepted Answer

A)   Since accounts payable and accrued liabilities must eventually be paid off, as these accounts increase, AFN as calculated by the AFN equation must also increase.
B)   Suppose a firm is operating its fixed assets at below 100% of capacity, but it has no excess current assets. Based on the AFN equation, its AFN will be larger than if it had been operating with excess capacity in both fixed and current assets.
C)   If a firm retains all of its earnings, then it cannot require any additional funds to support sales growth.
D)   Additional funds needed (AFN)  are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are nonspontaneous in the sense that they require explicit financing decisions to obtain them.E) A) and B)
F) All of the above

Question 9

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is NOT one of the steps taken in the financial planning process?

Accepted Answer

A)   Forecast financial statements and use these projections to analyze the likely effects of the operating plan on profits and various financial ratios.
B)   Forecast the funds that will be needed to support the 5-year plan.
C)   Develop a cash budget for use in determining when funds will be needed or when surplus funds will be available for investment.
D)   Consult with key competitors about the optimal set of prices to charge, i.e., the prices that will maximize profits for our firm and its competitors.E) B) and C)
F) A) and C)

Question 11

Pro forma financial statements are used primarily to assess a firm's historical performance.

Accepted Answer

A) True 
 B)False

Question 12

One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with sales.

Accepted Answer

A) True 
 B)False

Question 13

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Accepted Answer

A) True 
 B)False

Question 14

Which term best describes a relationship in which very large increases in sales require very little additional inventory?

Accepted Answer

A)   Lumpiness
B)   Curvilinear
C)   declining ratio
D)   constant ratioE) B) and D)
F) B) and C)

Question 15

Which of the following statements is correct?

Accepted Answer

A)   When we use the AFN formula, we assume that the ratios of assets and liabilities to sales (A*/S0 and L*/S0)  vary from year to year in a stable, predictable manner.
B)   Firms whose fixed assets are "lumpy" frequently have excess capacity, and this should be accounted for in the financial forecasting process.
C)   For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets.
D)   When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales growE) B) and C)
F) All of the above

Question 16

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is correct?

Accepted Answer

A)   Once a firm has defined its purpose, scope, and objectives, it must develop a strategy, or strategies, for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches.
B)   A firm's corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
C)   Operating plans provide detailed guidance, consistent with the corporate strategy, to help operating managers meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
D)   A firm's mission statement defines its lines of business and geographic area of operations.E) None of the above
F) A) and B)

Question 18

Which of the following is NOT an issue in the process of the FFS method?

Accepted Answer

A)   analyzing the interaction of all decisions of the firm
B)   projecting the consequences of decisions to avoid surprises
C)   establishing capital budgeting procedures
D)   measuring performance against the planE) A) and B)
F) A) and D)

Question 19

When a firm wants to maintain its ratios at their existing levels, if it has a positive sales growth rate of any amount, it will require some amount of external funding.

Accepted Answer

A) True 
 B)False

Question 20

Two firms with identical capital intensity ratios are generating the same amount of sales. However, Firm A is operating at full capacity, while Firm B is operating below capacity. If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.

Accepted Answer

A) True 
 B)False

Exam 5: Financial Planning and Forecasting Financial Statements

Which of the following best defines the term "spontaneously generated funds"?

Correct Answer
verified

When a firm wants to maintain its ratios at their existing levels, if it has a positive sales growth rate of any amount, it will require some amount of external funding.

Correct Answer
verified

Which of the following is NOT one of the steps taken in the financial planning process?

Correct Answer
verified

Which term best describes a relationship in which very large increases in sales require very little additional inventory?

Correct Answer
verified

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Correct Answer
verified

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Correct Answer
verified

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

Correct Answer
verified

Pro forma financial statements are used primarily to assess a firm's historical performance.

Correct Answer
verified

High performance companies are likely to place more emphasis on forecasting, planning, and business strategy than on cost management and cost accounting.

Correct Answer
verified

Correct Answer
verified

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

Correct Answer
verified

Correct Answer
verified

One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with sales.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Other things being equal, firms pursuing which type of working capital strategy will need what type of long-term external financing?

Correct Answer
verified

Which of the following is NOT an issue in the process of the FFS method?

Correct Answer
verified

Exam 5: Financial Planning and Forecasting Financial Statements

Which of the following best defines the term "spontaneously generated funds"?

Correct AnswerverifiedShow Answer

When a firm wants to maintain its ratios at their existing levels, if it has a positive sales growth rate of any amount, it will require some amount of external funding.

Correct AnswerverifiedShow Answer

Which of the following is NOT one of the steps taken in the financial planning process?

Correct AnswerverifiedShow Answer

Which term best describes a relationship in which very large increases in sales require very little additional inventory?

Correct AnswerverifiedShow Answer

A typical sales forecast, though concerned with future events, will usually be based on recent historical trends and events as well as on forecasts of economic prospects.

Correct AnswerverifiedShow Answer

The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.

Correct AnswerverifiedShow Answer

Pro forma financial statements are used primarily to assess a firm's historical performance.

Correct AnswerverifiedShow Answer

High performance companies are likely to place more emphasis on forecasting, planning, and business strategy than on cost management and cost accounting.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities that increase spontaneously with sales.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Other things being equal, firms pursuing which type of working capital strategy will need what type of long-term external financing?

Correct AnswerverifiedShow Answer

Which of the following is NOT an issue in the process of the FFS method?

Correct AnswerverifiedShow Answer

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