978-0133423822 Chapter 17 Part 2

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16) Assume that Gatsby Enterprises has sales of $83 million and ixed assets of $22.4

million in 2013. The corporation utilizes the percent-of-sales method of inancial

forecasting. If Gatsby is expected to generate sales of $94 million in 2014, what will the

irm’s investment in ixed assets be? The minimum ixed asset expansion costs $4,000,000.

A) $19.8 million

B) $26.4 million

C) $16.2 million

D) $25.4 million

Question Status: New question

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk-Return Tradeof

17) Apple Two Enterprises expects to generate sales of $5,950,000 for iscal 2014; sales

were $3,450,000 in iscal 2013. Assume the following igures for the iscal year ending

2013: cash $70,000; accounts receivable $250,000; inventory $400,000; net ixed assets

$520,000; accounts payable $235,000; and accruals $155,000. Use the percent-of-sales

method to forecast accruals for the iscal year ending 2014.

A) $890,001

B) $412,316

C) $267,319

D) $350,814

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk-Return Tradeof

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 irm may acquire some “lumpy” assets.

D) All of the above.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk-Return Tradeof

19) Discretionary inancing needs implies

A) that management may choose between various forms of debt and equity.

B) that the purchases being inanced are optional rather than necessary.

C) that management has considerable discretion in how to dispose of retained earnings.

D) that management may choose between debt, new equity or retained earnings.

Question Status: New question

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

20) Spontaneous sources of inancing include

A) accounts payable and accrued expenses.

B) notes payable and mortgages payable.

C) long-term debt and capital leases.

D) common stock and paid-in capital.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

21) Which of the following is the correct method of determining discretionary inancing

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

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

22) A discretionary form of inancing would be

A) notes payable.

B) accounts payable.

C) accrued expenses.

D) none of the above.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

23) An increase in projected ________ will increase discretionary funds needed.

A) cash dividends

B) sales

C) retained earnings

D) both A and B

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

24) Assume all else remains the same. Which of the following statements is true?

A) The lower the dividend payout, the less a irm will have to reinvest.

B) The higher the dividend payout, the more discretionary inancing a irm will require.

C) The lower the dividend payout, the more discretionary inancing a irm will require.

D) The higher the dividend payout, the higher the retention percentage.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

25) An exceptionally high growth rate in sales will typically

A) initially increase the irm’s need for discretionary inancing.

B) generate enough cash low to cover asset expansion.

C) allow the irm to increase its dividend in anticipation of higher cash lows.

D) allow the irm to inance expansion with spontaneous sources of inancing.

Question Status: New question

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

27) Holding other things constant, a irm’s “discretionary inancing needed” (the additional

funds required in order to inance the irm) would be reduced if the irm experienced an

increase in which of the following?

A) The dividend pay-out ratio

B) The proit margin

C) The accounts receivable average collection period

D) The expected growth rate in sales

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

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)

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

29) Considering each action independently and holding other things constant, which of the

following actions would increase a irm’s discretionary inancing needed (the need for

additional capital)?

A) A decrease in the irm’s accounts receivable average collection period

B) An increase in the irm’s proit margin

C) A decrease in the irm’s inventory turnover

D) A decrease in the expected growth rate in sales

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

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

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

31) Which of the following is a spontaneous source of inancing?

A) Accrued expenses

B) Notes payable

C) Common stock

D) Paid-in capital

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

32) Swings in discretionary inancing needed can be caused by

A) irm proitability.

B) the growth rate of sales.

C) the need to upgrade technology and physical assets from time to time.

D) all of the above.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

33) Which of the following will reduce the irm’s inancing requirements?

A) The irm operates at full capacity

B) The irm has excess capacity

C) The irm expects rapid growth in sales

D) The irm increases its dividend payout ratio

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

Use the following information and the percent-of–sales method to answer the following

question(s).

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 ixed 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.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

35) Banner’s projected ixed assets for 2015 are

A) $1,120,000.

B) $1,260,000.

C) $1,000,000.

D) $2,380,000.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

36) Banner’s projected accounts payable balance for 2015 is

A) $160,000.

B) $120,000.

C) $200,000.

D) $300,000.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

37) Banner’s projected accrued expenses for 2015 are

A) $120,000.

B) $160,000.

C) $100,000.

D) $200,000.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

38) Banner’s projected long-term debt for 2015 is

A) $700,000.

B) $880,000.

C) $380,000.

D) $300,000.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

39) Banner’s projected retained earnings for 2015 are

A) $260,000.

B) $280,000.

C) $340,000.

D) $350,000.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

40) Banner’s projected discretionary inancing needed for 2015 is

A) $420,000.

B) $440,000.

C) $360,000.

D) $370,000.

Question Status: Revised

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

41) The projected change in retained earnings equals projected net income less any

dividends to be paid.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

42) The initiation of a major advertising campaign would be an example of an event that

would afect past trends in sales when projecting statements.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

43) The percentages used in the percent-of-sales method comes from pro forma inancial

statements.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

44) The percent-of-sales method is a commonly used method for estimating a irm’s

inancing needs.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

45) Long-term inancial plans must include capital expenditures.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

46) Asset purchases frequently precede a rapid increase in sales and require increased

discretionary inancing.

Question Status: New question

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

47) Holding all other variables constant, as the dividend payout ratio decreases, the

sustainable growth rate increases.

Question Status: Previous edition

Objective: 17.2 Use the percent of sales method to forecast the inancing requirements of a irm,

including its discretionary inancial needs.

Keywords: percent of sales method

Principles: Principle 2: There Is a Risk–Return Tradeof

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