Chapter 5—LONG-TERM AND SHORT-TERM PLANNING
MULTIPLE CHOICE
1. An anticipated need for short-term borrowed funds is best shown in
a.
an operating budget
b.
a capital budget
c.
a production budget
d.
a cash budget
2. In the percent-of-sales forecasting method, all of the following balance sheet and income statement
items except  are assumed to increase proportionately with sales.
a.
dividends
b.
accounts payable
c.
long-term debt
d.
dividends and long-term debt
3. In the percent-of-sales forecasting method,  is (are) assumed to increase proportionately with
sales.
a.
cash
b.
accounts receivable
c.
accounts payable
d.
all of these answers are correct
4. Financial models that attempt to maximize or minimize the value of a criterion function (e.g., profits,
costs) are classified as  models.
a.
static
b.
dynamic
c.
probabilistic
d.
optimization
5. 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
6. 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 future growth
c.
cash needed to finance future growth
d.
debt financing needed
7. 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
8. 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
9. 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
10. Cash budgets indicate the periods when the firm
a.
had an increase in outflows
b.
expects an increase in net profit
c.
may have cash surpluses
d.
needs to increase accruals
11. 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
12. Computerized financial planning models may be classified as any of the following except:
a.
deterministic
b.
optimistic
c.
probabilistic
d.
none of these are correct
13. 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
14. All the following current liabilities normally vary directly with the sales except:
a.
accounts payable
b.
notes payable
c.
accrued wages
d.
accrued taxes
15. If a firm shows a profit on the quarterly income statement, then
a.
there will be no need for additional financing
b.
the firm may need additional financing
c.
the firm will increase its cash balance
d.
any of these answers may be correct
16. Pro forma financial statements show the results of some  event rather than a (an)  event.
a.
actual; assumed
b.
assumed; actual
c.
deterministic; probabilistic
d.
probabilistic; deterministic
17. 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.
percentage of sales forecasting and pro forma statement of cash flows
d.
none of these are correct
18.  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
d.
all of these answers are correct
19. 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
20. Which of the following is an example of a deterministic model?
a.
profit optimization model
b.
budget simulator
c.
probabilistic set
d.
discriminant model
21. 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
22. 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
23. 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
24. 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
25. Great Skot expects to have cash receipts in June of $532,160. Skot’s cash disbursements in June are
$581,720, including an interest payment on a bond issue of $32,000. If Skot wishes to maintain a cash
balance of $40,000, how much will Skot have to borrow if it started the month with a cash balance of
$52,000?
a.
Surplus of $2,440. Will not have to borrow
b.
Surplus of $34,440. Will not have to borrow
c.
$5,560
d.
$37,560
26. 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
27. 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
28. Great Subs believes it can increase sales by 50 percent 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
Accounts Rec.
4,400
Notes payable
Inventory
6,000
Long-term debt
Fixed assets, net
47,700
Stockholder’s equity
$60,600
a.
$3,350 surplus—no additional financing needed
b.
$1,650
c.
$3,650
d.
None of these are correct
29. 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
30. Lane Manufacturing 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
percent, and the dividend payout ratio is 40 percent. Assume the firm is currently operating at full
capacity and all assets will increase proportionately with sales. Lane’s 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%
31. 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.
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 and equity
$115,000
Last year, the firm had sales of $148,750. This year the company expects sales to increase 25 percent,
to generate earnings after tax of $16,000, and to pay a dividend of $5,000. Hudson operated its fixed
assets at 85 percent 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
32. 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 these are correct
33. 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
Accts. payable
$0.6
Accts. rec.
Notes payable
0.7
Inventory
Long-term debt
1.5
Fixed assets, net
Stockholders’ equity
2.2
$6.0
a.
$ 750,000
b.
$ 250,000
c.
$1,000,000
d.
None of these are correct
34. Cryo-vac expects sales to increase 20% next year from the current level of $5,000,000. The firm has
current assets of $1,000,000 and fixed assets of $1,500,000. Cryo-vac has current liabilities of
$750,000 of which $300,000 are in notes payable. What additional financing will Cryo-vac need to
support the expected sales increase if its profit margin is 8% and the firm expects to pay out $200,000
in dividends? An increase in net fixed assets of $300,000 will be required.
a.
$130,000
b.
$ 70,000
c.
Surplus of $70,000
d.
$270,000
35. Which of the following statements about strategic planning is correct?
a.
Strategic planning details the short range objectives of the firm.
b.
Strategic planning details the current management structure of the firm.
c.
Strategic planning details the long range direction of the firm.
d.
Strategic planning details the current financial needs of the firm.
36. Which of the following statements is/are correct?
I. Strategic planning focuses on the overall direction of the business and industry.
II. Operational planning details the future direction of the company and the resources required to get
there.
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
37. The firm’s operational plan begins with which of the following?
a.
Operational objectives
b.
Operational resources currently available
c.
Operational financial statements
d.
Operational management teams
38. As part of the organizational plan, a marketing plan is used. All of the following are marketing
resources in a marketing plan EXCEPT:
a.
channels of distribution
b.
advertising strategy
c.
assignment of sales territory
d.
product manufacturing
39. Which of the following best describes financial forecasting?
a.
It is primarily concerned with whether the firm can predict new niche markets.
b.
It is primarily concerned with whether the firm can obtain fair market value on its stock.
c.
It is primarily concerned with whether the firm’s management team can accurately predict
the firm’s future sales revenue.
d.
It is primarily concerned with whether the firm has sufficient internal resources to meet its
operational objectives.
40. Production plans consist of all of the following EXCEPT:
a.
vendor and supplier arrangements
b.
plant refurbishment and expansions
c.
channels of distribution
d.
inventory control
41. Which of the following statements about strategic planning is/are correct?
I. The strategic plan is determined by the long-term goals of the firm.
II. The strategic plan considers future financial resources but ignores the overall direction of the firm
since that is part of the operational plan.
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
42. The operational plan is a planning device. It is also which of the following?
a.
a marketing device.
b.
a monitoring device.
c.
a technology needs assessment device.
d.
an accounting device.
43. One method of forecasting pro forma statements is using the percentage-of-sales forecasting method.
Which of the following best explains the method?
a.
It forecasts the amount of external financing a firm will need for a projected increase in
sales.
b.
It forecasts the increase in expenses that management will incur to meet its operational
objectives.
c.
It forecasts increases in sales.
d.
It forecasts changes in financial ratios.
44. In developing a pro forma statement it may be necessary to use a “plug” figure. Which of the
following explains what a “plug” figure is?
a.
It is an asset that needs to be reassessed at its fair market value.
b.
It is a budgetary item that must be expensed.
c.
It is additional financing needed to balance the two sides of the balance sheet.
d.
It is an additional expenditure that is expected to be incurred.
45. In using the percentage-of-sales forecasting method, which of the following financial statement items
are assumed to increase proportionately with sales?
I. Dividends
II. Long-term debt
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
46. The percentage-of-sales forecasting method is useful in forecasting which of the following?
a.
The amount of internal financing a firm will need for a projected increase in sales.
b.
The amount of external financing a firm will need for a projected increase in inventory.
c.
The amount of internal financing a firm will need to expand.
d.
The amount of external financing a firm will need for a projected increase in sales.
47. Which of the following best explains the percentage of sales forecasting method?
a.
It assumes that all fixed assets are dependent on sales.
b.
It assumes that most variables on the balance sheet and the income statement vary with
sales.
c.
It assumes a specific cash flow dependent on future sales.
d.
It assumes that earnings per share will be based on sales rather than net income.
48. Which of the following liabilities would normally vary directly with sales?
I. Accounts payable
II. Notes payable
a.
I only
b.
II only
c.
Both I and II
d.
Neither I nor II
ESSAY
1. What are the components of an operational plan?
2. Explain financial forecasting and list some techniques that are used.