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1. The ______ forecast is the most important ingredient of the financial forecasting process. If this forecast is inaccurate,
the consequences to the forecasting firm can be serious.
a. expense
b. external financing
c. sales
d. accounts receivable
e. accounts payable
2. In the financial control phase of the financial planning process, a firm is primarily concerned with:
a. the amount of funds it generates internally.
b. determining the investments it should purchase with free cash flows.
c. determining its financial breakeven point.
d. the degree of financial leverage that is acceptable.
e. implementing financial plans and dealing with the feedback and the adjustments needed to meet its goals.
3. A firm that makes an overly optimistic sales forecast is likely to have a:
a. high inventory turnover ratio.
b. high depreciation expense.
c. low inventory carrying cost.
d. high return on equity.
e. low level of plant and equipment.
4. To compute the additional funds (AFN) the firm must raise using external financing sources to support a particular
level of forecasted operations, the firm should _____.
a. subtract the funds it expects to generate spontaneously from the forecasted sales
b. subtract the forecasted operating costs from its existing total liabilities
c. add the funds it expects to generate internally to the funds it expects to generate spontaneously
d. subtract the funds it expects to generate internally from the funds that are required to attain the forecasted sales
e. add the funds that it expects to generate spontaneously to its existing retained earnings balance
5. Which of the following is the first step involved in constructing pro forma financial statements?
a. Forecasting the next period’s balance sheet.
b. Determining the additional funds needed (AFN) to support expected growth.
c. Forecasting the income statement.
d. Determining financing feedbacks.
e. Computing the firm’s operating breakeven point.
6. Which of the following account balances is most likely to change spontaneously with changes in sales?
a. Notes payable
b. Long-term bonds
c. Preferred stock
d. Common stock
e. Accounts payable
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7. Which of the following account balances generally will not change when sales change?
a. Accounts payable
b. Notes payable
c. Inventory level
d. Accounts receivable
e. Accrued wages
8. Which of the following statements about funds that a firm generates spontaneously (internally) is correct?
a. In general, current liabilities that change naturally with changes in sales provide spontaneously generated funds.
b. Spontaneously generated funds are funds that a firm must raise by issuing new stocks and new bonds.
c. Notes payable, long-term bonds, and common stock provide most of the firm’s spontaneously generated funds.
d. Spontaneously generated funds tend to change at the same rate as a change in the firm’s net operating income.
e. Current liabilities that provide spontaneously generated funds require the firm’s management to make conscious
financing decisions.
9. Which of the following statements about the financial planning process is correct?
a. The additional funds needed (AFN) is estimated by summing the expected changes in assets and liabilities that
fluctuate with sales and then subtracting the expected operating income.
b. The projected balance sheet method requires only the balance sheet to determine a firm’s expected financial needs.
c. The decision as to how a firm should raise additional funds needed (AFN) to meet its financial goals depends on
the ability of the firm to handle additional debt, conditions in financial markets, and restrictions imposed by existing debt
agreements.
d. The projected balance sheet method of forecasting financial needs does not consider dividends paid to
shareholders because these are after tax payments from retained earnings.
e. Financial forecasts generally do not consider forecasts of the economic prospects for the nation and the industry
because these are factors that are beyond the control of the firm.
10. The primary reason the income statement is forecast prior to the balance sheet in the financial planning process is
because ______ must be estimated.
a. current liabilities that change naturally with changes in sales
b. funds that must raise externally through new borrowing or by selling new stock
c. the market value of stock in the coming year
d. the amount of retained earnings the company expects to generate during the year
e. the total of cash flows from various activities during the year
11. When forecasting income statements, which of the following is generally a key assumption firms make about their
variable operating costs?
a. Variable operating costs remain the same each year.
b. Variable operating costs increase at the same rate as sales.
c. Variable operating costs are forecast to be the average of the operating costs during the previous three years.
d. Variable operating costs decrease when sales increase.
e. Variable operating costs are set at industry averages.
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12. Current liabilities accounts that change “naturally” with changes in sales provide funds that tend to change at the same
rate as sales. These funds are referred to as ______ funds.
a. spontaneously generated
b. additional funds
c. natural operations
d. temporary assets’
e. extemporaneous short-term
13. Which of the following would be considered part of financing feedbacks in the financial forecasting process?
a. Funds that a firm must raise externally through new borrowing or by selling new stock to meet its financial goals.
b. The change in current assets that occur when a firm implements a sales forecast.
c. The effects forecasts of the economic prospects for the nation, region, and industry have on the taxes the firm must
pay on the income it earned in the most recent accounting period.
d. The effects on the income statement and balance sheet of actions the firm takes to finance forecasted increases in
assets.
e. The effect that forecasted sales has on the owners of the firm.
14. To fully account for financing feedbacks in financial forecasting, all of the steps in the projected balance sheet method
must be repeated until _____ equal zero.
a. financing feedbacks
b. spontaneously generated funds
c. additional funds needed (AFN)
d. additions to retained earnings
e. marginal revenues minus marginal expenses
15. When constructing pro forma financial statements, which of the following equations can be used to estimate additional
funds needed (AFN)?
a. Estimated AFN = Forecasted increase in assets + Forecasted increase in liabilities + Forecasted increase in retained
earnings
b. Estimated AFN = Forecasted increase in assets – Financing feedbacks + Forecasted increase in retained earnings
c. Estimated AFN = Forecasted increase in assets – Financing feedbacks – Spontaneously generated funds
d. Estimated AFN = Forecasted increase in liabilities + Financing feedbacks + Spontaneously generated funds
e. Estimated AFN = Forecasted increase in assets – Forecasted increase in liabilities – Forecasted increase in retained
earnings
16. In the control phase of the financial planning process, projected financial statements must be evaluated to determine:
a. the firm’s operating breakeven at different sales levels.
b. whether economies of scale have been achieved.
c. the level of leverage the firm can attain with its forecasts.
d. whether the forecasts meet the firm’s financial targets.
e. the amount of internal funds the firm must raise to meet its financial goals.
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17. Which of the following actions can be taken to reduce the firm’s average collection period?
a. Increase the firm’s credit sales.
b. Decrease the firm’s credit purchases.
c. More aggressively collect delinquent credit accounts.
d. Change the firm’s inventory valuation method.
e. Revise the firm’s capital budgeting investment policy.
18. Considering each item independently and holding other things constant, which of the following actions would reduce a
firm’s need for additional capital (additional funds needed, AFN)?
a. Increase the firm’s dividend payout ratio.
b. Decrease the firm’s days sales outstanding (DSO).
c. Decrease the firm’s profit margin.
d. Increase the firm’s expected sales growth.
e. Decrease the firm’s accrual accounts (e.g., accrued wages and taxes).
19. Following is the balance sheet of Cyan Inc.:
Current assets $ 5,000 Accounts payable $ 1,000
Net fixed assets 10,000 Accruals 1,000
Long-term debt 5,000
Common equity 8,000
Total $15,000 Total $15,000
Cyan currently is operating at full capacity. Next year, the firm expects sales to increase by 50 percent. It also expects to
retain $2,000 of next year’s earnings to invest in additional fixed assets. What will be Cyan’s additional funds needed
(AFN) next year?
a. No additional funds are required.
b. $1,000
c. $4,500
d. $4,000
e. $6,500
20. Compuvac Company just completed its initial forecasts of next year’s financial statements using the projected balance
sheet method. The firm determined that it needs $4 million in new debt, which can be issued at par with a 10 percent
annual coupon. Additionally, the firm can sell 500,000 shares of new common equity, which will net $18.10 per share.
Next year’s expected dividend is $0.48 per share. After accounting for the financing feedbacks associated with raising the
required funds, Compuvac expects its taxes to be $160,000 lower than were reported in the initial forecasts. Given this
information, what should Compuvac find the change to be in the addition to retained earnings that is reported in the
income statement that was initially forecasted after the financing feedbacks are included?
a. $0
b. $160,000
c. – $800,000
d. –$320,000
e. –$480,000
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21. In which of the following situations will Firm A require greater amounts of external funding (additional funds needed,
AFN) to meet its forecasted growth than Firm B? Assume the firms are identical in every other way.
a. Firm A operates at full capacity, whereas Firm B does not.
b. Firm A uses the projected balance sheet method to forecast its pro forms financial statements, whereas Firm B
does not.
c. Firm A generates substantial amounts of spontaneously generated funds, whereas Frim B generates very little.
d. Firm A has attained substantial economies of scale, whereas Firm B has not.
e. Firm A operates close to its operating breakeven point, whereas Firm B operates well above its operating
breakeven point.
22. If a firm is operating at its full capacity, future increases in sales will require _____.
a. it to attain economies of scale in its operations
b. it to issue new long-term debt
c. large amounts of new spontaneously generated funds to support expected growth
d. additional fixed assets
e. lumpy current assets to be purchased
23. If a firm currently operates at less than full capacity, it must increase existing plant and equipment only if:
a. its total variable operating costs increase with an increase in sales.
b. the unused capacity of its existing assets is not sufficient to support a forecasted increase in sales.
c. the internally generated funds exceed the amount required to support the forecasted increase in sales.
d. the addition of fixed assets in large, discrete units results in economies of scale that increase operating costs.
e. fixed operating costs tend to decrease with higher sales.
24. A firm utilizes 75 percent of its plant capacity to produce the current year’s sales of $3,000,000. What is the firm’s full-
capacity sales?
a. $12,000,000
b. $2,250,000
c. $3,000,000
d. $3,750,000
e. $4,000,000
25. Based on its existing sales, what is the formula for calculating the full-capacity sales of a firm?
a. Full-capacity sales = Existing sales level ÷ Percent of capacity used to generate existing sales level
b. Full-capacity sales = Future sales level ÷ (1 – Percent of capacity used to generate existing sales level)
c. Full-capacity sales = Future sales level ÷ Percent of capacity used to generate existing sales level
d. Full-capacity sales = Future sales level ÷ (1 + Percent of capacity used to generate existing level of assets)
e. Full-capacity sales = Existing sales level ÷ (1 – Percent of capacity used to generate existing level of assets)
26. To produce sales of $4,500,000, Azure Inc. uses only 80 percent of its plant capacity. Therefore, Azure can increase
its sales to _____ without having to increase its plant and equipment.
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a. $22,500,000
b. $3,600,000
c. $5,625,000
d. $5,400,000
e. $8,100,000
27. The additional funds needed (AFN) to achieve a particular growth in sales will be negative if:
a. assets that are required to support the growth can be acquired only in large, discrete amounts.
b. the amount of plant and equipment that is required to manufacture additional products is substantial.
c. the amount of internal financing the firm expects to generate is greater than the amount of external funds that
must be raised to support the growth.
d. the firm must issue new long-term bonds to support the increase in sales.
e. the amount of internally generated funds is more than sufficient to support the forecasted increase in sales.
28. ______ are assets that must be purchased in large, discrete units.
a. Fixed assets
b. Lumpy assets
c. Spontaneously generated assets
d. Excess capacity assets
e. Long-term assets
29. EvenFlo Pipes forecasts a small increase in sales next year. To achieve this growth in sales, however, the firm must
purchase an amount of plant and equipment that is more than double the increase in sales. What is the most likely reason
EvenFlo must purchase such a large amount of fixed assets?
a. The increase in sales will provide substantial economies of scale.
b. The increase in sales will result in a significant increase in fixed operating costs.
c. The increase in sales will generate a decrease in financing feedbacks.
d. The firm must purchase lumpy assets to achieve the increase in sales.
e. The increase in sales will produce a decrease in spontaneously generated funds.
30. When economies of scale exist, a firm’s _____ ratio is likely to decrease if the size of the firm increases substantially.
a. days sales outstanding
b. total assets turnover
c. variable cost of goods sold
d. times interest earned
e. price earnings (P/E)
31. Which of the following statements concerning lumpy assets is correct?
a. Purchasing lumpy assets generally does not have a significant effect on the amount of fixed assets a firm holds.
b. Lumpy assets normally are extremely liquid.
c. If it can only purchase lumpy assets, it is possible that a firm will be required to invest a substantial amount in
plant and equipment to attain a small projected increase in sales.
d. Lumpy assets can be acquired in small increments.
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e. Lumpy assets generally have lives that are less than 12 months.
32. By definition, a firm’s operating breakeven point represents the level of production and sales at which its:
a. additional funds needed (AFN) equal zero.
b. variable costs equal its operating revenue.
c. fixed variable costs equal its operating revenue.
d. net operating income is equal to zero.
e. cost of equity equals its cost of debt.
33. By definition, a firm’s financial breakeven point represents the level of net operating income (NOI) at which its:
a. stock value is maximized.
b. earnings before interest and taxes (EBIT) is equal to zero.
c. earnings per share (EPS) is equal to zero.
d. tax liability is equal to zero.
e. interest expense is equal to zero.
34. A firm examines the relationship between its sales volume and its operating profitability by conducting a(n) _____
analysis.
a. operating breakeven (cost-volume-profit)
b. financial breakeven
c. equity breakeven
d. production capacity
e. economies of scale
35. Everything else equal, a firm can reduce its operating breakeven point by:
a. increasing its fixed costs.
b. decreasing the selling price of its product.
c. increasing its product’s contribution margin.
d. increasing its variable cost per unit.
e. decreasing its earnings per share.
36. Operating costs that do not change when production levels change are called ______ costs
a. variable
b. lumpy
c. direct
d. fixed
e. forecasting
37. Which of the following statements about operating breakeven analysis is correct?
a. Operating breakeven analysis involves determining the level of production and sales at which net operating
income is equal to one.
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b. Operating breakeven analysis involves determining the point at which sales revenues equal operating costs.
c. Operating breakeven analysis involves determining the level of production and sales at which financing costs are
recovered.
d. Operating breakeven analysis involves determining the operating income the firm needs to generate to cover all of
its financing costs.
e. Operating breakeven analysis involves the analysis of the interest payments to bondholders and the dividend
payments to preferred stockholders.
38. By performing a cost-volume-profit analysis, EZ Rentals discovered that its operating breakeven point, QOpBEP, is at
sales equal to $180,000. If EZ wants to decrease its operating breakeven point, which of the following actions should be
taken? Assume everything else is equal.
a. Increase fixed operating costs.
b. Decrease sales.
c. Increase the variable operating cost ratio.
d. Decrease fixed financial costs.
e. Increase the product’s contribution margin.
39. Citation Manufacturing produces electronic components that sell for $600 each. The fixed production costs are
$720,000 when 30,000 or fewer components are produced, and variable production costs are $510 per component. What is
Citation’s operating breakeven point?
a. 8,000 components
b. 1,200 components
c. 1,412 components
d. $720,000 in sales
e. $389,189 in sales
40. Progressive Products makes coolers that sell for $250 each; the fixed production costs are $30,000 when 1,000 or
fewer coolers are produced; and variable production costs are $200 per cooler. To the nearest dollar, what is the
Progressive’s current operating breakeven point?
a. $30,000
b. $16,667
c. $150,000
d. $37,500
e. $200,000
41. On-The-Go Merchandiser sells luxury carry-on travel bags for $1,200 each. The firm’s fixed operating costs are
$600,000 when 5,000 or fewer bags are produced, and its variable cost ratio is 80 percent (i.e., variable cost per unit is 80
percent of the selling price). What is On-The-Go’s operating breakeven point?
a. 500 bags
b. 6,000 bags
c. 750 bags
d. 2,500 bags
e. 4,000 bags
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42. Expert Analysts Resources (EAR) has provided you with the following information about three companies you are
currently evaluating:
Company Degree of Operating Leverage (DOL) Degree of Financial Leverage (DFL)
Acme 1.5× 6.0×
Apex 3.0× 4.0×
Alps 5.0× 2.0×
Based on this information, which firm is regarded as having the greatest overall risk?
a. Acme, because it has the highest degree of financial leverage (DFL).
b. Acme, because has the highest degree of total leverage (DTL).
c. Apex, because it has the highest degree of total leverage (DTL).
d. Alps, because it has the highest degree of operating leverage (DOL).
e. Acme, because it has the lowest degree of operating leverage (DOL).
43. If a firm that has a degree of operating leverage (DOL) greater than 1.0 experiences a 1.0 percent change in _____, its
earnings before interest and taxes (EBIT) will change by _____1.0 percent.
a. earnings per share; greater than
b. net income; greater than
c. net operating income; less than
d. sales; greater than
e. fixed costs; less than
44. Which of the following mathematical equations is used to calculate the degree of operating leverage (DOL)? (Δ =
change)
a. DOL = % Δ in net operating income (NOI)/% Δ in sales
b. DOL = % Δ in sales/% Δ in earnings before taxes (EBT)
c. DOL = % Δ in earnings before interest and taxes (EBIT)/% Δ in earnings per share (EPS)
d. DOL = % Δ in sales/% Δ in earnings per share (EPS)
e. DOL = % Δ in earnings per share (EPS)/% Δ in earnings before taxes (EBT)
45. Marcus Corporation currently sells 150,000 units per year at a price of $4.00 a unit. Its variable costs are 30 percent of
sales, and its fixed operating costs are $300,000. What is Marcus’s degree of operating leverage (DOL) at sales equal to
150,000 units?
a. 1.4×
b. 2.2×
c. 3.5×
d. 2.0×
e. 5.0×
46. Trident Food Corporation generated the following income statement for the most recent fiscal year:
Sales revenues $150,000
Variable cost of sales (120,000)
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Gross profit 30,000
Fixed operating costs (10,000)
Net operating income (EBIT) $20,000
What is the degree of operating leverage (DOL) for Trident Food?
a. 1.5×
b. 7.5×
c. 5.0×
d. 1.4×
e. 2.5×
47. Which of the following mathematical equations represents the operating breakeven point, QOpBEP, for a firm?
a. Sales = Gross profit margin
b. Sales = Total variable costs + Total fixed costs
c. Total operating costs = Total variable costs + Total contribution margin costs
d. Total operating costs = Contribution margin
e. Contribution margin = Earnings before interest and tax
48. Operating breakeven analysis deals with the:
a. assets and liabilities forecasted in the pro forma balance sheet.
b. net cash flows from operations shown on the statement of cash flows.
c. noncash items included in operating activities.
d. revenues and expenses associated with a firm’s normal production and selling operations.
e. interest payments to bondholders and the dividend payments to preferred stockholders.
49. A firm would conduct operating breakeven analysis primarily to determine the:
a. minimum value of assets that it should hold to achieve profitability.
b. maximum amount of the total assets that should be financed with debt.
c. minimum earnings that should be retained and the earnings that should be paid out as dividends.
d. level of capacity utilization required to achieve its forecasted sales level.
e. level of sales a new product must achieve to be profitable.
50. New World Manufacturing has determined that its degree of financial leverage (DFL) is 3.0 when sales equal
$750,000, which happens to be its operating breakeven point (i.e., SOpBE = $750,000). At sales equal to $750,000, which
of the following conditions must exist for New World Manufacturing? Assume everything else is equal.
a. Earnings per share (EPS) = 0
b. Earnings per share (EPS) > 0
c. Earnings per share (EPS) < 0
d. Earnings before interest and taxes (EBIT) > 0
e. Total operating costs = 0
51. A firm’s financial breakeven point is defined as the operating income (NOI) at which its _____ is(are) equal to zero.
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b. sales
c. earnings per share (EPS)
d. fixed financial costs
e. gross profit
52. The financial breakeven point is the level of _____ at which earnings per share (EPS) is equal to zero.
a. net operating income (NOI)
b. retained earnings
c. taxes
d. net income
e. interest payments
53. Which of the following statements about the degree of operating leverage (DOL) is correct?
a. The higher the DOL, the closer the firm is to its financial breakeven point.
b. The higher the DOL, the higher the firm’s financial risk.
c. The lower the DOL, the higher the firm’s operating risk.
d. The higher the DOL, the closer the firm is to its operating breakeven point.
e. The higher the DOL, the higher the percentage increase in the sales when fixed operating costs change.
54. Suppose a firm increases its sales using existing fixed assets. Everything else equal, what effect will the increase in
sales have on the firm’s degree of operating leverage (DOL)?
a. The DOL should increase.
b. The DOL should decrease.
c. The DOL should not change, because the amount of fixed asset does not change.
d. The DOL should increase if fixed operating costs represent a significant proportion of total operating costs;
otherwise, the DOL should decrease.
e. Because the fixed operating costs are not know, the impact on DOL cannot be determined.
55. Financial leverage occurs because of the existence of fixed financial costs, which include _____.
a. costs associated with production
b. preferred dividends
c. common stock dividends
d. depreciation expenses
e. accruals
56. The degree of financial leverage (DFL) is defined as the percentage change in _____ that results from a given
percentage change in earnings before interest and taxes (EBIT).
a. sales
b. net operating income (NOI)
c. fixed financial costs
d. net income
e. earnings per share (EPS)
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57. Suppose a firm’s degree of financial leverage (DFL) is 1.0. Which of the following statements concerning this firm is
correct?
a. The firm must have fixed costs associated with its production process.
b. The firm’s earnings per share (EPS) must equal zero.
c. The firm’s degree of total leverage (DTL) must equal 1.0.
d. The firm’s degree of operating leverage (DOL) must be greater than 1.0.
e. The firm has no long-term debt, preferred stock, or other sources of financing that require fixed payments.
58. Trident Food Corporation generated the following income statement for the most recent fiscal year:
Sales revenues $150,000
Variable cost of sales (120,000)
Gross profit 30,000
Fixed operating costs (10,000)
Net operating income (EBIT) 20,000
Interest (15,000)
Earnings before taxes 5,000
Taxes (40%) (2,000)
Net income $3,000
What is Trident Food’s degree of total leverage (DTL)?
a. 4.0×
b. 6.0×
c. 1.5×
d. 5.0×
e. 50.0×
59. The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales
is known as the degree of _____ leverage.
a. financial
b. total
c. operating
d. combined
e. equity
60. Which of the following statements concerning the financial breakeven point, EBITFinBEP, is correct?
a. The financial breakeven point determines the impact of a firm’s financing mix on its earnings per share (EPS).
b. The financial breakeven point determines the level of sales a new product must achieve to be profitable.
c. The financial breakeven point determines the effects of a general expansion in the level of a firm’s operations.
d. The financial breakeven point analyzes the consequences of purchasing modernization projects that require
increase investments in fixed assets.
e. The financial breakeven point represents the level of production and sales at which net operating income equals
zero.
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61. Which of the following mathematical expressions is used to compute the degree of financial leverage (DFL) at a
particular level of earnings before interest and taxes (EBIT)? Assume the firm has no preferred stock.
a. DFL = Earnings before interest and taxes ÷ Earnings per share (EPS)
b. DFL = Gross profit ÷ Earnings before interest and taxes
c. DFL = Sales ÷ (Earnings before interest and taxes – Interest)
d. DFL = Earnings before interest and taxes ÷ (Earnings before interest and taxes – Interest)
e. DFL = (Earnings before interest and taxes – Interest – Taxes) ÷ Number of shares
62. Which of the following measures the effect on earnings per share (EPS) of a change in operating income (earnings
before interest and taxes)?
a. Operating leverage
b. Total leverage
c. Pooled leverage
d. Equity leverage
e. Financial leverage
63. Which of the following statements concerning the degree of total leverage (DTL) is correct?
a. DTL is the percentage change in earnings per share (EPS) that results from a given percentage change in earnings
before interest and taxes (EBIT).
b. It is the level of earnings before interest and taxes (EBIT) at which earnings per share (EPS) equals zero.
c. DTL is the percentage change in net operating income (NOI) (earnings before interest and taxes) associated with a
given percentage change in sales.
d. DTL represents the level of production and sales at which net operating income is zero.
e. DTL is the percentage change in earnings per share (EPS) that results from a 1 percent change in sales.
64. Suppose that in the control phase of the financial planning process a firm discovers it cannot raise the funds that are
required to meet the forecasted sales. In this situation, the firm should ______.
a. use available cash to repay as many outstanding loans as possible
b. scale back its projected level of operations
c. expand its plant and equipment to the level necessary to meet the sales forecast
d. build up its inventory quickly
e. reformulate its plans to increase retained earnings and to decrease the dividend payments to stockholders
65. 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.
a. True
b. False
66. Accounts that “naturally” fluctuate with changes in routine business operations affect internally generated funds,
which are generally referred to as spontaneously generated funds.
a. True
b. False
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67. Adding lumpy assets to a firm does not affect the financial requirements associated with an expansion because the
annual costs associated with growth normally are fixed, no matter the level of sales.
a. True
b. False
68. Lumpy assets are assets that cannot be acquired in small increments; rather, they must be obtained in large, discrete
amounts.
a. True
b. False
69. Managements does not need to consider economies of scale in operations when constructing pro forma financial
statements because economies of scale do not directly affect financial statements.
a. True
b. False
70. Everything else equal, a firm that has excess capacity generally requires more external financing to support increases
in operations than a firm that operates at full capacity.
a. True
b. False
71. If a firm that has fixed costs in its operations does not meet its forecasted sales level, its operating leverage will result
in a magnified decrease in net income compared to what is expected.
a. True
b. False
72. If the projected operating results are disappointing, management can reformulate its plans and develop targets that are
more reasonable for the coming year.
a. True
b. False
73. A firm should scale back its projected level of operations if the funds required to meet the forecasted sales are readily
available.
a. True
b. False
74. Deviations of actual sales from projected sales should be evaluated to determine how to improve future forecasts and
the predictability of future operations, and therefore to ensure that the goals of the firm are being pursued appropriately.
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a. True
b. False