Chapter 4: Financial Planning and Forecasting: Multiple Choice

Chapter 4: FINANCIAL PLANNING AND FORECASTING
MULTIPLE CHOICE
1. In the percent-of-sales forecasting method, all of the following balance sheet and income statement
items are assumed to increase proportionately with sales EXCEPT:
a. dividends
b. accounts payable
c. long-term debt
d. a and c
ANS: D PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
LOC: Knowledge of financial analysis and cash flows
TOP: Percentage of sales forecasting method
2. In the percent-of-sales forecasting method, which of the following is (are) assumed to increase
proportionately with sales?
a. cash
b. accounts receivable
c. accounts payable
d. all of the above
3. Which of the following is a financial model that attempts to maximize or minimize the value of a
criterion function (e.g., profits, costs)?
a. static
b. dynamic
c. probabilistic
d. optimization
LOC: Finance applications in spreadsheets
TOP: Computerized Financial forecasting and planning models
4. Pro forma financial statements are used to:

a. find the contribution margin
b. show the results of some assumed event
c. predict the sensitivity of different output variables
d. show the results of an actual event
ANS: B PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
LOC: Knowledge of financial analysis and cash flows TOP: Financial forecasting
5. The percentage of sales forecasting method is used by management to forecast the amount of
a. profit expected for a given percentage increase in sales
b. capital financing needed to promote marketing efforts
c. cash needed to finance future sales growth
d. debt financing needed
ANS: C PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
6. In using the percentage of sales forecasting method the assumption is that

a. there is a direct relationship between long-term debt and sales
b. inventories will increase proportionately with sales
c. there is a direct relationship between notes payable and sales
d. retained earnings will increase proportionately with sales
7. To decrease the additional financing needed to support an increase in sales, management can
a. decrease notes payable
b. retire common stock
c. increase the dividend payout
d. cut dividends
8. Cash budgeting can be employed effectively by management to

a. identify potential cash flow problems in advance
b. aid them in capital budgeting
c. control retained earnings
d. coordinate cash and deferred expenses
ANS: A PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking
LOC: Knowledge of financial analysis and cash flows TOP: Cash budgeting
9. The first step in cash budget preparation is the

a. estimation of credit sales
b. estimation of the expected cash disbursements
c. scheduling of disbursements
d. determination of estimated receipts
LOC: Knowledge of financial analysis and cash flows TOP: Cash budgets
10. Computerized financial planning models may be classified as any of the following except:
a. deterministic
b. optimistic
c. probabilistic
d. none of the above
11. The main advantage of deterministic models is that they

a. provide the user with more useful information than other models
b. allow the user to maximize some objective function
c. allow the user to perform sensitivity analyses quickly
d. allow the user to maximize or minimize some objective function
12. All the following current liabilities normally vary directly with the sales except:
a. accounts payable
b. notes payable
c. accrued wages
d. accrued taxes
13. Pro forma financial statements show the results of some ____ event rather than a (an) ____ event.
a. actual; assumed
b. assumed; actual
c. deterministic; probabilistic
14. The ____ is (are) used to forecast the amount of additional financing (i.e., cash) a company will need
in some future period.
a. percentage of sales forecasting method
b. pro forma statement of cash flows
c. a and b
15. ____ financial planning models seek to maximize (or minimize) the value of some objective function,
such as profits (or costs).
a. Deterministic
b. Optimization
c. Probabilistic
16. In 1998, Hepler Company's sales were $26 million and its total assets were $10 million. Current
liabilities were $4 million and total equity was $2 million. Hepler Company's sales for 1999 are
forecasted to be $34 million, earnings after taxes are expected to be 5 percent of sales and dividends of
$800,000 are expected to be paid. Assuming that the ratios "assets to sales" and "current liabilities to
sales" in 1998 remain the same in 1999, determine the amount of additional financing required.
a. $1,746,154
b. $1,446,154
c. $6,946,154
d. $ 946,154
ANS: D
Solution:
AFN =[(A/S)DS - (CL/S) DS] - [EAT - D]
=[(10,000,000/26,000,000)(8,000,000) - (4,000,000/26,000,000)(8,000,000)]
-[34,000,000 .05 - 800,000]
= $946,154
PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

17. Peerless believes that its sales next year will increase 20 percent from the current level of $800,000.
Management calculates that assets must increase $110,000 to support the new sales level, and current
liabilities will increase $70,000. What total financing will be needed?
a. $40,000
b. $1,600
c. $33,600
d. $8,000
ANS: A
Solution:
TFN = $110,000 -$70,000 = $40,000

TOP: Calculation of cash financing needs
18. ECG Monitors is forecasting that sales next year will be $8,640,000, a 20 percent increase over current
sales. ECG has total assets of $3,840,000 and all assets will increase proportionately with sales. Of the
current liabilities, only accounts payable (now $740,000) will increase with sales. What total financing
will be needed by ECG to support the expected sales increase?
a. $317,600
b. $620,000
c. $465,600
d. $840,400
ANS: B
Solution:
S = $8,640,000/1.2 = $7,200,000
TFN = (3,840,000/$7,200,000) ($1,440,000) -($740,000/$7,200,000)($1,440,000)
= $620,000

19. ICU has current assets of $800,000 and net fixed assets of $1,400,000. The firm expects its sales to
climb 25 percent next year from its current level of $3,500,000. ICU's only current liability is accounts
payable of $1,200,000. If both current assets and current liabilities will increase proportionately with
sales, what additional financing will be needed by ICU next year? Assume ICU has a net profit margin
of 6 percent. An increase in net fixed assets of $500,000 will be required. The firm pays out 50 percent
of its earnings as dividends.
a. $400,000
b. $358,750
c. $178,750
d. $268,750
ANS: D
Solution:
AFN = $500,000 + $800,000(0.25) - $1,200,000(0.25) - $3,500,000 (1.25)(0.06)(0.5)
= $268,750

20. CU Tech expects sales next year will be $4.8 million, a 25% increase over current sales. CU has total
assets of $2.24 million and all assets will increase proportionately with sales. CU has $1.49 million in
current liabilities and a current ratio of 1.60 to 1. What total financing will CU need to support the
expected sales increase?
a. No financing needed, surplus of $139,700
b. $ 187,500
c. $ 48.800
d. $234,400
ANS: B
Solution:
Current sales = $4.8/1.25 = $3.84 million
TFN = (2.24/3.84)(.96) - (1.49/3.84)(.96) = $.1875 million

21. Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has
current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All
assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what
additional financing will be needed to support the increase in sales? Getrag does not pay dividends.
a. $339,600
b. $283,200
c. No financing needed, surplus of $224,400
d. No financing needed, surplus of $524,400
ANS: C
Solution:
AFN = (2.16/4.7)(.94) - (.462/4.7)(.94) - 5.64(.10)
= 432,000 - 92,400 - 564,000 = - $224,400

22. Calculate United's total assets if the firm expects sales to grow 15 percent this year and the earnings
after tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends
10 percent this year. The firm will need additional financing of $25,000 to finance the expected
growth. United started the year with $40,000 in accounts payable; $30,000 in notes payable; and
$100,000 in long-term debt. The company is operating at full capacity.
a. $393,333
b. $590,000
c. $226,667
d. $616,000
ANS: A
Solution:
$25,000 = (A/S)(.15S) - ($40,000/S)(.15S) - ($50,000 - $22,000)
A = $393,333
PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

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

(December 31, 20X3)
($ millions)
Current assets: Current liabilities:
Cash $0.2 Accts. payable $0.6
Accts. Rec. 1.2 Notes payable 0.7
Inventory 2.0 Long-term debt 1.5
Fixed assets, net 2.6 Stockholders' equity 2.2
$6.0 $6.0
a. $ 750,000
b. $ 250,000
c. $1,000,000
d. None of the above
ANS: B
Solution:
Assets that are expected to vary proportionately with sales
= $6.0 - $2.6 = $3.4 million
External financing needed
= [($3.4/$12)($6) - ($0.6/$12)($6)] - [0.05($15 + $18) - 2($0.25)]
= $0.25 million, or $250,000

LOC: Knowledge of financial skills and cash flows TOP: Percentage of sales method
24. The Danville Company is considering a $50 million expansion (capital expenditure) program next
year. The company wants to determine approximately how much additional financing will be needed if
the expansion program is undertaken. Next year the company expects to earn $25 million after interest
and taxes. The company also plans to increase its dividends from $5 million to $7 million. If the
expansion program is accepted, the company expects working capital requirements to increase by
approximately $8 million next year. Long-term debt retirement obligations total $3 million next year
and depreciation is expected to be $13 million. No fixed assets are expected to be sold next year.
a. $30 million
b. $43 million
c. $32 million
d. $22 million
ANS: A
Solution:
Financing needed = $50 million capital expenditure - $25 million EAT + $7 million dividends + $8
million working capital increase + $3 million debt retirement - $13 million depreciation = $30 million

LOC: Knowledge of financial analysis and cash flows TOP: Cash flow calculation
25. Ship-to-Shore earned $280,000 after taxes last year. Its expenses included depreciation of $55,000,
interest expenses of $40,000 and deferred taxes of $20,000. The company also purchased two new
fresh water fishing boats for $40,000 ($20,000) each. What is Ship-to-Shores after-tax cash flow for
last year?
a. $395,000
b. $355,000
c. $315,000
d. $280,000
ANS: B PTS: 1 OBJ: TYPE: E. Prob
NAT: Analytic skills LOC: Knowledge of financial analysis and cash flows
TOP: Cash flow analysis
26. Scorch & Burn Fire Extinguishers, Inc. had an operating income (EBIT) of $260,00 last year. The firm
had $18,000 in depreciation expenses, $15,000 in interest expenses and $60,000 in selling, general,
and administrative expenses. If Scorch & Burn has a marginal tax rate of 40%, what was its after-tax
cash flow for last year?
a. $165,000
b. $129,000
c. $174,000
d. $147,000
ANS: A
Solution:
EBIT = $260,000 - $15,000 = $245,000
EAT = $245,000(1 - 0.40) = $147,000
ATCF = $147,000 + $18,000 = $165,000

LOC: Knowledge of financial analysis and cash flows TOP: Cash flow analysis
27. Last year Curative Technologies Inc. reported earnings after-tax of $23 million. Included in the
expenses were depreciation of $3.7 million and interest expenses of $2.9 million. The year-end balance
sheets shows an increase in deferred taxes of $2.6 million to a total of $14.2 million. What is Curative
Technologies after-tax cash flow for last year? Assume a marginal tax rate of 40%.
a. $20.1 million
b. $32.2 million
c. $29.3 million
d. $26.4 million
ANS: C
Solution:
ATCF = $23 + $3.7 +$2.6 = $29.3 million

LOC: Knowledge of financial analysis and cash flows TOP: After-tax cash flows
28. Last year Molexs net cash provided by operating activities was $14.1 million and its net cash used by
investing activities was $20.7 million. If net cash provided by financing activities was $9.8 million,
what was the net increase (or decrease) in cash and cash equivalents during the year? Molex started the
year with $2.1 million in cash.
a. $44.6 million
b. $3.2 million
c. $25.0 million
d. $5.3 million
ANS: B
Solution:
Cash = $14.1 - $20.7 + $9.8 = $3.2

LOC: Knowledge of financial analysis and cash flows TOP: Statement of cash flows
29. The financial statement that shows the effects of a companys operating, investing, and financing
activities on its cash balance is known as the:
a. cash budget statement
b. pro forma financial statement
c. statement of cash flows
d. breakeven analysis
LOC: Knowledge of financial analysis and cash flows TOP: The statement of cash flows
30. The Financial Accounting Standard Board (FASB) requires companies to prepare their statement of
cash flows using the:
a. indirect method
b. direct method
c. reconciliation method
31. Generally, which of the following non-cash charges is/are added to earnings after tax to calculate the
after-tax cash flow?
I. Depreciation
II. Deferred taxes
a. I only
b. II only
c. Both I and II
d. Neither I nor II
LOC: Knowledge of financial analysis and cash flows TOP: The cash flow concept
32. Which of the following shows the effects of a companys operating, investing, and financing activities
on its cash flows?
a. income statement
b. balance sheet
c. statement of cash flows
33. In preparing a statement of cash flows, the ____ method involves adjusting net income to reconcile it
to net cash flows from operating activities.
a. direct
b. indirect
c. accrual
34. After-tax cash flow equals:

a. earnings after tax plus non-cash charges
b. net earnings plus deferred expenses
c. net earnings plus depreciation
d. earnings after tax
LOC: Knowledge of financial analysis and cash flows TOP: Cash flow analysis
35. Which of the following is defined as the systematic allocation of the cost of an asset over more than
one period?
a. Deferral
b. Expensing
c. Optimization
d. Depreciation
LOC: Knowledge of financial analysis and cash flows TOP: Depreciation
36. Getrag expects its sales to increase 20% next year from its current level of $4.7 million. Getrag has
current assets of $660,000, net fixed assets of $1.5 million, and current liabilities of $462,000. All
assets are expected to grow proportionately with sales. If Getrag has a net profit margin of 10%, what
additional financing will be needed to support the increase in sales? Getrag does not pay dividends.
a. $339,600
b. $283,200
c. No financing needed, surplus of $224,400
d. No financing needed, surplus of $524,400
ANS: C
Solution:
AFN = (2.16/4.7)(.94) - (.46/4.7)(.94) - 5.64(.10) =
432,000-92,400-564,000 = -$224,400
PTS: 1 OBJ: TYPE: E. Prob NAT: Reflective thinking

37. Calculate Uniteds total assets if the firm expects sales to grow by 15% this year and the earnings after
tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10%
this year. The firm will need additional financing of $25,000 to finance the expected growth.
a. $393,333
b. $590,000
c. $226,667
d. $616,000
ANS: A
Solution:
$25,000 = (A/S)(.15S) - ($40,000/S)(.15S) - ($50,000 - $22,000)
A = $393,333

38. Great Subs believes it can increase sales by 50% without any increase in net fixed assets. Earnings
after tax are expected to be $2,000. The company pays no dividends. What additional financing will
Subs need to finance this growth? Subs balance sheet currently is as follows:
Cash $ 2,500 Accounts Payable $ 5,600
Accounts Rec. 4,400 Notes Payable 10,000
Inventory 6,000 Long-term Debt 15,000
Fixed Assets, net 47,700 Stockholders Equity 30,000
$60,600 $60,600
a. $3,350 surplus -- no additional financing needed

b. $1,650
c. $3,650
d. None of the above are correct.
ANS: B
Solution:
AFN = (12,900/S)(.5S) - ($5,600/S)(.5S) - $2,000
= 6,450 - 2,800 - 2,000 = $1,650

39. Lullaby Lane Bedding, Inc. needs to determine the amount of growth the firm could experience
without having to obtain external financing. The current sales level is $800,000, the net profit margin
is 6%, and the dividend payout ratio is 40%. Assume the firm is currently operating at full capacity and
all assets will increase proportionately with sales. Lanes current balance sheet follows:
Cash $ 30,000 Accounts Payable $140,000
Accounts Receivable 90,000 Notes Payable 50,000
Inventories 110,000 Long-term Debt 280,000
Net Fixed Assets 380,000 Common Stock 40,000
$610,000 Retained Earnings 100,000
$610,000
a. 6.53%
b. 1.09%
c. 11.97%
d. 13.50%
ANS: A
Solution:
AFN = (610/800g)(800g) - (140/800)(800g) - {800(1+g)(0.06)(1-0.4)]
0 = 610g - 140g - 28.8 - 28.8g
g = 0.0653 or 6.53%

40. The Hudson River Line Company has a balance sheet as of the end of the year as follows:
Cash $ 5,000 Accounts Payable $ 15,000
Accounts Receivable 20,000 Notes Payable 10,000
Inventories 40,000 Total Current Liab. 25,000
Total Current Assets $ 65,000 Long-term Debt 30,000
Fixed Assets, net 50,000 Stockholders Equity 60,000
Total Assets $115,000 Total Liabilities & Equity $115,000
Last year, the firm had sales of $148,750. This year the company expects sales to increase 25%, to
generate earnings after tax of $16,000, and to pay a dividend of $5,000. Hudson operated its fixed
assets at 85% capacity last year. What additional financing will be needed to support the sales
increase?
a. $2,125
b. $4,625
c. $1,500
d. $375 surplus -- no financing needed.
ANS: B
Solution:
Full capacity sales = $148,750/0.85 = $175,000
New Sales = $148,750(1.25) = $185,938
$50,000 net fixed assets will support $175,000 in sales. Hence net fixed assets must increase by
50/175, or 0.2857 times sales in excess of capacity, or 0.2857($185,938 - $175,000) = $3,125
AFN = $65,000(0.25) + $3,125 - $15,000(0.25) - ($16,000 - $5,000)
= $16,250 + $3,125 - $3,750 - $11,000 = $4,625

41. Jones Company sales last year were $25 million and its total assets were $8 million. Accounts payable
were $2 million and common stock and retained earnings were $5 million. Jones sales are forecasted to
be $30 million this year, earnings after tax are expected to be 3% of sales, and dividends of $250,000
are expected to be paid. Assuming that the ratio of assets to sales and current liabilities to sales remain
the same this year as last year, determine the amount of additional financing required.
a. $550,000
b. $1,200,000
c. $300,000
d. None of the above
ANS: A
Solution:
AFN = {(A/S) DS - (CL/S) DS} - [CF - D]
= [($8,000,000/$25,000,000)($5,000,000)
- ($2,000,000/$25,000,000)($5,000,000] - [0.03 $30,000,000 - $250,000] = $550,000

42. Operational plans are generally conducted at two levels. Which length of time is considered long-
term?
a. 2 years
b. 12 - 18 months
c. 5 years
d. 10 years
LOC: Knowledge of financial analysis and cash flows TOP: Introduction
43. Which of the following statements is/are correct about deferred taxes?
I. Deferred taxes can occur because of geographical problems with the location of corporate
headquarters.
II. Deferred taxes can occur because some companies use the straight-line depreciation method to
calculate income reported to stockholders and accelerated depreciation to calculate taxable income.
This practice reduces taxes owed.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
LOC: Knowledge of financial analysis and cash flows TOP: Deferred taxes
44. In those industries where capacity can be added only in discrete or lumpy increments, fixed assets
are increased in a ____ manner as sales increase.
a. proportional
b. stepwise
c. direct relationship
d. discriminant
LOC: Knowledge of financial analysis and cash flows TOP: Percentage of sales method
45. Which of the following is an example of a deterministic model?

a. profit optimization model
b. budget simulator
c. probabilistic set
d. discriminant model
46. ____ is the statistical technique that helps the analyst classify observations (firms) into two or more
predetermined groups based on certain characteristics of the observation.
a. Deterministic analysis
b. Sensitivity analysis
c. Discriminant analysis
d. Optimization
TOP: Using financial ratios to forecast future financial performance
47. In considering financial planning, the type of planning that focuses more on the overall direction of the
business and the industry is:
a. Deterministic
b. Strategic
c. Operational
d. Probabilistic
LOC: Knowledge of financial analysis and cash flows TOP: Financial Planning
48. Short-term operational plans are generally conducted over what time frame?
a. 3 - 6 months
b. 8 - 12 months
c. 12 - 18 months
d. 2 - 5 years
LOC: Knowledge of financial analysis and cash flows TOP: Financial Planning
49. The value of debt and equity securities is based upon:

a. The type of investment vehicle
b. The growth potential of the asset
c. The accounting method used for recording the asset
d. The present value of the cash flows that the securities are expected to provide.
LOC: Knowledge of financial analysis and cash flows TOP: Importance of cash flow
50. Using a cash budget is more useful than the percentage of sales method because:
I. It can more precisely estimate the amount of financing needed.
II. It can better estimate the time of financing need.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
51. The first step in the preparation of a cash budget is:

a. Estimation of future spending
b. Estimation of asset value
c. Estimation of cash receipts
d. Estimation of future stock sales
52. An example of an investing activity is:

a. Issuing new corporate stock
b. Paying corporate income taxes
c. Buying new computers
d. Taking out a new loan.
53. Cash and cash equivalents include:

I. Money market accounts
II. Currency on hand.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
54. The category Cash and Cash Equivalents includes short term investments. The time frame for short-
term is:
a. 30 days
b. 6 months
c. under 5 years
d. less than three months
55. A good operational plan incorporates a plan for:

a. the unionization of its business.
b. a solid organizational chart with detailed job descriptions.
c. the resources a firm will need to obtain its long term objectives.
d. all of the above
TOP: Introduction: Financial Planning
56. Strategic planning for a firm deals with which of the following items?
I. The overall direction of the firm.
II. Marketing and production needs.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
57. A firms operational plan states objectives that define where the firm wants to be at the end of the
planning period. These objectives must be:
a. specific.
b. flexible.
c. vague.
d. agreed upon by the union workers.
58. The financial plan that is a blueprint detailing where the firm wants to be at some future point in
time is the:
a. Executive Manifest
b. Strategic Plan
c. FASB Plan
d. Operational plan
59. Dippity Doo-Dah Party Dips has revenues of $50,000, general & administrative expenses of $35,000,
interest expense of $4,000 and depreciation expense of $4200. The firm is in the 38% tax bracket.
What would be the firms cash flow from operations?
a. $4216
b. $4000
c. $8416
d. $6,800
ANS: C
$50,000Revenue $4,216
(35,000)Expenses +4,200 Depreciation
( 4,200)Depreciation $8,416 Cash flow from operations
10,800 EBIT
(4,000) Interest
6,800 EBT
(2,584) Tax
$4,216 EAT

TOP: The Cash Flow Concept: Depreciation
60. Pro forma financial statements display the financial situation of a firm based on:
a. an actual event.
b. an assumed event.
c. a catastrophic event that recently happened to the firm.
d. the firms worst sales year.
ESSAY
1. An operational plan is necessary to determine what the firm wants to be at some future point in time.
What does an operational plan consist of?
ANS:
1. a marketing plan
2. a production plan
3. a human resource plan
4. a financial plan
PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

2. What information does a long-term financial plan offer?
ANS:
The financial plan lays out the financial resources that are needed to achieve the operational (including
the financial) objectives of the firm. It also includes financial forecasts.

3. Financial planning models have two classifications. What are they and how do they differ from each
other?
ANS:
The two models are deterministic and probabilistic.
Deterministic give a single-number forecast of a financial variable or variables without stating
anything about the probability of occurrence.
Probabilistic models provide output in the form of a probability distribution which gives the company
planners more useful information than a deterministic model. However, more input is needed for a
probabilistic model.

4. Explain the cash flow generation process:
ANS:
Financial managers are concerned with raising funds that can be used by the firm and investing those
funds into assets that can be converted into a stream of cash flows that can accrue for the firm and its
owners. If the stream of cash flows generated by the assets is greater than the cost of those assets, the
investments of the firm will add value to the firm. In the process of acquiring funds and directing those
funds, the financial manager must balance the risk and timing of the expected cash flow stream against
the magnitude of the expected returns.

TOP: The Cash Flow Generation Process
5. Why would a firm experience cash flow difficulties immediately after a good sales period?
ANS:
Inventory has been sold and must be replenished. However, many sales have been conducted on an
accounts receivable basis and collections have not yet been received. In addition, accounts payable
may become due before cash is actually received. All of this leads to cash flow difficulties.

6. In developing a firms financial plan, the firm develops a strategic plan and an operational plan. What
is the difference between a strategic plan and an operational plan?
ANS:
A strategic plan is long range in nature and deals with the overall direction of the firm. It concerns
anticipating significant new developments and changes that will have a major impact on the industry
and the firm. The operational plan begins with a series of operational objectives that define where the
firm wants to be at the end of the planning period. These objectives are very specific. Operational
plans can be both long-range and short-range and is designed as a blueprint detailing where the firm
wants to be at the end of the planning period.
7. Why would a firm want to develop a cash budget since it is only a projection of cash inflows and
outflows over some future period of time?
ANS:
Cash budgets are useful in determining the amount of short-term funds the firm may need to borrow to
cover any projected cash shortages. Short-term borrowed funds are almost always easier to obtain
when the need for them is anticipated. In addition to planning for any cash shortages, the budget also
indicates the periods when the firm may have cash surpluses. This information is helpful in managing
the firms marketable securities investments. Cash budgets can be a useful financial forecasting tool
and they can be useful for control and coordination purposes.


Chapter 4: Financial Planning and Forecasting: Multiple Choice

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Chapter 4: Financial Planning and Forecasting: Multiple Choice

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Chapter 4: FINANCIAL PLANNING AND FORECASTING

4. Pro forma financial statements are used to:

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

8. Cash budgeting can be employed effectively by management to

9. The first step in cash budget preparation is the

11. The main advantage of deterministic models is that they

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

Fillmore Co. Balance Sheet

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

34. After-tax cash flow equals:

PTS: 1 OBJ: TYPE: E. Prob NAT: Reflective thinking

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

a. $3,350 surplus -- no additional financing needed

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: C. Prob NAT: Analytic skills

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

49. The value of debt and equity securities is based upon:

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

52. An example of an investing activity is:

53. Cash and cash equivalents include:

55. A good operational plan incorporates a plan for:

PTS: 1 OBJ: TYPE: E. Prob NAT: Analytic skills

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

2. What information does a long-term financial plan offer?

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

4. Explain the cash flow generation process:

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking

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