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Multiple Choice
1. The percentage of sales forecasting method assumes which of the following?
a.
present asset levels are suboptimal with respect to present sales
b.
present asset levels are optimal with respect to present sales
c.
most items on the balance sheet are indirectly proportional to sales
d.
none of these are correct
b
2. In the percentage of sales forecasting method, which of the following is assumed to increase proportionately with sales?
a.
cash
b.
accounts receivable
c.
accounts payable
d.
All these are correct
d
3. Which type of financial model yields a distribution of possibilities rather than a single value?
a.
static
b.
deterministic
c.
probabilistic
d.
optimization
c
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
b
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
c
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.
accounts payable will not increase proportionally with sales
b
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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
d
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
a
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.
estimation of cash receipts
d
10. 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
b
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
c
12. All the following current liabilities normally vary directly with sales EXCEPT ______________.
a.
accounts payable
b.
notes payable
c.
accrued wages
d.
accrued taxes
b
13. Pro forma financial statements show the results of some ____ event rather than a(n) ____ event.
a.
actual; assumed
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b.
assumed; actual
c.
deterministic; probabilistic
d.
None of these are correct
b
14. Each of the following is used to forecast the amount of additional financing (i.e., cash) a company will need in some
future period EXCEPT:
a.
percentage of sales forecasting method
b.
pro forma statement of cash flows
c.
after-tax cash flow
d.
None of these are correct
c
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 these are correct
b
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 approximate amount of
additional financing required.
a.
$1,746,154
b.
$1,446,154
c.
$6,946,154
d.
$946,154
d
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
a
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?
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a.
$317,600
b.
$620,000
c.
$465,600
d.
$840,400
b
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
d
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
b
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
c
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
a
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23. In 20X3, Fillmore Company’s sales were $12 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 these are correct
b
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.
The company expects to earn $25 million after interest and taxes next year. 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
a
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
b
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?
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a.
$165,000
b.
$129,000
c.
$174,000
d.
$147,000
a
27. Last year Curative Technologies Inc. reported after-tax earnings 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
c
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
b
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
c
30. The Financial Accounting Standard Board (FASB) encourages companies to prepare their statement of cash flows
using the ___________.
a.
indirect method
b.
direct method
c.
reconciliation method
d.
None of these are correct
b
31. Generally, which of the following non-cash charges is (are) added to after-tax earnings to calculate the after-tax cash
flow?
I. Depreciation
II. Deferred taxes
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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.
c
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 these are correct
c
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 these are correct
b
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
a
35. Which of the following is defined as the systematic allocation of the cost of an asset over more than one year?
a.
Deferral
b.
Expensing
c.
Optimization
d.
Depreciation
d
36. A downside of financing expansion by selling new shares of stock is that do so _____________.
a.
dilutes ownership in the firm
b.
incurs higher financial risk
c.
reduces the prosperity of the firm
d.
All of these are correct
a
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 fund this growth?
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Class:
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Subs’ current balance sheet 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 these are correct
b
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%
a
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.
b
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40. Jones Company’s 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
a
41. Operational plans are generally conducted at two levels. Which length of time is typically considered long-term?
a.
2 years
b.
12–18 months
c.
5 years
d.
10 years
c
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.
d
43. In those industries in which 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
b
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
b
45. ____ is the statistical technique that helps the analyst classify observations (firms) into two or more predetermined
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groups based on certain characteristics of the observation.
a.
Deterministic analysis
b.
Sensitivity analysis
c.
Discriminant analysis
d.
Optimization
c
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
b
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
c
48. The valuation of debt and equity securities is based upon the _____________.
a.
type of investment vehicle
b.
growth potential of the asset
c.
accounting method used for recording the asset
d.
present value of the cash flows that the securities are expected to provide
d
49. Which of the following is an advantage of a cash budget over the percentage of sales method?
I. A cash budget can more precisely estimate the amount of financing needed.
II. A cash budget can better estimate the timing 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.
c
50. The third step in the preparation of a cash budget is the determination of ____________.
a.
future spending
b.
asset value
c.
cash receipts
d.
desired monthly beginning cash balance
d
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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
c
52. Cash and cash equivalents include which of the following?
I. Highly liquid investments
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.
c
53. Cash budgets are typically prepared on a(n) ________ basis and subdivided into __________.
a.
monthly; weeks
b.
monthly; days
c.
annual; quarters
d.
annual; months
d
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 objectives
d.
All of these are correct
c
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.
a
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
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d.
agreed upon by the union workers
a
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
d
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 $4,200. The firm is in the 38% tax bracket. What would be the firm’s cash flow
from operations?
a.
$4,216
b.
$4,000
c.
$8,416
d.
$6,800
c
59. Unlike long-term financial forecasts, short-term financial forecasts (one year or less) tend to be more ___________.
a.
strategic
b.
detailed
c.
helpful
d.
speculative
b
60. 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.
d
61. 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
b
62. _________ financial planning models are becoming increasingly popular because they often provide financial decision
makers with more useful information than other models.
a.
Deterministic
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b.
Probabilistic
c.
Optimization
d.
Sensitivity analysis
b
63. 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
c
64. A firm that keeps current asset balances too high ____________.
a.
sacrifices shareholder wealth
b.
incurs higher risk
c.
is not able to offer timely and profitable responses to prospective customers’ needs
d.
All of these are correct
a
Essay
65. 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?
4. financial plan
66. What is the purpose of a financial plan?
financial) objectives of the firm. It also includes financial forecasts.
67. Financial planning models have two classifications. What are they and how do they differ from each other?
probabilistic model.
68. Explain the cash flow generation process.
will add value to the firm. In the process of acquiring funds and directing those funds, the financial manager
69. Why would a firm experience cash flow difficulties immediately after a good sales period?
70. 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?
71. 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?