CHAPTER 4: FINANCIAL PLANNING AND FORECASTING
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. neither dividends nor long–term debt increase
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 answers are correct
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
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
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
Chapter 4: Financial Planning and Forecasting
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
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
10. Computerized financial planning models may be classified as any of the following except:
a. deterministic
b. optimistic
c. probabilistic
d. none of the answers is correct
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
Chapter 4: Financial Planning and Forecasting
12. All the following current liabilities normally vary directly with 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
d. none of the answers is correct
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. both percentage of sales forecasting method and pro forma statement of cash flows
d. none of the answers is correct
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
d. none of the answers is correct
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
Chapter 4: Financial Planning and Forecasting
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
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
19. ICU, an eyeglass manufacturer, 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
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
Chapter 4: Financial Planning and Forecasting
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
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
Chapter 4: Financial Planning and Forecasting
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
a. $ 750,000
$6.0
$6.0
b. $ 250,000
c. $1,000,000
d. None of the answers is correct
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
Chapter 4: Financial Planning and Forecasting
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Shore’s aftertax cash flow for last year?
a. $395,000
b. $355,000
c. $315,000
d. $280,000
26. Scorch & Burn Fire Extinguishers, Inc. had an operating income (EBIT) of $260,000 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
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
28. Last year Molex’s 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
Chapter 4: Financial Planning and Forecasting
29. The financial statement that shows the effects of a company’s 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
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
d. none of the answers is correct
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. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
32. Which of the following would indicate how much actual cash the firm has on hand?
a. income statement
b. balance sheet
c. statement of cash flows
d. none of the answers is correct
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
d. none of the answers is correct
Chapter 4: Financial Planning and Forecasting
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
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
36. Calculate United’s 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
37. 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:
$ 2,500
2,500
Accounts Payable
$ 5,600
4,400
Notes Payable
10,000
6,000
Long-term Debt
15,000
47,700
Stockholder’s 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 answers is correct.
Chapter 4: Financial Planning and Forecasting
38. 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. 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%
39. 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
Stockholder’s 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.
Chapter 4: Financial Planning and Forecasting
40. 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 answers is correct
41. 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
42. 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. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
43. 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
Chapter 4: Financial Planning and Forecasting
44. Which of the following is an example of a deterministic model?
a. profit optimization model
b. budget simulator
c. probabilistic set
d. discriminant model
45. 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
46. 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
47. 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
48. 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.
Chapter 4: Financial Planning and Forecasting
49. 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 needs.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
50. 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
51. 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.
52. Cash and cash equivalents include:
I. Money market accounts
II. Currency on hand.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
53. 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
Chapter 4: Financial Planning and Forecasting
54. 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 answers are correct
55. 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. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
56. A firm’s 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.
57. 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
Chapter 4: Financial Planning and Forecasting
58. 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 firm’s
cash flow from operations?
a. $4216
b. $4000
c. $8416
d. $6,800
59. 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 firm’s worst sales year.
60. 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?
61. What information does a long-term financial plan offer?
62. Financial planning models have two classifications. What are they and how do they differ from each other?
Chapter 4: Financial Planning and Forecasting
63. Explain the cash flow generation process:
64. Why would a firm experience cash flow difficulties immediately after a good sales period?
65. In developing a firm’s financial plan, the firm develops a strategic plan and an operational plan. What is the
difference between a strategic plan and an operational plan?
66. 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?
67. What is the difference between the direct method and the indirect method of presenting the cash flow from
operations?
a. The direct method is more reliable since it adjusts net income to reflect the cash flow from operations
b. The indirect method lists all cash-in versus cash-out accounts in determining the cash flow from operations
c. The direct method is the most popular method of determining the cash flow from operations.
d. The indirect method adjusts net income to reconcile it to net cash flow from operating activities.
Chapter 4: Financial Planning and Forecasting
68. When preparing a cash budget, once a firm has estimated its cash receipts the firm must
a. plan a pro forma statement.
b. schedule disbursements.
c. determine the desired cash balance.
d. pay dividends to its stockholders.
69. The financial forecasting and planning model that is becoming increasingly popular because they often provide
financial decision makers with more useful information than other models is
a. the deterministic model
b. the probabilistic model
c. the optimization model
d. sensitivity analysis
70. The kind of analysis that consists of rerunning the model to determine the effect on the output variables of
changes in the input variables is
a. simulation
b. scenario analysis
c. sensitivity analysis
d. probabilitistic analysis
71. All of the following are considered inflows from cash EXCEPT:
a. Increase in inventory
b. Deferred taxes and wages
c. New issues of securities
d. Increase in accounts payable